Special Edition: Forty Trillion Dollars — What the National Debt Means for Your Household
Welcome to a special edition of Money Lessons! I'm Andy Temte and today is September 14, 2026.
On Tuesday, August 18th, the United States Treasury published a routine daily report called Debt to the Penny. It comes out every business day, and almost nobody reads it. That day, for the first time in the nation's history, total public debt outstanding exceeded forty trillion dollars. The exact figure was $40.05 trillion.
Back on May 24th of last year, in an episode on the origins of money and debt, I told you the national debt stood at $36.8 trillion, that it was unsustainably high, and that we'd come back to it in much more detail as this series moved forward. On January 19th of this year, in a special edition about Greenland, I said the number had reached $38 trillion. Today it's $40 trillion. Three trillion dollars in fifteen months.
The Two Components of the National Debt
Our national debt is made up of two primary components.
The first component is called debt held by the public. On August 18th it stood at $32.27 trillion. This is the Treasury bills, notes, and bonds we studied all last winter — securities the Treasury sells at auction to pension funds, insurance companies, mutual funds, foreign governments, the Federal Reserve, and individual Americans. Every dollar of it was lent to the federal government by a lender outside the federal government. This is the portion of the debt that financial markets price every business day.
The second component is called intragovernmental holdings. On August 18th it came to $7.78 trillion. This is money the federal government owes to itself.
Here's how that happens. For decades, Social Security collected more in payroll taxes than it paid out in benefits. That surplus was not set aside in a separate account. By law, the Social Security Administration was required to lend the surplus to the Treasury. The Treasury spent the money on general government operations that year and issued the Social Security trust fund a special-issue bond in return. The same arrangement applies to Medicare's hospital insurance fund and to the federal employee retirement funds.
So when you hear that Social Security has a trust fund, what that trust fund holds is bonds — promises from the Treasury to pay the trust fund back. There is no account with money in it. Those bonds are legal obligations of the United States, and they are also non-marketable, which means no investor can buy or sell one and no market sets a price on them. They do count against the statutory debt limit, which is why every debt-ceiling standoff in Washington involves both components of the debt.
Debt Relative to the Size of the Economy
Forty trillion dollars, standing alone, tells you very little. If I told you a family owed four hundred thousand dollars, you'd want two more facts before you judged their situation. What do they earn each year, and what do they own? A family earning sixty thousand dollars with nothing to sell is in serious trouble. A family earning three hundred thousand dollars that also owns a paid-off rental property worth more than the debt is in a different position entirely. That family could sell the property tomorrow and owe nothing. The asset changes the answer.
A country does not have that option. The federal government owns enormous assets — land, buildings, military equipment — but it cannot realistically sell them to pay creditors. So for a nation, the asset question drops away and only the income question is left. That is why economists compare a country's debt to its annual income, and why a family with something to sell can safely carry more debt than it earns in a year while a country cannot. The measure economists use is called the debt-to-GDP ratio.
Gross domestic product, or GDP, is the total dollar value of all the goods and services a country produces in one year — every car, every haircut, every software license, every hour of nursing care. GDP is the closest thing a nation has to annual income. In 2026, US GDP is running around $32.4 trillion.
Now divide the debt by GDP. Using debt held by the public, the $32.27 trillion that financial markets finance, the United States owes $32.27 trillion against $32.4 trillion of annual national income. That works out to 99.6 percent. In round numbers, the federal government owes one full year of everything the country produces. Using total public debt, the full $40 trillion, the ratio is about 124 percent.
Economists and the Congressional Budget Office use debt held by the public as the standard measure. When you hear a debt-to-GDP figure quoted in the news, the hundred-percent figure is usually the one behind it.
On that same measure, the previous American record was 106 percent of GDP in 1946, at the end of the Second World War, the most expensive undertaking in the nation's history. The Congressional Budget Office projects that the United States will pass that wartime record before 2035.
Interest on the Debt
The federal government pays interest on every dollar it has borrowed. In fiscal year 2025, net interest on the national debt came to $970 billion. This fiscal year it will exceed one trillion dollars for the first time. The Congressional Budget Office projects that annual interest cost will more than double again, to $2.1 trillion, by 2036.
Interest is now one of the largest expenses in the entire federal budget. Only Social Security and Medicare cost more. In fiscal year 2025 — the most recent completed year, with audited figures from the Treasury — the federal government spent $970 billion on interest and $917 billion on national defense. This year, with the additional military spending Congress is considering, the two are running close to even at about one trillion dollars each. Interest also exceeds Medicaid, and it exceeds every non-defense discretionary program combined — every national park, every food inspector, every dollar of federal research funding, every air traffic controller, added together.
