What Happens When the World Stops Trusting the Dollar?

For decades, United States Treasury Bonds have stood as the global gold standard for safety. However, this perception is under growing pressure as the US national debt has surged to approximately $36.2 trillion, and the debt-to-GDP ratio has climbed to 122%, raising serious questions about the country’s long-term fiscal stability. In a historic shift, Moody’s recently cut the US credit rating from AAA to Aa1, breaking a century-long run of top-rated status. Meanwhile, the federal deficit has widened to 6.5% of GDP, and interest payments on debt have reached $1 trillion a year.

History of the US National Debt and Debt Ceiling

The United States has run a budget deficit every year, with major expenditures on defense, Medicare, Social Security, and interest payments accounting for nearly 70% of its annual budget. The national debt has grown exponentially, increasing from 3.2 trillion dollars in 1990 to 36.2 trillion dollars today. In the past five years alone, it has risen by 60 percent, from $22.7 trillion in 2019 to 36.2 trillion. This sharp increase is primarily due to large-scale stimulus measures introduced in response to the COVID-19 pandemic.

Since 1960, Congress has raised, suspended, or revised the debt ceiling 78 times to cover rising expenses.

Did DOGE Really Help Cut Federal Spending?

Despite promises of savings, federal spending rose 6% in the early months of Trump’s term. The Department of Government Efficiency’s (DOGE) cost-saving measures largely stemmed from workforce cuts, which, while reducing payroll, have compromised critical government functions like collecting revenue tax audits.

The Partnership for Public Service estimates DOGE may be costing taxpayers 135 billion dollars. With a federal payroll of 270 billion dollars, expenses tied to layoffs, rehiring, paid leave, and lost productivity may offset nearly half the intended savings.

How the US Stacks Up: Debt-to-GDP vs. Other Nations

Debt-to-GDP is a key indicator of a country’s fiscal health, showing the balance between national debt and economic output. For the US, the debt-to-GDP ratio peaked at 133% during the pandemic in 2020 and has remained above 100% since 2012.

Currently standing at 123%, the US ranks among the top 10 countries for the highest debt-to-GDP. This reflects years of deficit spending and large stimulus packages in response to economic crises. Among the G7 nations, Germany has the lowest debt-to-GDP at 65%, while France (116%), Canada (113%), the UK (104%), and Italy (137%) have similar figures. Japan, however, holds the highest debt-to-GDP ratio at 235%.

Inflation Risks: Is Printing More Money the Solution?

With US debt over $36 trillion and interest payments topping $1 trillion annually, the Federal Reserve may face increasing pressure to print more money. As Stephen Innes, Managing Partner at SPI Asset Management, noted, “The US government issues debt in a currency it prints and controls, and it owns the global reserve currency. You don’t default when your central bank can conjure up settlement liquidity with a keystroke. It’s not moral hazard – it’s just an operational fact.”

While this could reduce debt’s real value, it risks devaluing the dollar and fuelling inflation. Historically, rapid money printing has resulted in runaway inflation in other nations, with countries like Zimbabwe and Venezuela facing severe economic consequences. The Fed must balance maintaining liquidity with avoiding hyperinflation.

Moody’s US Credit Downgrade: A Growing Concern

According to Moody’s, U.S. debt is projected to rise to 134 percent of GDP by 2035, up from 98 percent in 2024. “Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” the ratings agency said, adding that “persistent, large fiscal deficits will drive the government's debt and interest burden higher.” “We expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation,” the rating agency said.

Billionaire investor Ray Dalio expressed concern about the downgrade, stating on social media platform X, “You should know that credit ratings understate credit risks because they only rate the risk of the government not paying its debt.” He added, “They don’t include the greater risk that the countries in debt will print money to pay their debts, thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting).”

The International Monetary Fund (IMF) has also sounded the alarm, urging the U.S. to address its growing fiscal deficit and manage its “ever-increasing” debt burden.

How the Markets are Reacting to Credit Downgrades and Rising Debt

The growing debt figures are more than just numbers; they signal increasing pressure on the government’s finances, and this is spooking investors, leaving a noticeable impact on the markets.

Recently, the 30-year Treasury yield crossed the critical 5% threshold, signalling higher risk premiums and tighter financial conditions. The equity markets have not been immune, with the S&P 500 seeing brief declines due to concerns over prolonged economic instability. Rising yields are also pushing up borrowing costs, which could lead to higher inflation.

President Donald Trump’s ‘One Big Beautiful Bill’ adds fuel to the fire, with sweeping tax cuts projected to increase the national debt by an additional $3.8 trillion.

Carol Schleif, Chief Market Strategist at BMO Private Wealth, believes Moody’s downgrade could make investors more cautious. “The bond market has been closely watching what happens in Washington, especially this year,” Schleif said.

Global Dominoes: Why US Debt Impacts the World

The impact of US debt is not confined to Washington. As the world’s primary reserve currency, the US dollar's stability is crucial to global markets. Many countries peg their currencies to the dollar or keep them tightly aligned, while much of global trade is invoiced in dollars.

A shock to US financial stability, such as a credit downgrade, could send shockwaves across the world, as seen during the 2008 financial crisis. In this way, America’s debt isn’t just an internal problem. It’s a global domino, tipping over entire economies when trust in the dollar is even slightly shaken.

Bitcoin’s Story: Inflation Hedge or Leverage Trap?

Amid concerns about the declining purchasing power of the US Dollar, Bitcoin has emerged as a digital alternative, an asset with a fixed supply and no central authority. Advocates often brand it as the “digital gold,” a hedge against inflation and central bank mismanagement. In theory, Bitcoin’s scarcity makes it a natural shelter when currencies like the US dollar lose purchasing power due to excessive debt or money printing.

However, its price history has been volatile, driven by speculative leverage on unregulated exchanges. Until the market matures with better regulation and less leverage, Bitcoin remains more of a leverage trap than a safe haven.

Macro strategist Lyn Alden noted the growing importance of Bitcoin, stating, “Nothing stops this train.” She argues that Bitcoin’s fixed supply makes it an effective hedge against traditional currency devaluation, highlighting the increasing need for decentralized financial systems in a world burdened by growing debt.

Conclusion

The rising US debt is no longer something that can be ignored. It has become a serious issue with global implications. From higher interest payments to credit rating cuts, the warning signs are clear. While the US remains uniquely positioned as the world’s reserve currency, even that has its limits.

For fiscal stability and long-term growth, President Trump and Congress must prioritize discipline and reform. If left unaddressed, the cost will not just be financial. It could undermine investor confidence, destabilize markets, and weaken America’s leadership in the global economy.