Moody’s Downgrade Signals Deeper Risk: Is U.S. Debt Undermining Global Leadership?

America’s Debt Reckoning

On May 16, 2025, Moody’s downgraded the United States’ credit rating, making it the last major rating agency to strip the United States of its Aaa rating. This downgrade is more than a technical market event; it represents an emerging consensus that the United States’ mounting debt burden has shifted from an abstract risk to a strategic constraint on U.S. power and leadership. As borrowing costs rise and fiscal space narrows, the nexus between debt and national security becomes increasingly salient.

As interest payments surpass defense spending, global growth slows, and demographic pressures accelerate, the United States faces difficult choices. Without reform, debt is projected to reach 156 percent of GDP by 2055, threatening to erode U.S. power in an era of intensifying great power competition and validating Adam Ferguson’s centuries-old warning that nations may mortgage their liberty through excessive borrowing.

Historical Context

Adam Ferguson, Debt, and Sovereignty

These challenges are not new. To fully understand the stakes of the United States’ current fiscal trajectory, it is worth returning to one of the first thinkers to articulate the dangers of sovereign debt: Adam Ferguson. It is fitting that I write this from Edinburgh, where Ferguson wrote his warnings about how reliance on borrowing could span national strength and entangle nations in dependencies:

States have . . . by pawning their credit, instead of employing their capital, to disguise the hazards they ran. . . . But the measure . . . is . . . extremely dangerous, in the hands of a precipitant and ambitious administration, regarding only the present occasion, and imagining a state to be inexhaustible, while a capital can be borrowed, and the interest be paid . . . an expense, whether sustained at home or abroad, whether a waste of the present, or an anticipation of future, revenue, if it bring no proper return, is to be reckoned among the causes of national ruin.

Ferguson’s concerns reflected deeper anxieties about civic virtue, national independence, and the capacity for self-governance. He saw debt as creating dependencies that could slowly erode a nation’s freedom of action.

Ferguson’s eighteenth-century warnings provided the intellectual foundation for understanding debt’s relationship to national power. As global financial systems evolved through industrialization and two world wars, twentieth-century economists would expand and refine these concepts, adapting them to a world of central banking, fiat currencies, and global capital markets.

Twentieth-Century Perspectives, From Keynes to Rueff

In the twentieth century, John Maynard Keynes reframed the debate, arguing that deficit spending could be beneficial during economic downturns. But even Keynes emphasized that debt should be cyclical, not structural. Governments, he argued, should run surpluses during economic expansions to pay down debt accumulated during downturns. Compare that principle to the recent U.S. policy: In 9 out of the last 10 years, the U.S. economy has grown, with the lone exception being 2020 during the Covid-19 pandemic, yet in all 10 years, the United States has run a budget deficit.

French economist Jacques Rueff warned that this lack of fiscal discipline was a predictable consequence of the Bretton Woods system. He anticipated what would later be called the “exorbitant privilege” of the dollar, allowing the United States to run deficits without facing the discipline normally imposed by balance of payments constraints. Rueff warned, perhaps presciently, that this arrangement was unsustainable and would eventually undermine global monetary stability.

The Song Remains the Same

Much has changed since the days of Ferguson, Keynes, and Rueff, but fundamental challenges of debt remain the same. Today, Ray Dalio, founder of Bridgewater Associates and a CSIS board member, is among the most prominent voices warning of the dangers in current U.S. debt dynamics. Dalio contends that the United States is approaching the end of a long-term debt cycle, set into motion by the role and privilege of the dollar in the global system. Whether it’s the end of a long-term debt cycle like Dalio argues, or a function of unrelated global trends, the United States will likely face a more constrained lending environment over the next 50 years than the last, and the choices made by policymakers over the next few years could significantly impact the United States’ ability to sustain its global leadership role, particularly in competition with China.

