The U.S. government’s debt clock is quickly ticking to $40 trillion. It’s a staggering, hard-to-process number, totaling over $359,000 in federal debt for every American taxpayer.
Bank of America’s chief equity strategist, Michael Hartnett, projects the number will swell to $50 trillion in less than three years.
“The problem with $40 trillion is not the number,” Stephen Innes, financial markets analyst and former investment bank trader, wrote in an analysis. “Markets have been watching the US debt clock spin higher for years and, for most of that time, the response has been little more than a shrug. Washington spends, Treasury issues, investors absorb it, and the machine keeps moving.”
The largest federal budget items are Medicare/Medicaid combined (nearly $2 trillion), Social Security (over $1.6 trillion), national defense ($946 billion) — and interest on the debt (over $1 trillion).
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.”
What does that mean for the stock and bond markets — and the cost of living?
For fiscal year 2026, the federal government is projected to collect $5.6 trillion in revenue while spending about $7.4 trillion. That results in a deficit of roughly $1.9 trillion, according to the Congressional Budget Office.
“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, told Yahoo Finance in an email.
“The good news is that there is still plenty of demand for US government debt,” he added. “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.
As swelling government debt pushes bond yields higher, borrowing costs for consumers also rise.
“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,” the Peter G. Peterson Foundation, a nonpartisan economic think tank, wrote in an economic outlook.
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.
However, it’s not only about a higher monthly housing payment, Ethan White, co-founder of White Sands Tax Services in Long Beach, Calif., told Yahoo Finance.
When borrowing costs remain high, the “freedom to buy, move, downsize, or respond to a new job or caregiving need” is reduced.
“In June, the Government Accountability Office (GAO) came to a startling conclusion: At $31.3 trillion, the U.S. debt was roughly equal in size to the country’s economy. Within weeks, the debt quickly surpassed the U.S. Gross Domestic Product.
“When the federal government spends more than it collects in revenue, it borrows money to make up that deficit,” the GAO report said, adding that while the federal debt would often spike during an economic setback, over the past two decades, the deficit had 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. In 30 years, that debt will likely be 2.5 times the size of the economy,” the GAO said. “What that means for you, and future generations, is that today’s deficits — if not addressed — could have lasting financial consequences. The federal government’s debt could ultimately lower the standard of living for all Americans.”
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, told Yahoo Finance. “When rates rise, the prices of current bonds drop since they are now less attractive than new bonds offering higher yields. Because rates have risen in 2026, the overall bond market has dropped approximately 2.5% so far this year. It’s not a devastating loss, but also not what many investors expect from ‘safe’ bonds.”
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.
Borrowers should watch debt levels as well.
“If rates remain elevated, carrying $25,000 on a variable-rate credit card or financing a car every few years becomes much more consequential,” Zachary Sahar, CPA, managing director at Capital Tax in Walnut Creek, Calif., said in an email. “I’d focus less on predicting Washington and more on reducing expensive variable-rate debt, maintaining liquidity, and avoiding new fixed expenses that only work if rates or economic conditions improve.”
