Many Americans have heard that they should worry about the staggering size of the national debt. For the first time in modern history, America is paying more interest on its debt, now more than $30 trillion, than it spends on national defense. And there is no end in sight, with our deficits running larger than we’ve seen outside a crisis.
Sadly, the size of the debt is not the only thing Americans need to be concerned about. Who is lending us money also matters, and the characteristics of our creditors have changed over the past decade, leading to higher and more volatile interest rates, which raise mortgage, student loan and other borrowing costs. The shift could also increase the fragility of the U.S. financial system during times of stress.
Summary:
Core thesis
The United States doesn’t just face a debt-size problem — it now faces a debt-buyer problem.
Over the past decade, who buys U.S. Treasury debt has fundamentally changed, and that shift is quietly pushing interest rates higher, making them more volatile, and increasing financial-system fragility.
What changed — and why it matters
1. The loss of “price-insensitive” buyers
For decades, a large share of U.S. debt was bought by Foreign governments (building dollar reserves) and The Federal Reserve. These buyers were policy-driven, not profit-driven. They bought Treasuries regardless of price, which:
- Kept borrowing costs unusually low
- Reduced interest-rate volatility
- Gave the U.S. what economists call an “exorbitant privilege”
At their peak, over half of U.S. debt was effectively financed by such institutions.
That era is over:
- Foreign governments now hold less than 15% of the Treasury market
- The Fed has shrunk its holdings by roughly $1.5 trillion
- Debt issuance has surged faster than these buyers’ demand
2. Private investors are now in charge
The gap has been filled by asset managers, banks, hedge funds and other profit-seeking investors. This matters because private investors:
- Demand higher yields
- React quickly to data, politics, and policy signals
- Pull back during stress
As deficits remain historically large, the return of private buyers means structurally higher interest rates, more rate volatility and greater sensitivity to political dysfunction.
3. Hedge funds increase fragility
U.S. officials are especially concerned about hedge funds. While their Treasury positions have doubled in four years, they often use high leverage and disruptions can force rapid selling.
This has already shown up:
- Treasury market turmoil during March 2020
- Volatility around recent political and trade shocks
Alarmingly, Treasuries — normally a safe haven — have sometimes become a source of instability.
4. Rising “term premium” is the warning light
Investors now demand extra compensation for holding long-term U.S. debt:
- The 10-year Treasury term premium is ~0.8 percentage points
- That translates into billions in added interest costs
These costs:
- Raise mortgage, student loan, and business borrowing rates
- Crowd out private investment
- Slow growth
- Reduce fiscal flexibility and national power
What won’t solve the problem
The author warns against comforting illusions:
- AI productivity alone won’t erase debt
- Stablecoins or crypto demand won’t magically create new Treasury buyers
- Issuance gimmicks (changing debt maturity opportunistically) undermine trust
- Pressuring the Fed to inflate away the debt would amount to a partial default
Inflationary “debasement,” he argues, would destroy credibility — the true foundation of the Treasury market.
Why credibility is everything
U.S. debt remains dominant because investors trust:
- The independence of the Federal Reserve
- Predictable Treasury issuance
- Rule of law
- The political and institutional framework behind the dollar
That trust can erode slowly — or suddenly. History shows bond markets eventually discipline governments that refuse to discipline themselves.
Bottom line
America is not facing an immediate debt crisis — but it is entering a more dangerous phase, with the following factors causing the cost of mistakes to rise:
- Larger deficits
- Fewer loyal, price-insensitive buyers
- Greater reliance on volatile private capital
Financial engineering, optimism, or monetary shortcuts won’t solve the problem.
Only credible deficit control and debt discipline will keep America’s lenders willing — and its borrowing costs manageable.
