US National Debt from the perspective of a US retail investor

[Grinkle]

What is the "smart" way for me to think about interest on the US national debt? Things that I think of when I think about the interest, numbered to make it easier for anyone inclined to comment to refer back to my post, not in any particular order.

1. I am a US bondholder, so part of that interest is being paid to me
2. I am a US taxpayer, so part of my taxes are going to pay that interest
3. All of the interest being paid to me I am putting back into the US economy when I use it to pay for goods and services
4. The below will tell you that about 2/3 of US debt is domestically owned.

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I'm not sure if the interest payments going to foreign debtholders can be thought of as coming back into the US economy or not, and if there is reason to be more or less concerned about that 1/3 of the debt from the perspective of a US bondholder / taxpayer.

5. If the US had no interest payments to make, that would mean it was not selling any bonds. I expect this would be HUGELY disruptive to the investment community, and I expect disruptive in a way that very few US citizens would say is good or helpful.

I don't know how to think about a throw-away comment that by such-and-such a date we will be paying 'x' amount of our tax revenue in interest payments, with the implication being that any reasonable person should find this alarming. As a buyer of bonds and a taxpayer both, I don't think its so simple as "interest is bad". Any thoughts on the appropriate perspective greatly appreciated.

 

[Greg Bernhardt]

Newbie question, are bonds the primary mechanism for foreign funding? When we talk about the national debt, what is the total outstanding bond?

 

[Grinkle]

@Greg Bernhardt

Per the below, about 80% of the US national debt is bonds. The remaining 20% I believe is quantitative easing, that is when the Federal Reserve buys bonds - the below article calls that the US govt borrowing money from itself, imo an apt description.

So if you own bonds, or a fund in your 401k or 403b or retirement pensions owns bonds (a very likely scenario if you have any of those) then you are loaning money to the US government.

U.S. National Debt and Government Bonds: What You Need to Know

When a government spends more than it brings in as tax revenue, it issues debt in the form of government bonds to raise more. Learn how national debt works.

www.investopedia.com

 

[EricDMMiller]

I posted this in the tariff thread, but it is relevant here, as it is an attempt to restructure the entire framework by which the US relates to sovereign debt and currency.

This article goes into some depth of the "Mar-a-Lago Accord", which seems to line up with a lot of the trade actions taken:

Client Challenge

It links to a discussion paper, titled:
A User's Guide to Restructuring the Global Trading System


It looks like a deliberate attempt to devalue the US dollar:

1) There is good reason to be more cautious with changes to dollar policy than with changes to tariffs.
2) Steps to strengthen undervalued currencies will likely not be taken until risks can be mitigated. The Administration will likely wait for more confidence that inflation and deficits are lower, to limit potentially harmful increases in long yields that could accompany a change to dollar policy. Waiting for turnover at the Federal Reserve increases the likelihood that the Fed will voluntarily cooperate to help accommodate changes in currency policy.
3) Tariffs are a tool for negotiating leverage as much as for revenue and fairness. Tariffs will likely precede any shift to soft dollar policy that requires cooperation from trade partners for implementation, since the terms of any agreement will be more beneficial if the United States has more negotiating leverage. Last time, tariffs led to the Phase 1 agreement with China. Next time, maybe they will lead to a broader multilateral currency accord.
4) Therefore, I expect policy to be dollar-positive before it becomes dollar negative.

The next step would be to begin defaulting on US Treasury bonds:

IEEPA can also be used to disincentivize the accumulation of foreign exchange reserves, if the Administration wills it. If the root cause of dollar overvaluation is demand for reserve assets, Treasury can use IEEPA to make reserve accumulation less attractive. One way of doing this is to impose a user fee on foreign official holders of Treasury securities, for instance withholding a portion of interest payments on those holdings. Reserve holders impose a burden on the American export sector, and withholding a portion of interest payments can help recoup some of that cost. Some bondholders may accuse the United States of defaulting on its debt, but the reality is that most governments tax interest income, and the U.S. already taxes domestic holders of UST securities on their interest payments. While this policy works through currencies as a means of affecting economic conditions, it is actually a policy targeting reserve accumulation and not a formal currency policy.

A reminder that, about a month ago, Trump suggested the US simply stop paying on bonds, since he felt that many of them were fraudulent:

https://www.reuters.com/markets/rates-bonds/bond-traders-waver-trump-questions-us-government-debt-figures-2025-02-10/

 

[Grinkle]

It looks like a deliberate attempt to devalue the US dollar

Seems to me a really bad idea to attempt this level of governmental free market influence, regardless of whether one thinks a weaker dollar is good or bad for any particular currency pair.

Also sounds uncomfortably plausible as a Trump strategy. Thanks for bringing the link to this thread, I agree its relevant.

 

[Greg Bernhardt]

Also sounds uncomfortably plausible as a Trump strategy.

See, https://civicswatch.com/threads/strategies-for-managing-financial-instability-in-2025.52/

 

[bwv]

As the US can always issue more dollars, default is less of a risk than inflation. the value of the debt comes from the same source as the value of the currency - the perceived ability of the sovereign to service the debt with future taxes - if bond holders lose confidence in this due to some combination of debt levels, interest payments and/or perceived willingness to pay then rates spike and it becomes difficult to issue new debt. The primary step to avoid this is financial repression - using various government powers to supress interest rates and forcing large investors like banks to buy bonds. The conversion of foreign-owned bonds to non-marketable 100-year bonds outlined in the ‘mar-a-lago accord’ is a form of this

 

[placebo]

I'm not sure if the interest payments going to foreign debt holders can be thought of as coming back into the US economy or not, and if there is reason to be more or less concerned about that 1/3 of the debt from the perspective of a US bondholder / taxpayer.

The interest payments are paid in dollars, so the funds are not usable in the foreign country. The foreign investor could, like you, simply plow the money back into the US economy to obtain goods and services here. Or they could use the dollars to buy their own currency from someone who's holding the foreign currency but needs the dollars to use in the US.

The concern is likely what happens if foreign investors lose confidence that the US Government can service the debt. They would try to sell the bonds, driving bond prices down and interest rates up. Of course, if foreign investors are losing confidence, it's likely all investors are losing confidence. Or maybe Trump claims that foreign investors are trying to rip us off, so he's going to refuse to make good on debt obligations held by foreign investors. Or perhaps China decides to wreak havoc on the US by dumping all of its holdings and ordering its citizens to do so as well. It would be a costly thing to do, but it's a possibility. In any case, it's not going to be good for the US.

What Happens If The US Defaults On Treasury Bonds? - U.S. Debt Calculator

What Happens If The US Defaults On Treasury Bonds? Explore the critical consequences for global finance, markets, and economic policies in a friendly and comprehensive breakdown.

usdebtcalculator.com

5. If the US had no interest payments to make, that would mean it was not selling any bonds. I expect this would be HUGELY disruptive to the investment community, and I expect disruptive in a way that very few US citizens would say is good or helpful.

Yeah, it would probably be very disruptive because investors are used to the availability of government bonds as traditionally safe investments. It also wouldn't be very practical since bonds help the government manage its finances, like we might use a credit card to manage our personal finances.

I don't know how to think about a throw-away comment that by such-and-such a date we will be paying 'x' amount of our tax revenue in interest payments, with the implication being that any reasonable person should find this alarming. As a buyer of bonds and a taxpayer both, I don't think its so simple as "interest is bad". Any thoughts on the appropriate perspective greatly appreciated.

I think the worry here is the debt becoming so large that interest payments crowd out other government spending. One way to get around that temporarily is to print more money, but that leads to the risk of hyperinflation.