Washington’s debt problem is reaching Main Street
America’s national debt has surpassed $40 trillion, and the cost of carrying it is becoming much harder to ignore.
The federal government ran a deficit of approximately $2 trillion in fiscal 2026, according to the Congressional Budget Office. That is roughly 6% of U.S. economic output, an unusually large shortfall for an economy that is still expanding.
Meanwhile, the 10-year Treasury yield has been trading above 5%, reaching approximately 5.3% this week before retreating as investors sought safety during the technology selloff.
Higher yields might sound like a problem confined to Wall Street. The housing market tells a very different story.
With mortgage rates climbing toward 7.5%, U.S. pending home sales fell 4% in September, their largest monthly decline in more than three years. Homebuying activity has dropped to levels rarely seen since 2014, as increasingly expensive financing pushes buyers out of the market.
Businesses face similar challenges. Expanding a factory, financing an acquisition or refinancing existing debt becomes more expensive when Treasury yields rise. Investors also demand stronger returns from stocks when government bonds already offer more than 5%.
Several forces are driving yields higher, including inflation, energy prices and expectations for Federal Reserve policy. But persistent federal deficits add another concern: the government must keep issuing enormous amounts of debt, and investors may demand higher returns to absorb it.
America is not facing an immediate debt crisis. Its borrowing costs are nevertheless beginning to reshape economic activity.
AI is creating another enormous demand for money
Washington is hardly alone in its appetite for capital.
Amazon, Microsoft, Alphabet, Meta and other technology giants are spending hundreds of billions of dollars building the infrastructure required for artificial intelligence. Data centers, semiconductor factories, power generation and networking equipment all require enormous amounts of upfront investment.
Increasingly, those projects are being financed through debt.
Major hyperscalers borrowed approximately $194 billion through early July, already exceeding their combined issuance during all of 2025. Goldman Sachs expects AI-related technology borrowing to reach roughly $250 billion in 2026 and $400 billion in 2027.
The result is an unusual competition for capital.
Washington needs investors to finance its deficits. Technology companies need many of those same investors to finance AI infrastructure. Both are issuing substantial amounts of long-term debt while inflation and interest-rate uncertainty are already weighing on demand.
Additional corporate borrowing does not automatically push Treasury yields higher. But the scale of AI-related debt issuance is adding pressure to credit markets, particularly as investors become more selective about the returns they require.
There is also an irony developing around artificial intelligence.
Washington is counting on AI-driven productivity to strengthen the economy and improve its fiscal outlook, while the enormous cost of building that same technology is creating additional demand for capital today.
AI may eventually deliver extraordinary economic benefits. Financing the infrastructure needed to get there is becoming another challenge.
Higher rates could make the deficit even harder to control
The mathematics of America’s debt problem become particularly uncomfortable when interest rates remain elevated.
As existing Treasury securities mature, Washington must refinance them at prevailing market rates. If those rates are substantially higher, the government’s annual interest bill grows even without a corresponding increase in other spending.
The CBO recently examined what would happen if borrowing costs stayed above its long-term assumptions.
Its analysis of higher interest-rate scenarios found:
- 0.5 percentage points above expectations: An additional $1.9 trillion in cumulative federal deficits through 2036
- 1.5 percentage points above expectations: An additional $6 trillion in cumulative deficits over the same period
Those are hypothetical scenarios, not forecasts. Still, they illustrate how quickly interest costs can compound when the government already carries such a large debt burden.
The obvious solution would be stronger economic growth, lower deficits or some combination of both. Yet relying entirely on growth presents another problem.
According to the Committee for a Responsible Federal Budget, balancing the federal budget through economic expansion alone would require approximately 7.2% annual real GDP growth sustained for a decade, far beyond normal U.S. growth rates.
Meaningful deficit reduction would therefore require difficult fiscal decisions, something Washington has struggled to achieve.
Treasuries remain a powerful global safe haven. In fact, investors have been buying government bonds during this week’s AI stock selloff, pulling yields down despite growing concerns about America’s fiscal position.
But temporary relief in bond yields does not eliminate the longer-term challenge.
America needs to borrow trillions, Big Tech needs hundreds of billions, and households and businesses are already struggling with the cost of money.
The question is no longer simply how much Washington can borrow. It is how expensive borrowing becomes for everyone else as the government continues doing it.
Explore More Stories in Markets
Disclaimer
Wall Street Access is an independent financial publisher. Wall Street Access is not a financial advisor. No company mentioned has compensated Wall Street Access for the preparation, publication or distribution of this article. This content is provided for informational and educational purposes only and is not investment advice or a recommendation to buy, sell or hold any security. Investing involves risk, including the possible loss of principal.
Prices, market capitalizations, financial figures and other market data are based on information available as of the date and time of publication and may change without notice. Information is drawn from public sources believed to be reliable but is not guaranteed to be complete or accurate. Opinions and expectations expressed are our own and may change as new information becomes available.
Readers should conduct their own due diligence and contact a licensed financial professional before making any investment decision. Past performance does not guarantee future results. Any material ownership interest or conflict of interest, where applicable, will be disclosed separately.
