Editor's note: Li Lun, a special commentator for CGTN, is an assistant professor of economics at Peking University. The article reflects the author's opinions and not necessarily the views of CGTN.

The United States' gross federal debt reached $40.05 trillion on August 18, crossing $40 trillion for the first time. About $32.27 trillion was held by the public, including domestic and foreign investors and the Federal Reserve, while $7.78 trillion consisted of obligations within the federal government. The total was nearly $10 trillion larger than US GDP in 2025 and equivalent to about $116,000 for every resident.

That milestone comes as the federal government continues to run large annual deficits. The budget deficit is projected to reach $1.9 trillion, or 5.8% of GDP, in 2026, while debt held by the public is expected to rise from 101% of GDP this year to 120% by 2036. The significance of the $40 trillion figure lies not only in its size, but in the expectation that large deficits will continue to add to the debt throughout the next decade.

The opportunity cost of that trajectory becomes clearer when its effects are traced from the US federal budget, through financial markets and into the wider world. A larger interest bill reduces the resources available for current priorities and future emergencies. To cover its ongoing budget deficits, the US government must borrow more by selling Treasury securities. The yields on those securities influence the price of credit and the allocation of capital in the United States and abroad. The growing volume of those securities can also place greater strain on the institutions that keep the market for US government debt functioning.

Rising interest payments are already absorbing a growing share of the US federal budget and limiting the money available for other government priorities. The Congressional Budget Office (CBO) projects net interest spending of $1.039 trillion in fiscal year 2026, equivalent to 3.3% of GDP. The figure exceeds the $918 billion projected for total US defense outlays and the $708 billion projected for federal Medicaid spending.  

By 2036, net interest spending is projected to reach $2.1 trillion and account for almost one-fifth of US federal spending. As more government revenue goes to servicing past borrowing, funding for research, infrastructure, education or disaster relief becomes harder to expand without yet more debt.

A heavier debt-service burden can constrain the scale and duration of the US government's response to future crises. Large-scale borrowing helped stabilize the economy during the 2008 financial crisis and sustain households and businesses during the pandemic. A future recession could again require relief on a similar scale, except that the response would begin with a much larger debt stock and a much heavier interest bill. As existing debt matures, refinancing it at higher rates would continue to enlarge that bill, leaving less room to sustain the recovery.

The consequences extend beyond the US federal budget into financial markets, where government borrowing influences both the cost and allocation of private credit. To finance persistent deficits, the government must sell more Treasury securities. When heavier government borrowing contributes to higher yields, those yields become the starting point for mortgage rates, corporate borrowing costs and many asset valuations. Investors can earn more from government securities, while private projects must offer a greater return to compensate for their additional risk.

Higher financing costs, however, do not affect all projects equally. Businesses with established earnings may still borrow, whereas startups, infrastructure projects and early-stage technologies often require years of spending before producing revenue. Their valuations are especially sensitive to higher interest rates, and many lack the collateral needed to borrow on favorable terms. The opportunity cost of federal debt therefore includes commercially promising investments that are delayed, reduced or abandoned.

Treasury yields also influence borrowing costs outside the United States. Governments and companies use them as a reference point when issuing dollar debt, while global investors compare other assets with the returns available in the United States. An IMF analysis finds that when the US government sells more Treasury securities than investors expected and long-term US government bond yields rise, long-term yields abroad rise by almost the same amount.

For economies that depend heavily on external finance, the effect extends from markets into domestic policy. Higher US yields can draw capital toward dollar assets and weaken other currencies. Central banks may keep interest rates high to contain capital outflows and imported inflation, even when domestic growth calls for cheaper credit. Governments and businesses then face higher financing costs, delaying investment in power, transport, industrial capacity and technological upgrading.

The expanding market for US government debt can itself become a source of financial risk. The banks and securities firms that buy and sell government bonds have not expanded their capacity as quickly as the market has grown. As a result, leveraged hedge funds, which rely heavily on borrowed money, now play a larger role in buying and trading Treasuries. Because much of that borrowing is short-term, a sudden rise in volatility can lead lenders to demand more cash or collateral, forcing funds to sell bonds quickly and potentially pushing yields higher.

The danger is that such stress would not remain confined to hedge funds or even to the US government bond market. US government securities are widely used as collateral, held as reserves and treated as benchmarks for pricing other assets. A disruption in their trading can therefore spread quickly through the global financial system, raising funding costs, depressing asset prices and reducing liquidity across borders. As this market grows, so does the potential reach of any disruption in its normal functioning.

The US government's continued reliance on borrowing has allowed difficult fiscal choices to be deferred, but postponement does not eliminate their costs. Interest payments are already narrowing choices in the US federal budget; the sale of more Treasuries can raise financing thresholds for investment; and the securities created to fund deficits transmit changes in US financial conditions across the world. The opportunity cost of the $40 trillion debt lies in the public priorities governments defer, the productive investments businesses forgo and the economic opportunities households find harder to pursue.

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