Why Does the U.S. Government Have So Much Debt? The History, Dollar Hegemony, and Future Risks

Why Does the U.S. Government Have So Much Debt? — The Paradox of the World’s Largest Economy

The real reasons behind America’s growing national debt: chronic deficits, military and welfare spending, political gridlock, and the dollar’s hegemony. This article examines the history, current state, and key lessons for investors.

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Part I. Birth of a Debt Republic — The Historical Origins of U.S. Debt

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1) The Revolutionary War and Early Debt — A Nation Born in Debt

America’s debt problem did not begin in modern times; it has been a structural reality since the nation’s founding.

In 1776, during the Revolutionary War, the fledgling United States had no stable tax system, no central bank, and no developed capital markets. To finance the war effort, it borrowed heavily from European bankers and governments.

Much of the debt was in the form of war bonds purchased by French and Dutch financiers. France even provided direct military support, which left America with a significant amount of external debt. After the war, each state also carried its own wartime obligations, creating a messy tangle of liabilities.

In 1790, Treasury Secretary Alexander Hamilton pushed through bold reforms, insisting that “the establishment of national credit is the foundation of national prosperity.” He consolidated all state debts under the federal government, establishing a unified national debt management system. This move greatly strengthened federal credit and laid the foundation for U.S. Treasuries to become trusted in international markets.

In short, the United States was “a nation that started in debt, and turned debt into credit.”

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2) The Great Depression and the War Economy — Debt that Fueled Survival

The Great Depression of the 1930s marked another turning point in America’s debt history. With unemployment above 25% and waves of bank failures, President Franklin D. Roosevelt launched the New Deal, a sweeping stimulus plan. Massive public works projects — roads, dams, power grids — and large-scale relief programs were financed through government borrowing, significantly expanding federal debt.

Then, with Japan’s attack on Pearl Harbor in 1941, the U.S. entered World War II, transforming into a full-scale war economy. Military spending and mobilization costs consumed nearly half of GDP.

By 1946, federal debt had surged to 119% of GDP — nearly identical to today’s debt ratio of about 120%.

Remarkably, this massive wartime debt was not a national crisis but rather a stepping stone for America to rise as the world’s industrial superpower. While Europe and Japan lay in ruins, the U.S. emerged from the war with a strengthened industrial base and dominance in global finance.

Debt, though risky, became the very force that powered America’s postwar leadership.

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3) The Postwar Golden Age and the Return of Debt — Growth Meets Politics

After 1945, the United States stood as the dominant global power. The Marshall Plan to rebuild Europe was financed while America’s own economy experienced rapid growth. As GDP surged, the debt burden shrank relative to the size of the economy. From the 1950s through the early 1970s, debt-to-GDP fell below 40%. This era is often called the “Postwar Golden Age.”

But balance did not last. In the 1980s, politics and economics collided once again. President Ronald Reagan enacted sweeping tax cuts while ramping up defense spending under the banner of a “strong America.”

As a result, federal debt skyrocketed from about $900 billion in 1981 to $2.6 trillion by 1989 — nearly a threefold increase.

This was more than a statistical jump. It marked a structural shift: for the first time, America could no longer reduce its debt ratio even during economic expansions. Political choices — tax cuts and military buildup — locked the U.S. into a path of chronic deficits and rising debt.

With reduced revenues and unyielding Cold War defense costs, America had firmly entered the era of perpetual deficits.

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Summary

From the start, America carried debt, which Hamilton transformed into a foundation of credit.

The Great Depression and World War II pushed debt to extreme levels, yet laid the groundwork for U.S. hegemony.

Postwar growth lowered debt ratios, but the Reagan era’s tax cuts and military spending reignited long-term debt growth.

In short, U.S. debt history is not simply about overspending — it is the product of economic crises, wars, political choices, and growth cycles intertwined.

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Part II. Structural Drivers of Debt — The U.S. Fiscal Mechanism

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1) Chronic Deficits — A Never-Ending Gap

The single biggest factor in America’s ballooning debt is its persistent budget deficit. Year after year, the federal government spends more than it collects in revenue.

In fiscal year 2024, the U.S. ran a deficit of about $1.7 trillion, roughly 6% of GDP. This was not an isolated case. With rare exceptions, deficits have been the norm for decades, compounding into today’s massive national debt.

Even in times of prosperity, the U.S. rarely runs surpluses. The brief period of surplus in the late 1990s under President Bill Clinton was erased by the 9/11 attacks, military expansions, and President George W. Bush’s tax cuts. The 2008 global financial crisis brought stimulus spending that widened deficits further.

In other words, U.S. fiscal policy is structured such that recessions lead to stimulus-driven borrowing, while booms are undercut by tax cuts or political gridlock — ensuring debt keeps piling up.

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2) Defense and Welfare Spending — The Twin Pillars of Debt

(1) Defense — The Cost of Superpower Status

The United States spends more on defense than any other nation. In 2023, military expenditure reached $877 billion, accounting for 40% of global defense spending.

That figure is triple China’s military budget and greater than the combined defense spending of Russia, India, and Saudi Arabia.

Defense spending covers far more than weapons. It includes the cost of overseas bases, personnel, and cutting-edge research and development. While it underpins America’s global dominance, it also locks in a structural fiscal burden.

(2) Welfare — Aging and Rising Healthcare Costs

The other massive component is welfare spending.

Social Security spending reached $1.3 trillion in 2023, reflecting the rapid increase in retirees.

