TLDR: Yes but we've gotten better at hiding it.
The U.S. national debt has crossed $39 trillion. Federal debt now exceeds the size of the entire economy. Interest payments alone hit roughly $1 trillion this year, surpassing what the government spends on national defense or Medicare.
It would appear given these numbers that national debt represents an immediate crisis. Despite the enormity of the debt the debt situation is understood very differently by economists on the left versus economists on the right.
Conservative economists generally treat the debt as a national emergency. They argue that unsustainable deficits crowd out private investment, drive up interest rates for everyone from homebuyers to small businesses, and that interest payments will eventually consume so much of the budget that the government will have no flexibility left to respond to genuine crises. The debt, in their view, is a ticking clock.
Progressive and Keynesian economists tend to argue the opposite. They note that the U.S. has run deficits in nearly every year since the 1960s and the economy has continued to grow. They argue that a country which controls its own currency cannot go bankrupt the same way a household can, and that the more immediate danger is not the debt itself but the political temptation to slash the services people depend on in the name of fiscal responsibility.
Deficit bars split into interest payments on existing debt and the primary deficit — what the government actually overspent beyond debt service. Hover any bar for detail.
To better understand how economists think about debt and why the right screams about it and the left hides it under the rug. We first need to understand an economic concept, a theory and the unique structural features of American debt.
Circular Flow
The circular flow model describes how money, goods, services, and resources move continuously between the main sectors of an economy. In its simplest form there are two sectors Households and Government. Households supply labor and other factors of production to firms, in return they receive income wages, rent, interest, and profit. In the government sector of this model taxes flow in, government spending and transfers flow out. Government accounts for nearly one-third of all dollars circulating in the American economy.
The majority of American debt is held in the form of treasuries. If you think of American debt as an IOU held by interested parties in the form of treasuries. You can begin to understand a relationship that is central to the governments continued spending. The relationship between banks and governments.
The top ten foreign holders of U.S. treasuries are, in order: Japan (≈$1.1T), China (≈$760B), the United Kingdom (≈$750B), Luxembourg (≈$410B), the Cayman Islands (≈$400B), Belgium (≈$300B), Canada (≈$290B), Ireland (≈$280B), France (≈$270B), and Switzerland (≈$260B). Domestically, the Federal Reserve holds roughly $4.3 trillion, and government trust funds — primarily Social Security — hold another $6.8 trillion. These are the parties that would have to get in a room and figure things out (in the form of a joint reconciliation) if a default were to occur.
Circle area proportional to dollars held. Hover any circle for detail. Total ~$36 trillion across all holders shown.
The most important thing to understand is what leverage or cards to play the creditors — in this case the parties that hold the U.S. national debt — have over the debtor, in this case the government. And those cards are few. They amount to essentially three responses: stop buying new U.S. debt, forcing the government to find other buyers or print money to cover its deficit; sell existing holdings, flooding the market with treasuries and driving yields sharply higher; or demand a higher yield before agreeing to purchase new debt at all, directly raising the cost of American borrowing.
In practice, none of these options is without it's cost to the creditors who might enact punishment for some kind of reform. Because unfortunately when any owner dumps its treasury holdings or stops purchasing treasuries it drives up the interest rate. In turn driving down the value of the holdings that every one already has. Given this paradox, government debt is sort of a mutually perpetuating game between debtor and creditor of let's see how far we can push the limits. Which is why the relationship, while on it's face appears asymmetric, functions less like a simple debtor-creditor dynamic and more like a mutual hostage situation.
The most catastrophic thing that could happen is that all of these parties stop purchasing new U.S. debt entirely for some reason. (Note the U.S. debt was recently down graded although that doesn't seem to have had any effect on treasury purchases for the time being). Ok now that we know the players in the room and relationship between them. Or the circular flow of the money we can better understand a more heady counterintuitive economic theory.
Modern Monetary Theory
Modern Monetary Theory (MMT) is a macroeconomic framework that challenges conventional thinking about how government spending, taxation, and debt actually work in countries that issue their own sovereign, fiat currency — like the US, UK, Japan, or Australia.
The central claim of MMT is that a government which issues its own currency cannot "run out of its own money" the way a household or business can, because it is the monopoly issuer of the currency. It can always create more money to pay any debt denominated in its own currency. In this way the government acts as both ends of the circle or flow of money.
Given this frame the real constraint on government spending in a fiat paradigm is inflation, not solvency. Which is the risk a country takes every time it prints more money. If the government spends beyond an economies productive capacity creating more demand than there are goods, or services and workers to meet the demand — then you get inflation. Inflation is the only limiting factor of a fiat society and while America is uniquely suited to weather inflation there do appear to be limits.