Now compare interest to the government's income. Of every dollar the federal government collected in revenue last year, eighteen and a half cents went to interest payments before any program was funded. Not a road. Not a soldier. Not a vaccine. Interest. The Congressional Budget Office projects that share reaches roughly twenty-five cents of every revenue dollar by 2036.
Eighteen and a half cents of every dollar, before anything else is funded. That's what I mean when I say interest is suffocating the federal budget. Interest is not a program. It builds nothing, treats no illness, teaches no student, repairs no bridge. It's the cost of borrowing decisions already made, and it must be paid before any new decision is considered.
Every generation before ours got to argue about how to spend federal tax revenue. Ours increasingly argues about what's left after the interest is paid. That's what keeps me up at night.
The Two-Trillion-Dollar Gap
This fiscal year the federal government will spend roughly $7.4 trillion and collect roughly $5.3 trillion in revenue. The difference, about $2.1 trillion, is borrowed. That annual shortfall is the deficit.
I'm going to be blunt, because I don't think there's a gentle way to say this. Income must rise and expenditures must fall. Not one or the other. Both. A two-trillion-dollar annual gap, in an economy near full employment with no world war and no pandemic, cannot be closed from one side of the ledger.
Every time I say that out loud, somebody offers the same answer. We don't have to raise taxes or cut spending. We'll grow our way out.
Let's test that claim.
The Arithmetic of Growing Our Way Out
Economists have a phrase, ceteris paribus, which is Latin for all other things held equal. It means we change one variable, hold every other variable constant, and observe the result.
Before we run the numbers, one definition. Economic growth can be measured two ways. Real growth counts only the additional goods and services produced — more cars, more haircuts, more software. Nominal growth counts real growth plus inflation, so it also rises when prices rise. For this exercise, nominal growth is the correct measure, because the national debt is a fixed number of dollars. When the dollar value of everything the country produces rises — whether because more goods and services were produced, or because prices went up, or both — the debt gets smaller relative to the economy, even though the debt itself hasn't changed.
Since 2000, nominal growth in the United States has averaged about four and a half percent a year.
Now the question. What counts as a sustainable level of debt? I wish there were an official target, the way the Federal Reserve has a two-percent target for inflation. There isn't one. But there is a widely cited target for the deficit, and it comes from Ray Dalio, whose book How Countries Go Broke: The Big Cycle I first recommended on June 7th of last year. His prescription is to bring the annual deficit down from about six percent of GDP to three percent, through a combination of spending cuts, revenue increases, and lower interest rates. He testified to the House Budget Committee on that target this past March.
A deficit held at three percent of GDP, in an economy growing at the historical rate of four and a half percent a year, would eventually stabilize debt held by the public at about two-thirds of GDP. So two-thirds is our target. Holding the deficit where it is, at six percent, how fast would nominal GDP have to grow to bring debt held by the public from one hundred percent of GDP down to two-thirds?
At four and a half percent nominal growth, against an annual deficit of six percent of GDP, the ratio never comes down at all. It climbs, and it eventually settles near 133 percent of GDP. That's the current path.
To reach two-thirds over the next twenty years, nominal growth would have to average 9.8 percent a year. Every year. Twenty years in a row. Without a single recession. To reach it in ten years instead, the required rate is 11.8 percent a year.
Now here's the part that matters most, and it's the reason I built this example. Nominal growth is real growth plus inflation. If inflation runs at the Federal Reserve's two-percent target, real growth has to supply the remaining 7.8 percent — every year, for twenty years. Real growth last quarter was 1.5 percent.
So what happens if real growth stays near where it is today? The arithmetic can still reach 9.8 percent nominal growth. It simply gets there through inflation instead of real growth. Two percent real growth plus 7.8 percent inflation equals 9.8 percent nominal growth. On paper, debt held by the public falls to two-thirds of GDP right on schedule.
But that is not growing your way out of a debt. That is inflating your way out. On August 16th of last year, in our episode on inflation, we called excessive money creation the modern equivalent of currency debasement. To be precise about the terms: debasement is the action — a government or central bank deliberately reducing what its money is worth. Inflation is the result — rising prices and falling spending power. Whether inflation arrives by deliberate decision or by drift, the effect on the debt is the same. The debt is a fixed number of dollars. Make each dollar buy less, and the real burden of the debt falls.
So the two answers people offer — we'll grow our way out, or inflation will take care of it — are not two answers at all. They are the same answer. One of them just sounds better in a speech.
