The United States government’s debt has reached a staggering milestone, surpassing $40 trillion. This monumental figure translates to over $359,000 in federal debt for every American taxpayer. According to Bank of America’s chief equity strategist, Michael Hartnett, the national debt is projected to swell to $50 trillion in less than three years.

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Impact of Soaring National Debt on the Economy

The largest federal budget items include Medicare/Medicaid combined (nearly $2 trillion), Social Security (over $1.6 trillion), national defense ($946 billion) — and interest on the debt (over $1 trillion). Financial markets analyst Stephen Innes believes interest costs will soon begin ‘eating the budget alive,’ with the steep trajectory of the government debt making the interest expense ‘one of Washington’s largest single outlays.’

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The federal government’s spending habits have significant implications on the stock and bond markets. For fiscal year 2026, the government is projected to collect $5.6 trillion in revenue while spending about $7.4 trillion. This results in a deficit of roughly $1.9 trillion, according to the Congressional Budget Office.

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‘In other words, the government is spending roughly $1.33 for every $1 collected,’ Colin Slabach, clinical assistant professor at New York University’s School of Professional Studies, explained. ‘The good news is that there is still plenty of demand for US government debt. The problem is that if that changes in the future — and nations like Japan need to sell our debt to stabilize their own currency — it could lead to an overabundance of supply.’

Impact on Interest Rates and the Cost of Living

As the federal government runs a deficit, it must borrow the difference by issuing Treasury securities. Increased supply of U.S. Treasuries pushes yields higher to attract investors. Those yields then serve as a benchmark for interest rates across the economy.

Rising interest rates have significant implications on the cost of living. ‘As the federal government runs a deficit, it must borrow the difference by issuing Treasury securities,’ the Peter G. Peterson Foundation, a nonpartisan economic think tank, explained. ‘Increased supply of U.S. Treasuries pushes yields higher to attract investors. Those yields then serve as a benchmark for interest rates across the economy.’

As rising rates filter through the economy, the cost of living squeezes household budgets even tighter. ‘Rising borrowing costs mean larger payments on mortgages, car loans, student loans, business loans, and credit card debt,’ the report noted.

Long-term Consequences of Soaring National Debt

The federal debt could ‘lower the standard of living for all Americans,’ according to a Government Accountability Office (GAO) report. ‘When the federal government spends more than it collects in revenue, it borrows money to make up that deficit,’ the GAO report explained. ‘Over the past two decades, the deficit has grown even as the economy thrived.’

One result: Businesses face higher borrowing costs. With less capital for operational costs, wages suffer, ‘leading to slower wage growth,’ the GAO reported. ‘If nothing is done to reduce deficits each year, we project that debt will grow about twice as fast as the economy over the next 10 years,’ the GAO said. ‘In 30 years, that debt will likely be 2.5 times the size of the economy.’

The federal government’s debt could ultimately lower the standard of living for all Americans. ‘What that means for you, and future generations, is that today’s deficits — if not addressed — could have lasting financial consequences,’ the GAO explained.

Impact on Taxes and Investments

A growing deficit could bring another headache to taxpayers: ‘It could mean higher taxes with no additional services because the taxes will pay the interest on the debt,’ Slabach said.

And investors are likely to see continued volatility in the markets. ‘Higher rates can weigh on stocks because it makes borrowing more expensive for companies,’ Robert Brokamp, CFP, a financial advisor with The Motley Fool, explained.

Brokamp recommends keeping any money you may need in the next three to five years in higher-yielding cash, money market funds, CDs, or short-term bonds, which are less sensitive to interest-rate moves.

What to Know About the National Debt

The national debt may be hard to conceptualize, but economists say its explosive growth has the potential to have major impacts on the economy and your wallet.

‘The good news is that there is still plenty of demand for US government debt,’ Slabach explained. ‘The problem is that if that changes in the future — and nations like Japan need to sell our debt to stabilize their own currency — it could lead to an overabundance of supply.’

That’s when the Treasury would have to pay increasingly higher interest rates to attract investments in the U.S. government, Slabach said.