The widening U.S. fiscal deficit is fueling debt concerns

   In 2024, the U.S. federal fiscal deficit once again surpassed $1.9 trillion, accounting for nearly 7% of GDP, marking a historic high outside of pandemic years. Meanwhile, the federal government's total debt has exceeded $34.5 trillion.

To maintain cash flow, the Treasury Department has been forced to continuously increase the scale of Treasury bond issuance, sparking deep concerns in global markets about the “sustainability of U.S. debt.”

Against the backdrop of the Federal Reserve yet to formally shift to a loose monetary policy, high interest rates, and ongoing geopolitical turmoil, the uncontrolled expansion of the U.S. fiscal deficit is triggering a global debt anxiety chain reaction. This is not merely a “fiscal issue” but may become one of the core variables driving financial market volatility in the coming years.

Structural Expansion of the Deficit: Policy Inertia Accelerates Risk Accumulation

While fiscal deficits are intended to be a tool for governments to regulate economic cycles, the U.S. deficit has recently exhibited a dangerous trend of structural expansion coupled with cyclical overlaps.

1. Rigid Growth in Social Security and Healthcare Expenditures

As the U.S. population ages rapidly, federal expenditures on Medicare and Social Security are expanding. According to the U.S. Congressional Budget Office (CBO), these two programs will account for nearly half of total budget expenditures by 2033. Regardless of whether Democrats or Republicans are in power, such expenditures are difficult to reduce.

2. Rising military and geopolitical costs

The ongoing Russia-Ukraine war, increased military aid to Taiwan, and tensions in the Middle East have driven the expansion of the U.S. defense budget. In the 2024 fiscal year, U.S. defense spending reached a record high of $886 billion, accounting for over 13% of federal budget expenditures.

3. Surge in Interest Expenditures Becomes the “Fourth Pillar”

The Federal Reserve's continued high-interest rate policy has led to a significant increase in interest expenditures on government bonds. In 2024, annualized interest expenditures exceeded $1.1 trillion, surpassing major expenditures such as education and veterans' affairs, becoming the “fourth pillar” after social security, healthcare, and defense. If debt continues to expand, this expenditure will rise rapidly in a spiral.

4. Weak tax revenue coexists with tax cuts

Despite the U.S. economy outperforming expectations in 2023, tax revenue growth has not kept pace, reflecting the suppression of corporate profits and consumer spending by high interest rates. Meanwhile, multiple tax cuts implemented by successive administrations (such as corporate tax cuts and personal income tax exemptions) continue to impact fiscal revenue.

Taking all these factors into account, the U.S. fiscal deficit is evolving from a “pandemic relief shock” into a “structural risk spillover.”

Debt rollover and market confidence: U.S. Treasury issuance is becoming increasingly challenging

Over the past few decades, despite the continuous growth of U.S. debt, U.S. Treasuries have been regarded as the “safest asset globally” due to the dollar's status as the world's reserve currency, ensuring smooth issuance. However, this situation is undergoing a subtle shift.

1. Imbalance in U.S. Treasury demand structure

Declining willingness of foreign central banks to purchase: Traditional major buyers of U.S. Treasuries, such as China and Japan, are gradually reducing their holdings of U.S. Treasuries amid geopolitical friction and pressure to control exchange rates. For example, China's holdings of U.S. Treasuries in 2024 have dropped to the lowest level in nearly 15 years.

Increased pressure on U.S. domestic financial institutions to “take over”: While insurance companies, pension funds, and money market funds remain the cornerstone of U.S. Treasury holdings, their asset allocation is shifting toward shorter-term, higher-liquidity assets, reducing the appeal of long-term Treasury bonds.

2. Frequent fluctuations in U.S. Treasury yields

Since the second half of 2024, the yield on 10-year U.S. Treasury bonds has approached 5%, exceeding that of most major developed economies' comparable assets. This is not merely a signal of “strong economic performance,” but also implies rising “credit discounts” and “risk premiums.”

3. Credit ratings face further shocks

In August 2023, rating agency Fitch downgraded the U.S.'s long-term sovereign credit rating to AA+, citing “structural expansion of the fiscal deficit and declining governance capabilities.” Although the market did not panic in the short term, this was the second warning on U.S. credit since 2011.

As the deficit continues to expand and bond issuance pressure intensifies, confidence in the “risk-free rate” is beginning to crack. Some hedge funds have even included U.S. Treasury bonds in their credit risk hedging portfolios, indicating that doubts about their “pure safety” are spreading rapidly.