Where the Customers Would Come From
Set the inflation problem aside for a moment and suppose the United States genuinely could grow at 7.8 percent a year, in real terms, for two decades. Two questions follow, and neither one has a comfortable answer.
The first question: who buys all the additional goods and services? Growth means producing more and selling it to someone. The United States is roughly one quarter of world economic output today. Grow real output at 7.8 percent for twenty years and the American economy goes from about $32 trillion of annual output today to roughly $146 trillion, measured in today's dollars. If the rest of the world keeps growing at its ordinary three percent, the American share of world output climbs from about a quarter to about forty-five percent.
Which means the customers for all that additional American production would have to come from the other fifty-five percent of the world — the part that grew far more slowly, and became relatively poorer while we became relatively richer. There's no realistic source of demand for that much additional American output.
The second question is this: who lends the federal government the money, and where does that money come from? The Treasury borrows by selling bonds to lenders — pension funds, banks, insurance companies, foreign governments, and individuals. Those lenders are lending out of the world's savings, and the world's savings are a finite amount of money. Every dollar of savings is invested somewhere — in a Treasury bond, or in a factory, a mortgage, a business loan, a data center, a new hospital. When the Treasury auctions new bonds every week and asks lenders for a larger share of the world's savings, it's competing with every one of those other uses for the same dollars.
Economists call this crowding out. When the government borrows more, everyone else who wants to borrow — a family buying a house, a business building a plant — has to pay a higher interest rate to compete for the same dollars. That includes you.
What Countries Do Instead
The United States has faced a debt this large exactly once before, after 1946. Growth was part of how the country brought it down — but only part. The Office of Management and Budget's own history of that period lists three reasons debt held by the public, measured against GDP, fell almost every year for three decades: relatively small deficits, an expanding economy, and unanticipated inflation. One ingredient of three was growth. The other two were spending discipline and a currency that lost spending power through inflation. The arithmetic we just ran shows why growth by itself was never going to be enough.
So what do countries do instead? Three things, and we've already studied two of them.
The first is austerity, a word that means deliberately cutting government spending and raising taxes, sharply and quickly, usually because a lender is insisting on it. Greece is the modern case. On December 20th of last year I described the Greek crisis as a slow-motion default, and it was. What that episode didn't cover was what the austerity program did to the Greek people. Between 2009 and 2015, Greek economic output fell by roughly a quarter. Unemployment peaked above 27 percent. Among young Greeks it passed 60 percent. Pensions and public-sector wages were cut repeatedly, and cuts of twenty to forty percent were common. The bailout programs and the austerity that came with them lasted eight years, and economists recorded the period as the worst contraction any developed country had suffered since the Second World War.
The second is debasement — deliberately expanding the money supply so that a fixed-dollar debt shrinks in real terms. We covered the mechanism on August 16th of last year. It works. It also functions as a tax, because it takes purchasing power away from everyone who holds dollars. And it's what economists call a regressive tax — one that takes a larger share from people with less money than from people with more. Wealthier households own assets that tend to rise with prices: businesses, real estate, stocks. Households with less wealth hold more of what they have in cash and in fixed payments — a savings account, a fixed pension — and those lose spending power as prices rise, unless the savings or the payment is inflation-indexed. Social Security benefits are indexed to inflation. Most savings accounts and most private pensions are not. There's one more difference between inflation and an ordinary tax. An ordinary tax requires Congress to pass a law, on the record, with every member's name attached to a yes or a no. Inflation imposes the same real cost on a household without any legislator having to vote for it.
The third is default — a government simply choosing not to pay. We covered that on December 20th as well, with France's Two-Thirds Bankruptcy and Spain's serial failures. Governments can always choose not to pay. Lenders then charge that government far more to borrow, for decades afterward.
Nobody selects austerity, debasement, or default on purpose. Countries are forced into them when the alternatives run out.
All three outcomes are documented in detail in Dalio's book, and if you want to understand how countries arrive at them, that's where I'd send you. It's demanding but approachable, and few writers outside academia have studied this pattern across as many countries and as many centuries.
The Sacred Cows
Now the second component of the debt — intragovernmental holdings — becomes relevant again.
The Social Security and Medicare Trustees released their 2026 reports in June. Social Security's retirement fund — the one paying your parents now, and eventually you — can pay full scheduled benefits through the fourth quarter of 2032. After that, the reserves are exhausted, and incoming payroll taxes cover 78 percent of what was promised. Medicare's hospital insurance fund runs out in the second quarter of 2033 and covers 89 percent after that.
Let me be precise here, because this gets reported badly. Depletion is not disappearance. Payroll taxes keep arriving every payday, and the checks keep going out. They are simply smaller than what was promised, unless Congress acts first. And 2032 is six years from now. The underfunding of Social Security, and of the other major social programs, is large enough that it will likely get its own special edition of this show before then.
