“Borrowing to Pay Off Debt”: U.S. National Debt Tops $40 Trillion for First Time, Raising Credit Crunch Risk if AI Bubble Bursts

Deficits accumulate even during economic expansion amid tax cuts and higher government spending
Treasury buybacks aimed at containing long-term yields fall short of a fundamental solution
U.S. fiscal and financial stability hinges on AI profitability and productivity gains

U.S. federal debt has surpassed $40 trillion for the first time, emerging as a major risk to global financial markets. Debt swollen by tax cuts, Social Security spending and war costs is pushing up both Treasury yields and the government’s interest burden, setting in motion a full-fledged “debt spiral” that is also weighing on corporate credit markets and Wall Street. Although the U.S. government has moved to contain long-term yields by expanding Treasury buybacks, market intervention alone is unlikely to keep rates in check while fiscal deficits and refinancing needs remain unchanged. At present, the clearest path out is for AI to generate productivity gains and expand the tax base. But if high interest rates burst the AI bubble before astronomical investment outlays translate into profits, AI could instead become a trigger that amplifies an asset-market correction and credit crunch.

Approaching the Statutory Debt Ceiling

According to the U.S. Treasury Department on Aug. 24 local time, total federal debt stood at $40.047 trillion as of Aug. 18. Even if all the gold ever mined in human history were sold, the proceeds would still fall $7 trillion short of that amount. Debt held by the public totaled $32.266 trillion, while intragovernmental holdings amounted to $7.782 trillion. The total is now roughly $1 trillion below the statutory U.S. debt ceiling of $41.1 trillion. This marks the first time the national debt has crossed the $40 trillion threshold, and the Peter G. Peterson Foundation, a U.S. fiscal watchdog, estimates that the debt is still growing by an average of $7 billion a day.

According to the Committee for a Responsible Federal Budget, it took the United States roughly 200 years for its national debt to exceed $1 trillion for the first time in 1981. Even in January 2017, when President Donald Trump began his first term, the figure stood at $19.95 trillion. In May 2023, the Congressional Budget Office projected that the debt would reach $40 trillion in 2028, but it has doubled in less than a decade. After crossing $39 trillion in March this year, it took less than five months for another $1 trillion to accumulate.

Structural Deficits Driven by Aging, Tax Cuts and War Costs

The rapid increase in U.S. national debt is attributable primarily to massive fiscal spending in response to COVID-19, successive rounds of tax cuts and rising Social Security and healthcare costs stemming from population aging. The CBO estimates that mandatory spending will account for $4.529 trillion of the federal government’s projected $7.449 trillion in expenditures in fiscal 2026. Social Security spending of $1.666 trillion, Medicare spending of $1.063 trillion and net interest costs of $1.039 trillion together exceed half of total federal outlays. As the population ages, the number of beneficiaries is rising, while the workforce and payroll-tax base needed to support them cannot expand nearly as quickly. With a structure now entrenched in which spending increases automatically regardless of economic conditions, restoring fiscal balance through cuts to discretionary spending alone is effectively impossible.

Recent policy decisions have further constrained the government’s fiscal room for maneuver. The Trump administration has emphasized workforce reductions at federal agencies and a restructuring of subsidies, but the tax-and-spending law enacted last year is projected to increase cumulative deficits by $4.7 trillion over the next decade. Prolongation of the Iran war is also adding to expenditure pressures through higher defense spending, while tariff revenue, once presented as a means of strengthening public finances, has been undermined by large-scale refunds. The U.S. government paid $100 billion in tariff refunds through July, while net tariff revenue for July alone swung to negative $8.55 billion. With tax cuts, military spending and tariff refunds simultaneously weighing on public finances, the United States remains in the unusual position of running massive deficits even during an economic expansion.

Table 1. Major U.S. Federal Expenditures and Sources of Fiscal Pressure

Long-Term Treasury Yield Hits 19-Year High

With astronomical national debt intensifying concerns over U.S. fiscal soundness, the standing of U.S. Treasuries—the benchmark safe-haven asset long treated as virtually equivalent to cash—is also being fundamentally shaken. Investors are demanding higher yields in both primary and secondary markets. On Aug. 18, the yield on the 30-year U.S. Treasury reached 5.33%, its highest level in 19 years since June 2007, when it stood at 5.44%.

The sharp rise in long-term yields is first increasing the federal government’s refinancing burden. Existing Treasuries carry their original coupon rates until maturity, but refinanced debt must be issued at today’s elevated market rates. As bonds issued during the low-rate era mature one after another, the federal government’s average funding cost inevitably rises. If revenue cannot cover the higher interest expense, the shortfall must again be financed through additional Treasury issuance. Debt generates interest, and that interest necessitates fresh borrowing that further enlarges the debt stock.

