Nations borrow against tomorrow’s growth. And it would seem tomorrow has arrived for many of them.
On Wednesday, US’s gross federal debt crossed $40 trillion—more than the combined GDP of China, Germany, Japan, India and the UK. Look at the interest cost. The Congressional Budget Office estimates it at $1.039 trillion. That is more than what the US spends on defence, which itself is $900 billion—more than that of the next six countries. In geopolitics and geoeconomics, scale defines attention.
The rise in debt is scarcely a secret. The US Debt Clock updates by the second. Over the past year, the country has added $5.49 million to its debt per minute. The load is worsened by wars and the messy tariff landscape; Friday saw Canada walking out of its trade talks with the US. The $40-trillion milestone sent the yield on US 30-year bonds past 5.33 percent, the highest 19 years. The rate signalled trouble across the economy—from the cost of government borrowing to that of credit card debt. Treasury Secretary Scott Bessent stepped in to declare his department would double its buyback from $2 billion a day to $4 billion. The long bond market rallied to 5.18 percent, only to pop up like a financial whack-a-mole.
The market mocked the intervention, calling it a band-aid on a bullet hole. Bessent, a former hedge fund operator who worked with George Soros, dismissed the retracement, stating, “Anything that happens within a 24-hour period is noise.” The signal went up in smoke. The market found Bessent and Fed Chair Kevin Warsh’s word salads unpalatable. On Friday, the yield on 30-year gilts touched 5.28 percent and nudged the benchmark 10-year to 4.74 percent.
Zoom out, and the American story is a common one of nations living beyond their means. The 10 largest economies—the G7 plus China, Russia and India—account for nearly two-thirds of global GDP at $83 trillion. Not one of them covers spending from total revenues, let alone from taxes alone unless they borrow. It is what punters call a carry trade—borrow at one rate, hold or invest in the hope of higher returns, which in this case is GDP growth. India has its own quiet carry trade within the mechanics of fiscal management. The Reserve Bank transferred a record `2.87 lakh crore—a windfall from foreign exchange operations—to the government, patching up the fiscal gap.
The model for decades was to borrow at yields below nominal GDP growth rate and let growth service the debt—the scope for borrowing went up as interest rates went down after the global financial crisis. Olivier Blanchard told a room of economists in 2019 that public debt is not problematic, as the interest rate paid on it stays below the economy’s growth rate. The equation r<g has been upended. The 2026 Annual Economic Report of the BIS states the rate-growth differential has narrowed. Debt and interest rates are up and growth is sliding. As every punter knows, the carry position is viable until the moment it is not.
Following Covid-19, public debt spiralled to near post-Second World War highs in many economies and GDP growth has also slowed from post-pandemic peaks. Sovereign debt of the G7 plus India, China and Russia, as per IMF data, is at $94 trillion. Data on interest costs as a proportion of GDP illuminates the spectre. Interest cost borne by the top 10 economies is around $2.23 trillion. India carries the extreme version—interest absorbs 25 percent of every rupee spent, the worst ratio of the 10, on the second-narrowest revenue base. Rising debt and deficit catalyses political rhetoric over how much is spent on whom—elections are effectively a contest of schemes.
The debt toll is rising. The world has migrated from demand deficit to supply scarcity, is navigating the punitive impact of wars and paying the price for onshoring capacity via new industrial policies. The trade does not stop at the sovereign. The sovereign is only the first floor. Below it are corporations. JP Morgan estimates the data centre buildout could touch $5 trillion by 2030, with $2 trillion financed in credit markets. JP Morgan CEO Jamie Dimon warned of high levels of margin debt and leverage. Ray Dalio of Bridgewater warned of a debt crisis and advised folks to buy gold.
It is layer upon layer, with lenders and borrowers assuming the asset beneath will retain value. Hedge funds borrowing against Treasuries. Private-credit funds lending against increasingly leveraged companies. Hyperscalers borrowing to finance AI infrastructure. Households borrowing against houses, shares and gold. That is how leverage becomes a pyramid. What happens in the US bond market does not stay in the bond market. Fears of a weaker dollar rattled investors at home and the prospect of higher rates hung over emerging markets. A synchronised selloff—driven by inflation concerns, rise in fiscal deficit and the rush of capex borrowers—sent long bond rates to decadal highs across advanced economies.
The higher cost of money threatens the economic and political model in democracies. The OECD spends nearly 20 percent on welfare. India must fund the world’s largest food, employment, health programmes. Even as democracies tool and retool income security schemes, the fact is that the world is yet to know the impact of AI on jobs. The murmurs of new taxes—on real estate, on billionaires—are smoke signals.
For years, governments and corporations believed they could outrun the rising cost of money. But as the carry trade turns, a delicious irony is emerging. It was once said that socialism runs out of other people’s money. Now, the modern capitalist economy may be discovering that it, too, can run out of cheap money.
Read all columns by Shankkar Aiyar
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India
(shankkar.aiyar@gmail.com)
