The U.S. national debt has surged past $36 trillion and it’s not slowing down. Behind the headlines lies a deeper story of policy decisions, market distortions, and structural habits that have inflated this financial bubble over decades. This memorandum unpacks the forces driving the debt crisis - from the end of the gold standard to chronic deficits and artificially low interest rates - then explores what could happen if the bubble bursts, and what it might take to defuse it.

Background

The concept of a debt bubble refers to a situation in which the level of debt has grown beyond what is reasonable and can lead to serious problems for the economy. In the United States, several key factors have led to the present debt bubble:

Fiat Currency System: The move from the gold standard to fiat currency has allowed governments to increase money supply without having assets to back it, which has enabled more borrowing and spending.

Chronic Budget Deficits: Government expenditures have consistently exceeded revenues, leading to persistent budget deficits. In FY 2023, the federal government collected $4.4 trillion in revenues but spent $6.1 trillion, leaving a deficit of $1.7 trillion or 6.3% of the GDP (Congressional Budget Office).

Bank Bailouts and Debt Expansion Post-2008 Crisis: In response to the 2008 financial crisis, the U.S. government borrowed heavily to fund economic stimulus programs and bail out failing institutions. The Troubled Asset Relief Program (TARP) allocated $700 billion, including $250 billion for bank stabilization and $70 billion for AIG (U.S. Department of the Treasury). The recession also caused a sharp drop in tax revenues and increased spending on social welfare programs, worsening deficits. Consequently, the debt-to-GDP ratio surged from 67.6% in 2008 to 98% by 2012, leading to persistent deficit spending in subsequent years (Federal Reserve Bank of St. Louis).

Low-Interest Rate Environment: The U.S. has had low interest rates since the early 2000s, and they have hit historic lows after the financial crisis of 2008 and again after the pandemic to boost economic growth. These low rates have been in place for so long that they have encouraged over borrowing and the creation of asset bubbles and a growth in debt levels.

Current Situation

As of March 20th, 2025, the U.S. national debt stands at $36.22 trillion (U.S. Department of the Treasury). This substantial debt level has several implications:

Debt-to-GDP Ratio: The debt-to-GDP ratio, at 123% as of September 30, 2024, has risen significantly, indicating that the nation's debt growth is outpacing its economic output (U.S. Department of the Treasury).

Interest Obligations: In FY 2024, the federal government incurred $1.13 trillion in interest expenses on its debt (U.S. Department of the Treasury, “Interest Expense”). As a share of federal revenues, federal interest payments would rise to 18.4 percent in the year 2025 (Peterson Foundation). These rising interest payments constrain the government's fiscal flexibility, limiting its ability to invest in essential programs and services.

Debt Ceiling Dependency: An unsustainable fiscal path of spending more than revenue is reflected by the U.S. government's repeated debt ceiling hikes. Since 2009, frequent adjustments—often happening under threat of shutdowns—have forced borrowing to just cover essential expenses like Social Security and military salaries. The reliance on debt instead of structural reforms erodes market confidence: Congress has expanded borrowing without a repayment strategy (Peterson Foundation).

Consequences of a Debt Market Collapse

A collapse in the debt market could lead to the following detrimental economic effects:

Surge in Interest Rates: A sell-off in government bonds would lead to a decline in bond prices and a corresponding increase in yields. Given that U.S. Treasury yields serve as benchmarks for various lending rates, a spike in these yields would result in higher borrowing costs across the economy.

Corporate Financial Strain: Many companies rely on debt to finance their operations and growth and, therefore, higher interest rates would mean that they pay more for funds. This could result in a decrease in investment, layoffs and increase in corporate bankruptcies.

Consumer Spending Reduction: Higher interest rates would make loans more expensive for consumers, discouraging borrowing for significant purchases such as homes and automobiles. This decline in consumer spending could further suppress economic growth.

Asset Price Declines: Rising borrowing costs may trigger corrections in other asset markets such as equities and real estate as investors revalue assets relative to higher discount rates.

Economic Contraction: The result of reduced business investment and consumer spending could be that the economy tips into a recession, defined by falling GDP and rising unemployment.