Medicare spending was about $900 billion. With the U.S. having the world’s most expensive healthcare system, aging demographics magnify the fiscal load.

These programs are politically untouchable, as they are tied to the voting power of seniors. No administration dares to cut them significantly. As a result, welfare spending continues to grow inexorably, becoming a structural driver of long-term debt.

In short, America shoulders two immovable fiscal mountains — defense and welfare — that together guarantee rising debt.

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3) Political Gridlock and the Debt Ceiling — A Paradoxical Burden

One of America’s most unique fiscal features is the debt ceiling, a legal cap on how much the government can borrow. Congress must vote to raise it whenever spending exceeds revenues.

But this has become a recurring stage for partisan battles:

Democrats typically push for welfare spending.

Republicans typically push for tax cuts and limited government.

The ideological clash often results in political standoffs and government shutdowns.

A landmark case occurred in 2011, when partisan gridlock over raising the debt ceiling triggered fears of a U.S. default. In response, Standard & Poor’s downgraded U.S. sovereign credit from AAA to AA+ for the first time in history. Global markets shook as a result.

Thus, a mechanism designed to discipline borrowing paradoxically creates more political conflict and financial instability.

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Summary

U.S. debt stems not from simple overspending but from chronic deficits, defense and welfare obligations, and partisan gridlock.

Defense and welfare spending are politically untouchable, locking in structural debt growth.

The debt ceiling system has become a source of recurring crises rather than a solution.

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Part III. A Nation Whose Debt the World Buys — The Dollar Hegemony Paradox

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1) Dollar Hegemony — Trust as a Privilege

America’s ability to carry enormous debt while retaining global confidence comes from the dollar’s reserve currency status.

Today, the dollar accounts for over 80% of global trade settlements and over 60% of global foreign exchange reserves. Commodities like oil, gas, and grain are priced in dollars, making the currency the lifeblood of global commerce.

This creates a paradox: the more uncertainty in the world, the greater the demand for dollars and U.S. Treasuries. Every crisis — from European instability to emerging-market turmoil — drives more capital into American debt.

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2) Rising Debt, Falling Yields — The Safe Haven Paradox

In 2025, U.S. federal debt stood at about $35 trillion, or 120% of GDP. For most nations, such levels would cause soaring borrowing costs and credit downgrades. But for the U.S., Treasury yields remain among the lowest in the world.

Why? Because Treasuries are seen as the “ultimate safe haven asset.”

When crises hit, investors flee to U.S. debt, pushing yields down even as debt rises. America, uniquely, can borrow more cheaply the more it owes.

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3) Foreign Holdings — Debt Propped Up by the World

Foreign investors hold over $7 trillion in U.S. Treasuries, with Japan and China the largest creditors.

Japan: over $1 trillion (largest holder)

China: about $800 billion (second largest)

These countries recycle their trade surpluses into Treasuries to stabilize their currencies and earn steady returns. In effect, America’s debt is underwritten by the rest of the world.

Thus, the U.S. occupies a paradoxical position: a debtor nation whose power is reinforced, not weakened, by its debt.

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Part IV. The Future of U.S. Debt — Risks and Opportunities

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1) Warning Signs — When Debt Becomes a Burden

Even with unique advantages, several red flags loom:

Rising Interest Costs: In 2024, interest payments on U.S. debt exceeded $1 trillion for the first time, rivaling defense spending.

Aging Society: Social Security and Medicare funds are projected to run dry in the 2030s if current trends continue.

Perpetual Political Gridlock: Repeated debt ceiling crises and government shutdowns inject recurring uncertainty into markets.

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2) Opportunities — Growth Amid the Debt

Debt is not solely a burden. America still has powerful strengths:

Innovation and Growth: The U.S. leads the world in AI, semiconductors, biotech, and space exploration, generating new industries and long-term growth capacity.

Dollar Dominance: The reserve currency role ensures that capital keeps flowing into Treasuries, even in crises.

Yet, these advantages can be undermined in periods of rising interest rates, when debt servicing costs balloon and begin to crowd out growth. America’s debt future will remain a tug-of-war between opportunity and constraint.

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📌 Conclusion — Lessons for Investors

The U.S. government’s debt burden is not the result of reckless spending alone. It arises from a structural interplay of chronic deficits, military and welfare spending, political conflict, and dollar hegemony.

America is unique as a nation whose debt is financed by the rest of the world. Yet, rising interest burdens and political risks can still ripple through global markets.

For investors, three lessons stand out:

1. Focus on long-term structures, not short-term noise.

2. Treasuries and the dollar remain safe havens, but rate cycles can flip them into risks.

3. For Korean investors, tracking USD/KRW exchange rates, foreign capital flows, and U.S. monetary policy is essential.

Ultimately, U.S. debt is not just America’s problem — it is a central variable of the global financial system that demands constant observation and analysis.

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📚 References

U.S. Congressional Budget Office (CBO). The Budget and Economic Outlook: 2024 to 2034. 2024.

U.S. Department of the Treasury. Monthly Statement of the Public Debt. 2024.

Stockholm International Peace Research Institute (SIPRI). Military Expenditure Database. 2023.

Social Security Administration. Trustees Report. 2023.

Medicare Board of Trustees. Annual Report. 2023.

Standard & Poor’s. U.S. Sovereign Credit Rating Report. 2011.

International Monetary Fund (IMF). World Economic Outlook. 2024.