The United States is moving steadily further into an unsustainable fiscal path and the consequences are not limited to the borders of its own. Constant budget deficits, rapid growing public debt, and rising interest costs are becoming increasingly seen not only as problems for policymakers in the United States as well as threats to global economic stability. As the world’s most populous economy and holder of the reserve currency that is dominant and the dominant reserve currency, the United States occupies a unique place in the global financial system.
Its government debt supports international banking systems as well as foreign exchange reserves and benchmarks that are risk-free that are used to determine the price of assets globally. When US fiscal fundamentals deteriorate, the ripple effects can reach far beyond Washington impacting currencies, capital flows, commodity prices, and financial stability in emerging and developing economies. Recent trends suggest that, if not significant changes that the US deficit in the fiscal sector could turn into one of largest causes of financial instability around the world in the next decade.
The Scale of the US Fiscal Imbalance
The magnitude of the US deficit in the fiscal area is staggering. In fiscal year 2025 the deficit in the federal budget reached $1.8 trillion which is roughly 5.9 percentage of the GDP. The amount of borrowing is atypically high in a time period that isn’t the deep recession or war.
Gross federal debt has gone over the $38 trillion mark in the last quarter of 2018, while debt held by the public – often thought of as the most pertinent indicator of economic analysis – has risen to almost 100 % of the GDP. Based on projections from the Congressional Budget Office, that number could be at least 118 percent GDP in 2035 with current policies unchanged.
Another issue is another issue is the nature in the form of US debt. Treasury issuing has become constant and heavy with a significantly shorter average duration. This means that large chunks of debt need to be refinanced frequently, making public finances incredibly sensitive to fluctuations in interest rates. Even small rises in yields could translate into billions of dollars of cost-per-year increases.
US Fiscal Deficit Overview
| Indicator | Current Situation (2025-26) |
| Federal Budget Deficit | $1.8 trillion |
| Deficit as % of GDP | 5.9% |
| Gross Federal Debt | More than $38 trillion |
| Debt Held by the Public | 100% of GDP |
| Annual Interest Cost | Exceeds $1 trillion |
| Largest Foreign Holder | Japan |
| Key Risk Factor | The increasing sensitivity of interest |
| Global Impact | Currency volatility, capital flows |
| Official Website | https://www.fiscal.treasury.gov/ |
Rising Interest Costs and Fiscal Constraints
The interest payment of US the public debt exceeded a symbolic, but potentially risky threshold of over $1 trillion each year. This makes debt service one of the top budget categories for federal spending, which is in competition with defense and the major entitlement programs.
While Treasury yields have dipped from their highs in mid-2025 However, they remain high according to historical norms. In the last week of January 2026, 10-year Treasury yield was hovering around 4.24 percent and the 30-year bond was trading at 4.85 percentage. These yields reflect both the tightening of monetary conditions and the investor concerns over long-term fiscal sustainability.
Economic research has revealed a troubling feedback loop. Each increment of one percent in the debt-to-GDP ratio could increase interest rates for long-term loans by two to three percent. In turn, higher rates increase the cost of interest and further increase deficits, resulting in the self-reinforcing loop which gradually reduces the flexibility of fiscal policy.
Waning Foreign Demand for US Treasuries
Another risk that is emerging is the steady loss of foreign interest in US public debt. Foreign investors hold around 30% of the publicly owned US debt which is roughly 25% of the total Federal debt. Although still significant the share of this debt has been slowly declining.
Japan is the world’s largest foreign holder, holding over $1.2 trillion worth of Treasuries in November 2025. However, pressures from demographics and currency management issues and national policy requirements could restrict future purchases for traditional buyers.
If the demand for foreign currency weakens quickly, the consequences could be grave:
- Higher Treasury yields
- A weaker US dollar
- More volatility in bond markets
These changes would not be restricted to the US. They will ripple across global portfolios that view Treasuries as the most secure asset.
Policy Uncertainty and Monetary Independence
The risks to fiscal stability are exacerbated by institutional and political uncertainty. The appointment by Kevin Warsh to succeed Jerome Powell as Chair of the Federal Reserve has intensified debate regarding the balance that should be maintained between monetary and fiscal independence.
There is increasing anxiety that political pressure can push monetary policy towards lower interest rates, primarily to reduce the cost of borrowing by government. This is often referred to in the context of financial dominance–poses grave dangers.
If the market begins to think they are being told by there is a risk that Federal Reserve is subordinating price stability to debt management, trust within US institutions could be weakened. This could lead to:
- A weaker dollar
- Real yields are lower
- The status of safe-havens has been reduced for US assets
The results could prompt investors around the world to look for alternatives that would increase capital outflows, and financial fragmentation.
Global Spill overs and Financial Volatility
The ripples that are sweeping across the globe of US fiscal pressures are beginning to show. A stronger dollar could help reduce the US trade deficit but it also shifts capital flows to emerging markets.
Although inflows may initially increase currency and asset prices in these countries but they can also have unexpected results:
- Lower competitiveness in exports
- The rising inflation
- Asset bubbles
- Greater vulnerability to abrupt changes
Commodity markets also suffer. Changes in the currency, along with geopolitical tensions and tariffs cause price volatility to rise. For countries dependent on imports, it can cause inflation. For exporters, this causes income instability.
The rising demand for gold and a gradual shift away from dollars-denominated assets is triggering an ongoing debate about whether the longevity of dominance over dollar-denominated assets.
Risks for Emerging and Developing Economies
Emerging markets are more vulnerable to US fiscal instability. The fluctuation of capital flows, exchange rate swings, and rising expenses for servicing of debt abroad could undermine the autonomy of monetary policy and financial stability.
In extreme instances this pressure can cause:
- Crises in balance-of-payments
- Stagflation
- Financial sector stress
Without reforms in the US, these risks could escalate into broader global contagion especially during periods of geopolitical tension or economic slowdown.
Needed Reforms in the United States
To reduce the risk of these threats To reduce these risks, to mitigate these risks, the United States must prioritize fiscal reforms. Important steps include:
- Extending the average maturity of debt to lessen the risk of rollovers
- Reducing structural deficits by revenue and spending reforms
- Protecting the independence of the Federal Reserve
Maintaining credibility of institutions is vital to maintain global trust for US the financial sector.
The Role of Global Cooperation
International coordination remains crucial. Institutions like The International Monetary Fund and the Group of Twenty play critical roles in:
- Facilitating debt restructuring
- Global financial safety nets strengthened
- Promotion of policy coordination
In the future, developments like more efficient cross-border payment systems and gradual diversification of reserve could reduce dependence of the dollar. However, these shifts need to be handled with care to prevent destabilizing shocks.
Without a decisive response Without decisive action, the US fiscal deficit could transform from a problem for the domestic budget into a significant risk to the stability of global finance. In a highly interconnected global and a world that is increasingly interconnected, it is essential to have a sustainable US public finances aren’t only a matter of national importance, they are essential to the survival of the global imperative.
FAQ’s
Q1. Why does the US fiscal deficit matter globally?
Since US Treasuries anchor global financial markets, the instability of US public finances can affect the rate of interest, currency exchange and capital flows around the world.
Q2. Is the US close to a debt crisis?
Not immediately, but the increasing interest and debt costs can increase risks in the long run and decreasing the flexibility of fiscal policy.
Q3. Can global institutions reduce the impact?
They can be a great help in managing crises and spillovers however, their longevity depends on credible reforms to the fiscal system across the US.
