$40 Trillion of U.S. Debt
An interesting piece of news has come out of the U.S. Treasury. The Treasury says it plans to increase buybacks of long-term Treasury bonds.
So what does that mean?
Very simply: when investors become less willing to hold long-term bonds, prices fall and yields rise. And that’s not good news for the U.S. government.
Higher rates mean higher debt-servicing costs, creating a dangerous cycle:
More debt → higher interest costs → larger deficits → more debt
So the Treasury wants to reduce pressure in the long-term bond market by buying back some of those bonds.
But there’s a catch.
To finance these operations, the Treasury could rely more heavily on short-term debt—effectively replacing part of its long-term debt with short-term debt.
That’s a double-edged sword. It may ease pressure today, but it also changes the structure of the debt.
And this is where things get interesting for the Federal Reserve.
The Fed wants rates high enough to fight inflation. But high rates are increasingly expensive for the U.S. government.
The higher rates stay, the larger the government’s interest bill and budget deficit become.
So as U.S. debt grows, pressure to lower interest rates also increases.
This is essentially what economists call Fiscal Dominance: when the government’s fiscal position increasingly constrains monetary policy.
There’s also a common misconception worth correcting.
Treasury buybacks do not mean the Federal Reserve is printing money right now.
Treasury buybacks are not the same as Fed QE.
But if the government increasingly needs lower rates, higher inflation, or more accommodative monetary policy to manage its debt, the story becomes very different.
And this is where gold becomes interesting to me.
The issue isn’t simply that gold is up $100 today.
The bigger question is:
How is the U.S. ultimately going to manage a $40 trillion debt burden?
Cut spending? Raise taxes? Keep rates high? Or allow inflation and nominal growth to gradually reduce the real value of the debt?
In my view, this could be one of the most important stories for markets over the next several years.
You shouldn’t look at markets only through price charts. You need to understand what’s happening underneath the price.
If we look at this realistically rather than politically, I don’t think massive monetary expansion is the base case.
More likely, the U.S. will use a combination of measures, including inflation and nominal economic growth, to gradually reduce the real burden of its debt.
Inflation is ultimately a monetary phenomenon. If the U.S. tries to “solve” its debt problem through inflation, there will be a price to pay.
The root of the problem is years of excessive credit creation and government spending.
From an economic perspective, the more rational solution would be real spending cuts, an end to chronic deficits, and allowing interest rates to be discovered by the market.
Bond yields are a price too.
When long-term Treasury yields rise, perhaps the market is telling us something. If the government uses buybacks to push those yields lower, it may be suppressing part of that signal.
The U.S. will either reduce the real burden of its debt through inflation, or grow its economy fast enough to outpace it.
And which one ultimately happens may depend heavily on how much the AI revolution actually increases economic productivity.
So which assets are likely to perform better as the real value of the dollar and dollar-denominated debt gradually declines?
For now, economic data still seems to support gold as one of the lower-risk options.
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@RezaMacroEdge
2August 21, 2026 52
