The U.S. Manages Its National Debt

The United States, as the world’s largest economy, has a national debt that is closely watched by both domestic and international observers. Managing this debt is a complex and ongoing challenge that involves various strategies, political debates, and economic trade-offs. The U.S. national debt, which exceeds $31 trillion as of 2025, is often described in terms of public debt (money owed to external entities) and intragovernmental holdings (money owed to various government trust funds). The way the U.S. manages this debt has significant implications for its economy, global markets, and future fiscal policy.

Understanding the National Debt

National debt is the total amount of money the U.S. government owes as a result of borrowing to cover budget deficits. It is mainly accumulated through the issuance of Treasury securities—bonds, notes, and bills that are sold to investors (including foreign governments, banks, and individuals). The U.S. government borrows money because its spending exceeds tax revenues, a situation that has been common for many years. The debt is categorized into:

1. Public Debt: This represents the portion of the national debt held by outside investors, including foreign governments, mutual funds, and private institutions.

2. Intragovernmental Debt: This portion is owed to trust funds, such as Social Security and Medicare, that hold U.S. Treasury securities. The government borrows from these funds to cover current spending.

Managing such a large debt involves balancing short-term fiscal needs with long-term sustainability, and it can have major implications for interest rates, inflation, and economic stability.

How the U.S. Manages Its Debt

1. Issuing Treasury Securities

The primary tool the U.S. uses to manage its national debt is the issuance of Treasury securities. The U.S. Department of the Treasury regularly issues bonds, notes, and bills, which investors purchase as a way to lend money to the government. These securities are attractive because they are backed by the full faith and credit of the U.S. government, making them relatively low-risk investments.

There are three main types of securities issued:

• Treasury Bills (T-Bills): Short-term securities that mature in one year or less. They are sold at a discount, meaning investors pay less than the face value and receive the full face value upon maturity.

• Treasury Notes (T-Notes): Medium-term securities with maturities ranging from two to ten years. These pay interest every six months and return the principal at maturity.

• Treasury Bonds (T-Bonds): Long-term securities with maturities ranging from 10 to 30 years. They also pay interest semiannually.

These securities are sold through auctions, and their yield (interest rate) is determined by market demand. The government borrows money by selling these securities, and investors receive a return in the form of interest payments.

2. Debt Refinancing

One of the ways the U.S. manages its debt is through refinancing—the practice of issuing new debt to pay off maturing debt. For instance, when a Treasury bond reaches maturity, the government may issue a new bond to raise the funds needed to repay the original debt. This strategy allows the U.S. to continually roll over its debt without needing to make large, lump-sum payments, keeping the debt manageable. However, this approach requires that the government continues to have access to borrowing at reasonable interest rates.

3. Interest Payments and the Role of the Federal Reserve

The U.S. government must make regular interest payments on its debt. These payments are made from the general revenue fund, which comes from tax collections, while the principal on the debt is usually refinanced or paid off when bonds mature.

The Federal Reserve (the central bank of the U.S.) plays a key role in managing the debt. While the Fed does not directly pay off the national debt, it influences the debt's sustainability through its control of interest rates and monetary policy. For instance, during times of economic recession, the Federal Reserve may lower interest rates to stimulate growth and reduce the cost of borrowing. This helps the U.S. government borrow at lower rates and reduce the burden of interest payments. Conversely, when the economy is overheating or inflation rises, the Fed might raise interest rates, making borrowing more expensive.

4. Fiscal Policy and Budget Management

Managing the national debt also involves fiscal policy decisions, particularly regarding government spending and taxation. Policymakers must balance budget deficits (when spending exceeds revenue) with long-term debt sustainability. To reduce the debt, the U.S. could either reduce spending, increase taxes, or implement a combination of both.

However, the political process complicates these decisions. For example, cutting spending can be politically unpopular, especially when it involves programs like Social Security, Medicare, or defense. Similarly, raising taxes can also be contentious. In practice, U.S. policymakers have historically taken a combination approach, with temporary tax cuts and spending increases followed by attempts at fiscal consolidation, typically during times of economic growth.

5. Managing Debt-to-GDP Ratio

A key indicator used to assess the sustainability of national debt is the debt-to-GDP ratio, which measures the total national debt in relation to the country’s economic output. The U.S. debt-to-GDP ratio has steadily risen in recent decades, exceeding 130% in the 2020s. While some economists argue that a high debt-to-GDP ratio is not inherently problematic for a country with a strong and diversified economy like the U.S., others warn that it could become a problem if the U.S. faces prolonged periods of slow economic growth, rising interest rates, or political gridlock over debt reduction.

In times of economic crisis, such as the 2008 financial crisis or the COVID-19 pandemic, the U.S. government may borrow more to stimulate the economy. While this can help mitigate short-term economic damage, it can also add to long-term debt levels.

Challenges in Managing the National Debt

1. Interest Rate Increases: As the U.S. debt grows, so does the cost of servicing it. If interest rates rise, the government’s debt servicing costs could skyrocket, consuming a significant portion of federal revenue. This could crowd out funding for other programs like healthcare, education, or infrastructure.

2. Political Gridlock: The U.S. political system often finds itself at a standstill when it comes to fiscal policy. Congress and the president may disagree on how to reduce the deficit or raise the debt ceiling, which can lead to government shutdowns or delays in debt payments.

3. Global Economic Shocks: Events like trade wars, geopolitical tensions, or recessions in major economies (such as China or the European Union) could disrupt the global markets and affect U.S. borrowing costs or access to credit.

4. Entitlement Programs: The long-term costs of entitlement programs like Social Security, Medicare, and Medicaid are a significant driver of U.S. debt. As the U.S. population ages, the demand for these services will grow, placing additional pressure on the budget.

5. Inflation and Currency Devaluation: High levels of national debt can raise inflationary pressures if the government borrows excessively to finance its activities. If inflation increases, the value of the U.S. dollar could decline, which in turn might make the cost of borrowing higher in the future.

Conclusion: The Path Forward

Managing the U.S. national debt is a balancing act that involves borrowing, refinancing, and managing interest payments while striving to ensure that the debt remains sustainable in the long term. The U.S. government has significant flexibility due to the dollar’s role as the global reserve currency, but the growing debt presents risks that require careful management. Addressing the debt will likely involve tough decisions on taxation, spending, and long-term fiscal reform. With an eye toward the future, policymakers must navigate these challenges while maintaining the stability and growth of the world’s largest economy.