Strong Dollar and Capital Mismatch: Chain Reactions in Global Financial Markets

The expansion of the U.S. fiscal deficit is not only a domestic economic issue but also a systemic risk source for global financial markets. Its primary spillover effects include:

1. A strong dollar and “capital siphoning”

To address the expansion of the deficit and interest payments, the U.S. Treasury must continuously attract global capital into the U.S. Treasury market. Combined with the Federal Reserve's high-interest-rate environment, this drives the dollar to remain strong, leading to capital outflows from emerging markets, currency depreciation, and heightened financial market pressures.

Currencies in countries such as Brazil, India, and Indonesia came under pressure in the second quarter of 2024, forcing central banks to deploy reserves to counter exchange rate shocks, while foreign investors' risk appetite plummeted.

2. Global Asset Repricing

Rising U.S. Treasury yields have driven a global reassessment of “discount rates.” Valuations of stocks, real estate, and long-term bonds have been broadly compressed, with market volatility increasing. Technology-related assets and highly leveraged companies have been hit hardest by the negative impacts.

3. Sovereign Credit Premium Contagion

The deepening of U.S. debt issues has also triggered market repricing of other high-debt nations such as Italy, Japan, and the United Kingdom. The bond market has seen frequent “premium unraveling” as investors begin to carefully assess the fiscal soundness of different countries, leading to a significant widening of yield spreads.

Will fiscal-monetary conflicts resurface? The Federal Reserve and the Treasury Department's “see-saw”

The U.S. is currently in a typical “fiscal expansion-monetary tightening” phase: fiscal deficits are expanding significantly, but the Federal Reserve is maintaining high interest rates to curb inflation. This combination is highly prone to policy conflicts.

1. The Federal Reserve is caught in an “interest rate paradox”

To combat inflation, the Federal Reserve must maintain high interest rates; however, high interest rates exacerbate fiscal interest expenses, forcing the Treasury Department to issue larger-scale bonds, creating pressure on the bond market — rising long-term interest rates may actually stimulate more deficit financing, forming a “debt-interest rate” spiral.

2. Is the fiscal department “holding monetary policy hostage”?

If the U.S. bond market experiences a sharp sell-off or a surge in yields, the Federal Reserve may be forced to cut interest rates early or launch a new round of “hidden QE” (such as adjusting the term structure or expanding reverse repurchase tools) to stabilize the Treasury market.

This “fiscal-dominated monetary” path will weaken the Fed's independence and damage the credibility of the U.S. dollar.

3. Will inflationary pressures resurface?

If fiscal deficits continue to boost monetary liquidity (e.g., through subsidies, military spending, or tax incentives), once demand recovers, it could reignite “lagged inflation.” The risk of inflation rising again by 2025 cannot be ignored.

Breaking the deadlock: The political and financial challenges of reducing deficits

The U.S. is not without means to address the deficit issue; the problem lies in the “excessively high political costs.”

1. Tax increases: an “impossible task” in reality

Although the Biden administration has proposed higher capital gains taxes and corporate taxes on businesses and high-net-worth individuals, such measures are unlikely to gain traction in the Republican-controlled House of Representatives.

The two parties have significant disagreements over the path to “fiscal austerity,” and electoral considerations are suppressing rational budget repairs.

2. Cutting Spending: Structurally Difficult to Implement

As mentioned earlier, the U.S. budget is highly rigid, with defense spending, social security, healthcare, and debt interest accounting for over 70% of total expenditures. Without institutional reforms, there is limited room for short-term cuts, which could spark backlash from the public and institutions.

3. Leveraging Economic Growth to Resolve the Issue: Increasingly Difficult

“Using growth to offset debt” has been a core fiscal philosophy of the United States. However, current structural challenges such as population aging, declining labor force participation rates, productivity bottlenecks, and reduced investment returns in a high-interest-rate environment make this path increasingly difficult to pursue.

Therefore, the financial path to reducing the deficit is more likely to rely on “implicit financial repression”: for example, maintaining inflation above interest rates, promoting moderate currency depreciation, and encouraging capital to remain in the domestic bond market. While this approach may provide short-term relief, it could weaken the dollar's credit foundation in the long term.

The expansion of the U.S. fiscal deficit is not an isolated event but one of the symptoms of a shift in the global financial system. It exposes the reliance of major economies on “debt-driven growth” in the post-pandemic era and reflects the gradual erosion of capital markets' trust in “unlimited loose monetary policy.”

In the short term, U.S. Treasury bonds remain the anchor of global asset allocation. However, in the long term, if fiscal expansion continues unchecked, the dollar, U.S. credit, and even the global capital order may face a profound reassessment.

From this perspective, the deficit issue is not only a fiscal challenge for the United States but also a litmus test for global financial stability. Its trajectory warrants vigilance and reflection from every investor, policymaker, and ordinary citizen.