The National Debt Interest Spiral and Its Impact on U.S. Fiscal and Market Stability

The U.S. national debt has reached unprecedented levels, with the total outstanding debt surpassing $38.40 trillion as of December 2025-a $2.23 trillion increase from the previous year. This surge, coupled with rising interest rates, has triggered what analysts are calling an "interest spiral," where the cost of servicing the debt now consumes a growing share of federal outlays. In fiscal year 2025 alone, the Treasury spent $1.22 trillion on interest payments, and the Congressional Budget Office (CBO) projects that net interest will account for 14.52% of total federal outlays by 2028. These figures signal a fiscal trajectory that threatens long-term economic stability and necessitates a reevaluation of asset allocation strategies for investors.

Fiscal Sustainability Under Threat

The U.S. debt-to-GDP ratio has climbed to 119% in 2025, with projections indicating it could reach 135% by 2035. This trajectory raises critical concerns about fiscal sustainability. As debt grows faster than GDP, the government's ability to service its obligations weakens, eroding investor confidence and increasing the risk of a fiscal crisis. The CBO estimates that annual interest payments will balloon to $1.8 trillion by 2035, a burden that will consume a larger portion of the federal budget than revenue growth can accommodate.

The structural imbalance between debt accumulation and economic output is exacerbated by policies that lack long-term fiscal discipline. Deficit-driven tax cuts, rising tariffs, and expanded social spending programs have pushed the U.S. toward a fiscal outlook deemed unsustainable by international credit rating agencies. This environment creates a self-reinforcing cycle: higher debt necessitates higher borrowing, which in turn drives up interest costs, further straining fiscal flexibility.

Market Stability and the Dollar's Diminishing Allure

The market implications of this debt spiral are equally concerning. Higher interest rates, a necessary tool to attract investors to U.S. debt, have already begun to crowd out private investment and slow long-term economic growth. The U.S. dollar's relative weakness against the yen and euro in recent months has been attributed to declining confidence in the dollar as a stable reserve asset. Foreign investors, who hold approximately 29% of U.S. Treasury bonds, are increasingly reassessing their portfolios, with central banks shifting toward gold and other safe-haven assets.