U.S. National Debt Is Now Bigger Than the Economy: What It Means

During World War II, when the U.S. finally entered in 1941, the day after the Pearl Harbor attack, the country had a lot of work to do. Not only sending soldiers and providing for them but mobilizing for battle. Building weapons, ships, tanks, uniforms, ammo, equipment, vehicles. Buying food, fuel, and whatever.

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All that cost a lot of money the government did not have sitting in a savings account, so it borrowed liberally until eventually paying off the debt.

Things have changed. Below is a graph from the Federal Reserve Bank of St. Louis that shows the federal debt held by the public as a percentage of the U.S. gross domestic product. It covers the period of January 1, 1970, through October 1, 2025, with the final date representing the end of the government’s 2025 fiscal year.

By the end of calendar 2025, the debt held by the public was about $31.265 trillion, as the Treasury Department’s monthly statement revealed. GDP over the preceding year was $31.216 trillion. The ratio of the publicly held debt to GDP is now 100.16%. Under current conditions, that’s likely to continue, as the budget deficit this year is projected at $1.9 trillion, as The Wall Street Journal reported.

Crossing a Line

"With debt now above 100% of GDP, it’s only a matter of time until we pass the all-time record of 106% reached in the immediate aftermath of World War II," Maya MacGuineas, president of the nonprofit, non-partisan Committee for a Responsible Federal Budget (CRFB), said in prepared comments.

People talk about this ratio because economists use it as a way to better understand the potential impact of debt on a country. The higher the debt, the higher the costs of making interest and principal payments on the borrowing. The more money that goes into debt service, the less is available for anything else.

All this has implications. In May 2024, Benn Steil, senior fellow and director of international economics, wrote for the Council on Foreign Relations that for the first time the U.S. was spending more on interest — not even principal, but interest — than the annual defense department budget.

“The likelihood of the U.S. actually defaulting on its debt is trivial, since the government prints the currency in which its debt is denominated,” Steil wrote. “But the alternatives to default under the path of continued high deficits all point toward lower living standards.” As he and many others have pointed out, as the government borrows more, the cost of money throughout the economy increases.

Why Excess Borrowing Is a Problem

The reason is fundamental. The more the government borrows from investors, whether individuals, companies, or other governments, the higher yields on Treasury instruments like the 10-Year Note rise. Investors want compensation for perceived increased risks. Higher yields mean lower prices of the investments. The lower the price, the more bonds the government has to sell to make the sums needed to cover costs, which includes paying off the balances of the yields. That drives up borrowing costs in the form of even higher yields.

Treasury yields are not just direct costs for government borrowing. Most commercial interest rates comprise two parts, a risk-free basis and a risk premium. The higher the risk, the higher the premium. When the risk-free basis gets more expensive, so does the overall rate.

“As the government borrows more and more, the cost of money across the economy increases, crowding out private investment, reducing supply, increasing prices, and lowering growth. In the worst-case scenario, the country enters a debt spiral in which government borrowing and interest rates each keeps pushing the other up,” Steil wrote.

The Potential Impacts

The movement causes concern everywhere. How long is any of this sustainable? How will investors react? Will they continue to enable the ongoing bond sales that keep everything in place?

Here’s a reminder of what a fiscal crisis could look like, according to the CRFB. There are six categories of fiscal crisis, virtually all of which are a direct or indirect result of national debt:

• Financial — There is reduced confidence in short- and long-term bond issuance. Yields (the interest rates those bonds must offer to get buyers) rise sharply. Traders get wary of falling bond values and possibly panic internationally. Credit in general slows or freezes. Key financial institutions fail.
• Inflation — A government tries to manage exploding debt through what CRFB called monetization, but which is a set of manipulative techniques, including pushing interest rates low in an artificial way or what they called “financial repression,” any or all of which could drive quickly rising inflation, far more than happened in 2021 and 2022.
• Austerity — Historically, one of the ways governments try to deal with debt (and, I’d add, save wealthy interests) is through austerity programs, sharply increased taxes and heavily cut spending. The results are bad recessions and suffering by most of the population.
• Currency — The status of a country’s currency is threatened by too much debt. When markets get wary, the value of the currency drops, because value is really a function of perception. There was a time in the 19th to 20th centuries when you could have bought a Van Gogh or Picasso for a song. Now they’re worth a lot. But changes run the other way as well. The U.S. dollar is the primary global reserve currency, providing many advantages to the entire country and everyone who lives here that would disappear.
• Default — Constitutionally, via the Fourteenth Amendment, the U.S. is not allowed to default on its debt. But then, many things that happen aren’t supposed under the Constitution. As someone explained to a former congressional staffer, who once shared the analogy to me, from a financial viewpoint, a U.S. default would be like having every single nuclear weapon set off simultaneously. The question is whether every living thing would be wiped out (maybe other than some cockroaches) or if the impact would be something merely unthinkably horrible.
• Gradual — In CRFB’s words, “Living standards and fiscal and monetary flexibility could gradually erode in response to rising debt, potentially causing as much or more long-term damage than an acute crisis.”

By Erik Sherman, Senior Contributor