It is also worth considering the psychological effect of fiat sovereignty and MMT. Or easy money's ability to create a climate of political and private sector profligates. Willing to test just how far they can push spending before they topple the entire system. Politicians almost seem compelled by their constituencies to test the upper bounds of fiat systems. And their large donors are more than happy to profit from the relationship, lest you forget we vote them into office.
Debt Denominated in a Nations Own Currency
There are currently roughly thirty major economies with debt denominated in their own sovereign fiat currency. But Japan has become a standout outlier. And the poster child for why countries can get away with bigger and bigger deficits.
General government gross debt as % of GDP. Eurozone members excluded — they lack independent monetary policy. Source: IMF World Economic Outlook 2024.
Today nearly every economist will point to Japan's GDP when someone asks what the actual limits of government spending in fiat countries are. Japan's debt-to-GDP ratio is over 200% — by some measures over 235%. The country has not collapsed, has not defaulted, and continues to borrow money to service its government at extremely low rates. Japan is often used as evidence for why the U.S. — which is sitting at somewhere around 122% debt to GDP — has nothing to worry about.
Japan's lack of a major default, or hyperinflation, or a relative fiscal crisis like the great recession in spite of its debt sounds fine on the surface. But the Japanese story is more complicated and more cautionary than this talking point suggests.
The so called "successful" outcome of the Japanese Economy are three lost decades.
What is a lost decade? "A prolonged period of economic stagnation, characterized by little to no growth in GDP, low or negative stock market returns, and high volatility, typically lasting roughly ten years."
Japan experienced a catastrophic collapse of its real estate and equity bubble in 1991. This crash was preceded by an era of immense productivity and wealth growth for the country. What would come after is now called a lost decade.
What followed the 1991 crash was not a debt crisis but a slow, grinding, multi-decade stagnation: nominal GDP barely grew through the 1990s and 2000s, prices were flat or falling for years, wages stopped rising, and the country spent two decades trying to engineer a fix with unprecedented monetary experiments. The reality for Japan is that despite all of its attempts the Japanese working class's real wages have been roughly stagnant for thirty years.
The government may have avoided a default — but by any other metric of success, the answer is much grimmer.
In many ways it appears that America wants to follow the Japanese play book.
America's debt-to-GDP ratio climbed from roughly 70 percent in 2007 to over 122 percent today — most of that accumulation enabled not by tax increases or genuine revenue growth, but by the Federal Reserve's willingness to buy government debt and suppress interest rates for over a decade. When inflation finally arrived in 2021 and 2022, the Fed was forced to raise rates sharply, and suddenly the interest bill on all that accumulated debt began to compound rapidly. Congress's response has been to continue spending. The CBO now projects that interest payments alone will consume a larger share of the federal budget than either defense or Medicare within the decade. Meanwhile, both parties campaign on deficit-funded promises — tax cuts on the right, expanded programs on the left — and the debt ceiling is routinely lifted without meaningful concessions.
The pattern is recognizable: not a crisis, not a default, not a moment of reckoning. Just a steady accumulation of obligations and a political class that has concluded that the consequences are someone else's problem.
The right is right that there are limits, and that the willingness of politicians to test those limits will come at a cost that's very well hidden. The American debt story might not end in a catastrophic market meltdown. It might simply continue in a long series of smaller choices that lead to the erosion of wage earning power. With each new act of debasement.
Debasement is the act of increasing the volume of money in circulation, or decreasing the relative value of each unit of currency. This makes old debt easier to pay off with new dollars. Debasement is possibly the only popular monetary policy for managing high government debt. At least it's the most preferred by politicians.
Debasement almost always causes inflation — eroding the buying power of the lower and middle class. Because it creates a cascade renegotiation across a market about who absorbs the inflation, who loses purchasing power, whose wages stagnate, whose assets appreciate.
Debasement often benefits older generations whose assets grow in value because of inflation. While punishing the younger generation whose main wealth growth instrument — wages — rarely keeps up with inflationary trends.
Comparing the U.S. to Japan may be a convenient sleight of hand for those in power. But this sleight of hand may be losing its luster for many younger Americans who appear to be turning to demagogues with simple narratives about wicked or greedy cabals to requit their economic woes.
The debt may not be a crisis in the way a hurricane is a crisis. But it does appear to be a problem that's structural, slow-moving, and often resistant to simple fixes.
The one thing that seems true about American debt is that the debt will continue to grow — the only remaining question is which generation hands it in.