America’s Debt Trap

The nation’s debt trap and borrowing are shrinking US officials’ leverage to manage the world’s largest economy and honor its global security obligations.

America’s mounting debt transcends its pressing domestic economic challenges; it now represents a defining test of the nation’s global power. As its debt burden reaches historic highs, the US risks compromising its financial stability at home and its capability to project power abroad.

photo by Jp Valery

Economic forecasters project America’s debt will hit a record $37 trillion by the end of 2025. The deficit spending required to finance the debt creates widespread global anxiety. America has shouldered high levels of debt before, but the difference this time: America’s total debt is approaching the size of the entire US economy, leaving US officials in a debt trap. They need the money to pay the bills but borrowing it shrinks their leverage to manage the world’s largest economy and honor its global security obligations. The increasingly dire situation could spur inflation, intensify pressure to cut sensitive social programs, and potentially build the momentum for “de-dollarization,” a process that could undermine American global power while strengthening its adversaries, particularly China and Russia.

It’s Different This Time

Most news coverage of the US debt focuses on the nation’s domestic economy, and rightly so. The debt mounts pressure to address deferred decisions on programs that are deeply sensitive to American voters. Washington is likely to run a budget deficit this year, totaling approximately 6.2 percent of the nation’s economic output, as measured by Gross Domestic Product (GDP).

Other presidents have run budget deficits of similar magnitude. President Ronald Reagan ran deficits that totaled just over 6 percent of GDP, the same level President Donald Trump faces now. However, a key difference exists between Reagan’s and Trump’s terms. At its peak, the total debt racked up by Reagan, who was fighting the Cold War, equaled about 53 percent of the nation’s economic output. In contrast, Trump, who is not engaged in a war, is set to end the year with a total debt level of at least 100 percent of America’s GDP. 

“Our current debt level is higher than at any time since World War II,” says Maya MacGuineas, president of the Committee for a Responsible Budget. “And it’s rising rapidly. To add insult to injury, we’re on course to spend $1 trillion this year just on interest costs. Hopefully, this milestone is enough to wake up policymakers that we need to do something, and we need to do it quickly.”

Trump Tariffs Fall Short of Fixing Problems

About eight months after MacGuineas issued her warning, Congress passed the extension of President Trump’s “Big Beautiful” tax bill. Forecasters project that Trump’s spending measure will eventually add $4.1 trillion to the national debt, raising the total debt to approximately 135 percent of the US economy’s output.

Faced with high deficits and debt, the American economy could easily see higher interest rates and inflation. The government’s financial needs will undoubtedly crowd out private investors competing to borrow the capital needed for productive investments. President Trump says he will offset the borrowing needs with the revenue from tariffs imposed on America’s trading partners. However, even under the most optimistic projections, the tariffs would only generate somewhere between $1.3 trillion and $2.8 trillion, which is not enough to offset deficit increases, according to the Yale University Budget Lab. Meanwhile, Trump is using the tariffs as a bargaining chip in trade deals, tossing uncertainty into exactly how much revenue they will generate.

Debt Jeopardizes America’s Standing

Although the debt trap poses significant hurdles the American economy must overcome, the financial distress can have more serious consequences for America’s ability to sustain military and diplomatic commitments, which are already under strain.

The surging amount of interest payments the Treasury must pay creditors, for example, poses a major challenge. Non-partisan analysts estimate interest payments on federal debt will exceed the combined budgets of the Defense Department and Medicare in 2025. The amount of interest the Treasury must pay investors this year is the second-largest item in the US budget.

Rising debt-service levels increase pressure on government programs requiring large budgets, such as the Department of Defense. As interest payments on the debt surge, US officials will face a dilemma about whether the nation can afford pricey defense modernization projects, such as the $132 billion advanced ballistic missile submarines the Navy says it needs to project power in hotspots like Taiwan.

Dumping Treasuries a Dubious Tactic

Capitalizing on Washington’s substantial debt levels will also tempt rivals. Foreign investors now hold nearly one-quarter of the Treasury securities the nation sells to finance its debt. Japan owns about $1.145 trillion, followed by China at $759 billion and the United Kingdom at $723 billion. Trump targeted all three nations with tariffs on their exports to the US, particularly China.