Corporate Refinancing Wall Puts Highly Valued AI Stocks to the Test

A prolonged period of high interest rates will first exert pressure on credit markets for vulnerable companies. Corporate bond issuers must pay a credit-risk premium on top of Treasury yields, leaving companies that accumulated debt during the low-rate era particularly exposed to rising refinancing costs. Even if businesses unable to shoulder their interest expenses resort to maturity extensions or debt exchanges, such measures are likely to do little more than buy time. According to Moody’s, such distressed debt exchanges have accounted for more than 70% of U.S. corporate defaults since 2022. Companies that fail to improve their balance sheets amid persistently high rates also face an elevated risk of defaulting again.

In the equity market, AI-related stocks that have expanded investment through extensive borrowing are particularly sensitive to interest-rate shocks. U.S. companies issued $1.7 trillion in investment-grade corporate bonds last year, close to an all-time high, with AI-related borrowing accounting for approximately 30% of net issuance. After committing enormous sums to data centers and semiconductor facilities, companies inevitably face higher corporate borrowing costs when Treasury yields rise. At the same time, higher rates reduce the present value of profits expected far into the future, putting pressure on both earnings and corporate valuations. On Aug. 18, renewed concerns over elevated valuations sent Micron down 7%, Nvidia down 2.3% and Broadcom down 3.2%, while the Nasdaq Composite fell 1.3%. The synchronized decline further heightened concerns that delayed returns on AI investment could lead to reduced capital expenditure and an additional correction in share prices.

$4 Billion Buyback Falls Short in a $32 Trillion Market

As Treasury yields surged, the U.S. government moved to curb the rise in long-term rates through buybacks, but the prevailing market view is that the measure will amount to little more than emergency relief. On Aug. 19, the Treasury Department said it would at least double the amount of 10- to 30-year Treasuries purchased in each operation, from $2 billion to a minimum of $4 billion. The strategy is intended to strengthen the market’s buyer base by directly purchasing less-liquid long-dated securities and to calm the rapid rise in yields. Immediately after the announcement, the 30-year yield fell from 5.34% to an intraday low of 5.19%, showing signs of temporary stabilization.

Yet the additional $2 billion in purchases is negligible relative to the U.S. Treasury market, which exceeds $32 trillion. With outstanding 20- and 30-year Treasuries alone totaling $5.5 trillion, there is a clear limit to how much supply buybacks can absorb. Indeed, even on Aug. 18, when the Treasury purchased $2 billion of long-term debt under its existing plan, the 30-year yield surged to a 19-year high. This demonstrates that Treasury yields are highly likely to rise again after the purchases end unless fiscal deficits and refinancing demand decline. Moreover, the unexpectedly expanded market intervention has raised concerns that the Treasury could undermine its long-standing principle of “regular and predictable issuance.” In other words, buybacks alone cannot contain long-term yields while spending adjustments and revenue increases remain unaddressed.

AI Success Could Expand Tax Revenue; Failure Could Trigger a Credit Crunch

With fiscal austerity and tax increases blocked by political resistance, the clearest exit available to the United States lies in raising economic growth through AI. If massive investment generates actual profits and productivity gains, while exports of U.S.-dominated AI chips, cloud services and software also expand, corporate earnings and wages will rise, broadening the tax base. In addition, if the economy grows faster than the debt stock, there will be greater scope to reduce the debt-to-gross domestic product ratio. The Brookings Institution estimates that a large-scale productivity breakthrough could reduce the annual fiscal deficit from approximately 6% of GDP to around 2%. If AI delivers sufficient results to dispel concerns over a market bubble, it could become a core engine for easing the burden of $40 trillion in debt.

For this scenario to materialize, however, AI must demonstrate reliable cash flow and productivity gains before investment capital is exhausted. The CBO has noted that tax revenue could decline in the short term if businesses deduct their initial AI investments as expenses. It argues that if expanding AI investment lifts both the neutral interest rate and market rates, thereby increasing the government’s interest burden, and if labor income shifts toward more lightly taxed capital income, the anticipated revenue gains could also be significantly diminished. The Brookings Institution likewise found that once AI-specific labor-market disruptions and higher interest rates are taken into account, more than half of the fiscal improvement normally expected from productivity innovation could be offset.

Conversely, if the AI bubble bursts before profitability is established, the direction of the shock would be the exact opposite. According to the Bank for International Settlements, the five largest U.S. technology companies are expected to invest more than $1 trillion in AI during 2025 and 2026. If expected returns deteriorate, losses could spread to investment firms and financial institutions that supplied funding through equities, corporate bonds and private credit, while the combination of capital withdrawals and reduced lending could deepen a credit crunch. The BIS warned that a sudden cutoff in investor funding could lead to a prolonged investment downturn, while Fitch Ratings identified a sharp correction in AI-related assets as a major credit risk. Yet with its fiscal capacity already weakened, the United States would have limited policy tools available to support financial markets in the event of a crisis.