Is the US Government Debt unsustainable?

Should Indian Investors worry about the US National Debt?

Uncertainty in the markets is a given, however the current set of circumstances is giving an especially bigger headache to most investors. The recent policy hike from the US Federal Reserve has calmed some of the bond vigilantes however it appears that investors may not be completely out of the woods yet. The question remains: Is the US government debt unsustainable? In any case why should investors worry? What are the implications for global investors, and more so should Indian investors worry in this case?

An unholy mix

The reason the question, “is the US Government debt unsustainable? “- is difficult to answer simply due to the combination of factors that bear on it. If this were the decades following the 1960’s it was an easier question to answer. The US then was the most powerful economic machine in the world with the almighty dollar being the reserve currency of the world and a happy alliance of the rich western nations working in harmony allowing for stability in a mutually supportive environment.

Cut to the present, the US is at odds with its closest trading partners, political allies, suppliers as well as with its political adversaries, trade competitors as well as involved in a seemingly intractable and messy conflagration in the middle east. The rise of a multipolar world has caused much uncertainty to the established dominance of the US dollar as well as the perceived strength of the US economy in general.

However some things yet remain the same. The US dollar continues to be the reserve currency of the world and most world trade continues to happen in this currency. This is a sustainable and unsurmountable advantage which in effect means that the world continues to lend money to the US interest free. In addition, US external debt demarcated in such terms has no cost to the US government. Of the debt that it does have an interest burden on, it pays to mostly its own citizenry that can be compensated by fresh issue of notes, or otherwise called as monetisation1. In fact 80% of the $40 trillion debt is owned to the public. Hence there appears to be no reason to worry about the US Government debt in the conventional sense as we would worry about anyone in the sense of solvency and ability to pay back.

So why is the investor worried?

The reason investors are worried is due to impact of any increase in bond yields can have on the rest of the world. As the pressure of the mountain of debt rises so should yields. Inflation pressures are also bearing hard on bond yields and hence the level of debt becomes a problem for investors.

Higher yields mean lower equity market returns and weaker bond prices mean more marked-to-market losses on a large portion of the portfolios held by the largest institutional investors of the world viz. the insurance companies, pension funds and the most conservative sovereign funds. This can have cascading effects on the cost of capital, restricting growth and the rate of expansion for banks across the world. Growth estimates as a result will have to be adjusted

Global growth and India

As highlighted in our previous blog dated Aug 17, 2026. Link here:https://hxgonpartners.com/is-india-a-stealth-dollar10-trillion-economy

• India is poised to become a high-income nation and will eventually become the largest economy in the world on a PPP basis

• A stable world global growth environment is necessary for this to translate into reality

• Interdependencies and the cost of capital will be important to sustain the growth rate in India despite it being a domestic led growth story

• Capital flow into India will be constrained if higher interest rates prevail in developed economies

• Higher global interest rates will translate into higher domestic rates, constraining growth and limiting equity capital market growth given higher discounting rates

Inflation expectations and interest rates remain key

The next few quarters will be crucial to decide the direction in interest rates and inflation. If political conflicts and trade situations ease, this will be a lesser worry, and a much rosier view can be taken. However, if the current supply shocks continue to hamper global growth, the writing is on the wall – slower growth, higher inflation and underperforming equities.

Indian equities markets remain reasonably priced, and any global supply shocks will have a limited impact on the same. However, volatility is something that Indian investors need to incorporate into their return expectation and remain prepared to hold for the longer term despite these uncertainties.

The proverbial pot of gold at the end of the rainbow may yet prove to be elusive for some more time

Happy investing!