Debt hawks warn that foreign rivals could dump US Treasury securities and unleash havoc in global bond markets. Mass dumping of Treasury securities would be self-defeating as America’s creditors would suffer huge losses. A more likely scenario: A simple threat of revolt gives foreign adversaries leverage to limit the flexibility of American political and military power. If Treasuries, long considered a “haven” in times of economic distress, are to lose their cherished status, the decline would probably be gradual and take considerable time. However, the US Treasury’s data on debt suggests the process may already be underway. In 2008, foreign investors held about half of America’s public debt. By 2025, the share has fallen to 30 percent.

The Move to Dump the Dollar

America’s adversaries are eager to capitalize on the nation’s reliance on foreign capital. They seek to displace the dollar as the world’s reserve currency, a status that affords the United States enormous advantages. While that might be possible, it will be very challenging.

Global traders price about 54 percent of international transactions in dollars, according to the Brookings Institution, a Washington-based think tank. Dollar-denominated assets account for nearly 60 percent of foreign reserves, underscoring the dollar’s dominance as a cornerstone of American financial and political power. Demand for dollars enables the nation to enjoy lower borrowing costs, reduces the risk of currency fluctuations, and empowers the US to impose punitive trade sanctions, as most dollar-denominated transactions flow through US banks.

However, these benefits, sometimes referred to as America’s “exorbitant privilege,” also pose risks. If dollar dominance weakens, sanctions could lose their impact as they rely heavily on the dollar’s central role in global trade and finance.

American alliances established in the wake of World War II also rely on the US and its military to maintain global stability. The alliances not only encompass large swaths of Europe but also include essential nations in Asia. Unsustainable debt levels could lead to significant defense budget cuts, prompting America’s allies to search for alternatives, especially if debt constraints affect ventures such as joint military drills or security spending. In fact, allies have already started to seek alternatives.

BRICS+ Growth Strains Alliance

In 2001, Jim O’Neill, a respected economist and former investment banker, coined the term BRICs for four emerging economies: Brazil, Russia, India, and China. BRICS has evolved into BRICS+, a major geopolitical alliance with the potential to challenge the United States’ global dominance.

As of January 2025, the alliance is made up of ten members and nine partner countries. It accounts for half of the world’s population, 41 percent of the global economy, 30 percent of global oil production, and 45 percent of agricultural output. It also generates a larger percentage of global GDP compared to the G-7 nations. BRICS+ positions itself as a counterweight to global financial institutions dominated by the US, offering its members access to capital outside the clout of the World Bank and the International Monetary Fund. As a BRICS member, China leads efforts to replace the dollar with other currencies or assets, such as gold or unique legal tenders like a Chinese digital currency. 

As muscular as BRICS+ has become, the bloc’s growth will ironically make its challenge much harder, says O’Neill, a British Lord who closely follows its development.

“They couldn’t get much done when there were just five members,” O’Neill told the Chicago Council on Global Affairs last month. Increasing the number of members by adding nations with conflicting self-interests makes management of the alliance even more unwieldy.  “China and India,” he says, “don’t even want to be in the same room together.”

The True Test of American Resolve

As long as America’s economy remains dominant, O’Neill doesn’t believe BRICS+ or anyone else will topple the dollar. But that doesn’t mean there won’t be attempts to do so. President Trump’s tariffs may encourage rival nations to grow their appetite for risks. For instance, in a confrontation between the US and China over Taiwan, China might consider that incurring huge losses through the sale of Treasuries would be worth gaining control of the Taiwan Strait.

America has faced debt crises before, but rarely with its global interests so intricately intertwined with its financial strength. The US may be able to continue borrowing, but the real question is, how long will the world continue to underwrite its power? The actual test is whether Washington can muster the political will and resolve to act before the debt trap reshapes America’s economy and its global standing.

—James O’Shea

James O’Shea is a longtime Chicago author and journalist who lives in North Carolina. He is the author of several books and is the former editor of the Los Angeles Times and managing editor of the Chicago Tribune. Follow Jim’s Substack, Five W’s + H here. 

A note to readers: I’ve decided to occasionally collaborate with Eagle Intelligence Reports, a new media organization set up as a global platform specializing in insightful political and strategic analysis as well as exclusive international intelligence for decision-makers, researchers, and sophisticated audiences. EIR strives to be a credible benchmark for rigorous, unbiased geopolitical and strategic analysis free from media oversimplification, political noise, and ideological bias. EIR’s editor is Omar Al Qasim, an experienced print journalist. The organization is headquartered in Europe. I will continue to write about domestic issues in the U.S. too. This post first ran on EIR’s website.