Potential Solutions

Addressing the debt bubble necessitates a multifaceted approach:

Using Tariffs to Pay Down National Debt: Allocating a small percentage of tariff revenues to debt reduction ensures trade policy revenues contribute to fiscal stability. A structured framework for directing tariff proceeds to debt repayment could provide a sustainable solution without impacting essential spending.

Eliminating the 'Use It or Lose It' Budgeting System: The current framework forces agencies to spend their full budget or risk cuts, leading to wasteful expenditures. Shifting to performance-based budgeting, allowing agencies to retain savings for critical projects, and enforcing independent audits could curb inefficiencies and redirect billions toward debt reduction.

Expanding the Gold Visa Program to Reduce National Debt: A $5 million investment-based citizenship program could be expanded to generate revenue for debt reduction. All investment funds with the exception of logistical costs would be used directly to reduce the national debt. Background checks on the applicants must be strict and financial portfolios and plans to contribute to the U.S. economy must be robust enough to ensure overall economic benefits are derived from the new citizens, minimizing the risk of dependency on public resources.

Investing in and Strengthening the Department of Government Efficiency: Strengthening DOGE to reduce waste, streamline operations, audit programs, and eliminate redundancies could curb excessive spending. Expanding its oversight, modernizing technology, and cutting regulatory inefficiencies would enhance fiscal discipline and debt management.

Capping Federal Debt through Congressional Accountability: Enforcing fiscal discipline by capping deficits at 3% of GDP could deter excessive borrowing. Additionally, making policymakers ineligible for reelection if deficits exceed this limit would enhance accountability and encourage responsible budget management.

Reinstating the Gold Standard: Re-linking the currency to gold could impose fiscal discipline by limiting the ability to expand the money supply arbitrarily. In order for the government to acquire more debt, it would need to have sufficient gold reserves, preventing unchecked borrowing.

Conclusion

Unless this rising national debt is checked, it threatens the economic stability of the United States, growing interest payments and persistent deficits putting a strain on government resources. This needs to be addressed with fiscal discipline and systemic reforms. Solutions such as the reinstatement of the gold standard, caps on deficits, improving government efficiency, and using revenue sources like tariffs and investment programs can provide a sustainable path forward. By implementing structural changes and prioritizing debt reduction, the U.S. can work toward long-term fiscal stability.

References

● U.S. Department of the Treasury. “Interest Expense on the Debt Outstanding and Average Interest Rates.” Fiscal Data, U.S. Department of the Treasury, https://fiscaldata.treasury.gov/interest-expense-avg-interest-rates/. Accessed 3 Mar. 2025.

● Federal Reserve Bank of St. Louis. Federal Debt: Total Public Debt as Percent of Gross Domestic Product (GFDGDPA188S). FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/GFDGDPA188S. Accessed 3 Mar. 2025.

● Congressional Budget Office. The Budget and Economic Outlook: 2024 to 2034. U.S. Congress, 7 Feb. 2024, https://www.cbo.gov/publication/59727. Accessed 3 Mar. 2025.

● U.S. Department of the Treasury. “National Debt.” Fiscal Data, U.S. Department of the Treasury, https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/. Accessed 3 Mar. 2025.

● U.S. Department of the Treasury. Troubled Asset Relief Program (TARP). Retrieved from https://home.treasury.gov/data/troubled-asset-relief-program

● Peterson Foundation. “Any Way You Look at It, Interest Costs on the National Debt Will Soon Be at an All-Time High.” Peter G. Peterson Foundation, 7 Feb. 2024, https://www.pgpf.org/article/any-way-you-look-at-it-interest-costs-on-the-national-debt-will-soon-be-at-an-all-time-high. Accessed 3 Mar. 2025.

● Peterson Foundation. “The Debt Ceiling Will Be Reinstated on January 1—Here’s What’s at Stake.” Peter G. Peterson Foundation, 14 Dec. 2023, https://www.pgpf.org/article/the-debt-ceiling-will-be-reinstated-on-january-1-heres-whats-at-stake. Accessed 7 Mar. 2025.