Posted Oct 23, 2026 by Martin Armstrong |
The United States has reached a point where the government is spending more than $1 trillion annually simply to pay interest on money it has already borrowed. The Treasury Department reported that the federal deficit reached $1.99 trillion for fiscal year 2026, an increase of $217 billion from the previous year. Total government spending climbed to $7.4 trillion while revenues amounted to only $5.4 trillion. Yet the most alarming figure is buried within that enormous spending bill. Net interest payments reached $1.05 trillion, while gross interest costs climbed to $1.36 trillion. Washington is now spending approximately $2.9 billion EVERY DAY in net interest, and that money does absolutely nothing to reduce the outstanding principal.
The interest expense alone has surpassed the entire national defense budget. Net interest is now the third-largest federal expenditure behind Social Security and Medicare, exceeding spending on Medicaid, veterans’ benefits, and numerous other government programs. Interest costs increased 8% over the previous fiscal year, while federal revenue increased only 3%. Washington collected more money from taxpayers, yet the cost of servicing its accumulated debt rose nearly three times as fast. Approximately 19 cents of every dollar collected by the federal government is now consumed by net interest payments. That money cannot build infrastructure, improve education, or provide additional services because it is being transferred to creditors for debts incurred by previous administrations and Congresses.
This is precisely what I have explained about the Sovereign Debt Crisis. Governments have absolutely no intention of repaying their debts. They continually roll over existing obligations while issuing additional debt to finance current spending. The politicians pretend that borrowing is a permanent source of revenue, but every bond eventually matures and must either be repaid or refinanced. When interest rates rise, the cost of refinancing becomes increasingly expensive. Washington became accustomed to artificially low rates during the pandemic and behaved as though that arrangement would continue indefinitely. The average interest rate on outstanding federal debt has now reached approximately 3.53%, more than double its 2021 level. Even that average understates the pressure from newly issued securities carrying higher market yields.
The numbers reveal how this process feeds upon itself. Federal debt held by the public increased by approximately $2 trillion during fiscal 2026, reaching $32.4 trillion, while total gross federal debt surpassed $40 trillion earlier this year. The government must borrow to cover its annual deficit while simultaneously refinancing trillions in existing securities as they mature. A one-percentage-point increase in the average interest cost on $40 trillion would eventually represent approximately $400 billion in additional annual interest, assuming the entire debt stock were affected. That increase would not occur overnight because existing fixed-rate securities retain their coupons until maturity, but the arithmetic demonstrates why the Treasury has become so sensitive to movements in the bond market.
Treasury Secretary Scott Bessent understands this problem because he comes from the world of global macro trading. He knows perfectly well that the Treasury cannot simply dictate what investors must accept as a return. The government can conduct buybacks, alter the maturity structure of its borrowing, and attempt to improve market liquidity, but none of those operations eliminates the underlying debt. Meanwhile, the Federal Reserve under Kevin Warsh can influence short-term rates, but it cannot command the 10-year or 30-year Treasury yield. If global capital demands higher compensation for inflation, currency risk, and the enormous supply of government securities, Washington must ultimately confront those market conditions.
Japan provides an important warning because it has spent decades attempting to manage an enormous sovereign debt burden through artificially suppressed interest rates. Japanese institutions are also among the largest foreign holders of U.S. Treasury securities. As Japanese government bond yields rise, those investors have a greater incentive to keep capital at home rather than finance Washington. This does not mean Japan must suddenly liquidate its American holdings. Even a reduction in future Treasury purchases matters when the United States must continually find buyers for enormous quantities of new and refinanced debt. Washington is competing with Japan, Europe, corporations, and private borrowers for the same international pool of capital.
The situation becomes even more absurd when politicians discuss cutting government spending. They argue endlessly over relatively small discretionary programs while interest costs are growing into one of the largest obligations in the entire federal budget. Interest payments are not optional expenditures that Congress can simply eliminate during budget negotiations. Treasury must honor its obligations if the United States intends to preserve the credibility of its debt. The more revenue consumed by interest, the less flexibility the government has to finance other commitments without additional borrowing or taxation. The political establishment has spent decades accumulating obligations, and now an increasing share of federal revenue is required merely to maintain the existing financial structure.
Consider what this means for the American taxpayer. The government collects income taxes, payroll taxes, corporate taxes, and numerous other forms of revenue, yet approximately one-fifth of federal receipts is now absorbed by interest on past borrowing. Americans are already confronting higher prices for housing, food, energy, insurance, and transportation. Washington continues demanding revenue from an economy where households are struggling to maintain their standard of living, and an increasing portion of that money is required to service the debt rather than provide any new public benefit. Politicians speak about the need for additional taxes, but the underlying spending problem remains untouched.
This is also why the notion that the Federal Reserve can rescue Washington simply by lowering interest rates is absurd. The Fed could reduce its overnight target, but that would not automatically lower long-term Treasury yields if investors remain concerned about inflation and fiscal sustainability. Attempting to suppress yields through massive bond purchases would introduce another problem by expanding central bank support for government financing. The United States already experienced the consequences of extraordinary monetary expansion during the pandemic. Americans are still paying the accumulated inflation bill, and repeating those policies would carry serious risks for purchasing power and confidence in the currency.
The most revealing aspect of the latest Treasury figures is that Washington is accumulating nearly $2 trillion in new deficits during a period when the economy is not experiencing a conventional recession. Revenue has reached approximately $5.4 trillion, yet the government still cannot come remotely close to balancing its books. Spending rose 6%, roughly twice the growth rate of revenue, while interest costs continued climbing. The political establishment keeps treating every new tax dollar as permission to spend even more, and nobody wants to confront the fact that the government has made itself increasingly dependent upon perpetual borrowing.
There is a fundamental difference between a government borrowing to finance productive infrastructure and one borrowing merely to maintain existing obligations. The latter becomes increasingly dangerous as debt servicing consumes a larger share of national resources. America has now reached the point where more than $1 trillion is spent annually on net interest, with no reduction in principal and no guarantee that refinancing costs will decline. The politicians will continue arguing over which party is responsible, but the debt has accumulated under both Republicans and Democrats because neither side has been willing to confront the long-term arithmetic.
The Sovereign Debt Crisis has never been about the government suddenly running out of dollars. The United States can create dollars, but it cannot create unlimited real purchasing power or compel international investors to hold its debt at whatever interest rate Washington prefers. The crisis emerges as confidence deteriorates and the cost of financing government becomes increasingly burdensome. We are watching that process unfold as interest payments consume more revenue, deficits expand, and the Treasury becomes increasingly dependent upon the willingness of global capital to finance its obligations.
The United States is now borrowing trillions annually while paying nearly $3 billion every day in net interest on its existing debt. That is an extraordinary financial burden for a government that continually promises the public more spending, more programs, and more benefits without explaining how any of it will ultimately be financed. The politicians have created a system where yesterday’s borrowing demands today’s taxes, and today’s borrowing guarantees an even larger interest bill tomorrow. They are not solving the debt problem. They are financing the cost of refusing to solve it.