Social Security and Medicare together account for more than a third of all federal spending. Interest is nearly as large as Medicare. Add Social Security, Medicare, and interest together and most of the budget is committed before anyone debates anything.
Which means the expenditure half of "income must rise and expenditures must fall" cannot be achieved without touching Social Security and Medicare. There's no arithmetic path around them. And those are the two programs that politicians in both parties have found nearly impossible to touch, because nearly every one of us is either drawing those benefits, counting on them, or helping to support a parent who depends on them.
That's the sacred-cow problem. Not that the programs are wrong — I am not arguing that. It's that the math requires a national conversation the political system has spent forty years avoiding.
What all of this means for your own retirement planning deserves its own series, and it will get one. Today I want to stay on the household question.
What This Means for Your Household
What does a forty-trillion-dollar national debt mean for your own finances? Consider three time horizons.
Start with the short term, the next few years. Interest rates on US Treasury securities are the reference point from which nearly every other interest rate in this economy is priced. I made this point in the Greenland episode on January 19th: your mortgage rate, your car loan, your credit card, and the rate a small business pays on its line of credit are all set at a spread above Treasury rates. When the government borrows two trillion dollars a year, it has to find buyers for every dollar of it, and finding buyers means paying enough interest to attract them. That pushes Treasury yields upward, and every rate priced from Treasury yields moves with them. This works in both directions, and I want to be fair about it — the same pressure that raises what you pay on a mortgage raises what you earn in a savings account or a certificate of deposit. If you're putting new money into savings at today's higher rates, part of this is working in your favor. Savings already locked into a lower fixed rate — a certificate of deposit bought two years ago, a bond held to maturity — don't get that benefit, and none of it helps if inflation rises faster than the interest rate.
Next, the intermediate term, roughly five to fifteen years out. This is when the consequences become personal. Interest keeps crowding out programs. The Social Security retirement fund and the Medicare hospital insurance fund reach their depletion dates. The arithmetic gets settled somehow, and the only two levers available are higher taxes and lower benefits. Lower benefits can take several forms — a smaller monthly check, a later full retirement age, or benefits that are taxed more heavily. My expectation — and I'll label that as my expectation rather than a fact — is that we end up with some of each. If you're in your fifties today, 2032 and 2033 fall inside your own planning window, not your children's.
Then the long term. If Congress cannot raise revenue and cannot cut spending, inflation becomes the most likely outcome. Not because anyone decides on it. Because inaction lets financial markets decide instead. A government that keeps borrowing two trillion dollars a year has to find lenders for all of it, and as lenders grow more reluctant, they demand higher interest rates. Higher rates make the interest bill worse, which requires more borrowing. Eventually the pressure lands on the Federal Reserve to buy the debt with newly created money — and creating money faster than the economy produces goods and services is the definition of monetary inflation we learned on August 16th. No law gets passed. No vote is taken. Markets force the result.
I am not predicting inflation. I am telling you that inflation is the historical pattern when governments cannot close their budget gaps, and that a household is better off knowing what protects it from inflation before it arrives. Cash loses value. Ownership of productive assets — businesses, real estate, the broad stock market — has historically held up far better. That's precisely why grow, the fifth of the six jobs your money has from our August 8th episode, matters so much in an environment like this one.
Here's what you control. Nothing you do at home will reduce the national debt. What you can do is prepare your own finances for the consequences we've discussed — higher interest rates, higher taxes, and smaller benefits. That preparation runs through three of the six jobs. Borrow less, especially at high interest rates. Protect what you have with a real emergency fund. Grow your ownership of productive assets. And find out what Social Security is promised to pay you, then plan on receiving less.
I'll end where I started, with the arithmetic, because the arithmetic is the one part of this that isn't political.
Forty trillion dollars. One hundred percent of everything we produce in a year. Eighteen and a half cents of every revenue dollar paid to interest. A two-trillion-dollar gap, every year, between what the federal government collects and what it spends. Income must rise and expenditures must fall.
I don't say any of that to frighten you. I say it because a country full of people who understand this arithmetic is a much harder country to sell an easy answer to. Some of you will remember the red Staples button from the commercials — press it and a voice says "That was easy." There is no easy button for the problem we've discussed today. Be wary, and downright skeptical, of any politician who claims to have an easy, painless solution.
That's what financial literacy is for. Not only managing your own money well, though it starts there. It's becoming an informed citizen — one who cannot be misled about the nation's finances.
Grace. Dignity. Compassion.