These historical and contemporary perspectives converge on a crucial insight: Debt’s impact on national power depends on its structure, purpose, and sustainability. To understand precisely how the United States’ current debt trajectory poses a national security risk, we must examine the specific structural drivers of the country’s fiscal imbalance and their strategic implications.

U.S. Debt: An Unsustainable Economic and Security Risk

Not All Debt Is Bad

Before examining the risks posed by the United States’ current debt trajectory, it’s important to underscore a key point: Debt is not inherently harmful to economic or national security. When used wisely, borrowing can bolster both economic resilience and strategic strength. Governments can, and often should, borrow to smooth economic downturns or finance critical long-term investments that private markets may undervalue. The real danger lies not in the existence of debt, but in its structure, growth rate, and purpose. By those standards, there is ample reason for concern about the direction of U.S. fiscal policy.

Structural Drivers of Debt

As of May 19, U.S. national debt stands at $36.22 trillion, or 124 percent of GDP—the highest level since World War II—and, unlike then, there are several underlying structural drivers:

1. Demographic Pressures: With fertility rates falling, the United States is projected to grow older and more slowly over the next 30 years compared to the last. An aging population is also fueling Medicare and Social Security outlays—now over 35 percent of federal spending.
2. Rising Interest Costs: As global growth slows and as many in the developed world enter retirement, interest rates have risen. Interest payments are projected to exceed $1.8 trillion annually by 2035—more than current federal spending on defense, education, and transportation combined.
3. Persistent Primary Deficits: The United States now runs deficits even in economic expansions. This is clear evidence of a fundamental fiscal imbalance. This also contributes to persistent trade deficits, as excess domestic demand pulls in foreign goods and capital.
    

Despite widespread awareness of these trends, political gridlock continues to stymie serious fiscal reform. Left unaddressed, the compounding effects may fundamentally reshape how both allies and adversaries assess U.S. credibility and resilience.

While debt is not inherently good or bad, excessive debt, regardless of its cause, can constrain policy options and create risks for national security in various ways:

1. Interest Payments Crowding Out Defense Spending: As debt service consumes a larger share of the federal budget, discretionary spending, including defense, faces increasing pressure. In 2024, the United States spent approximately 3 percent of its GDP on interest payments alone, exceeding the level of defense spending, and it is on pace to do the same in 2025. Based on current deficit projections, spending on interest payments for U.S. sovereign debt will soon eclipse total discretionary spending.
2. Reduced Fiscal Flexibility: Nations with high debt levels have less capacity to rapidly increase spending in response to emerging threats or during conflict or economic downturns, when tax revenues fall while social spending rises automatically.
3. Vulnerability to Interest Rate Shocks: Heavily indebted nations are particularly vulnerable to rising interest rates or changes in the attitudes of foreign lenders. While this is less of a concern for the United States because it borrows in its own currency and can monetize its debt, after any significant monetization, the United States would then face painful choices between debt service, defense spending, and other national priorities.
    

This erosion of fiscal space is no longer a theoretical concern. It is already reshaping the United States’ strategic posture in measurable ways. Perhaps the most consequential manifestation of this shift can be seen in the changing dynamics of global capital flows, particularly Washington’s growing dependence on foreign sovereign wealth funds. This relationship exemplifies Ferguson’s warnings about debt-induced dependencies, creating new strategic vulnerabilities even as it temporarily sustains the United States’ domestic investment needs.

A New Strategic Challenge of Debt: The Sovereign Wealth Fund Dilemma

Over the past 25 years, sovereign wealth funds (SWFs) have proliferated in number and scale, now managing over $12 trillion globally, nearly doubling in just the last decade. Countries from Norway to China to the United Arab Emirates (UAE) all use sovereign wealth funds to secure returns on national wealth and pursue national priorities and strategic interests.

Seeing the strategic role these funds can play, many in the United States have proposed creating similar vehicles. Discussed during the Biden administration, the idea gained prominence when President Trump signed an executive order directing the Department of the Treasury and the Department of Commerce to develop a plan for a U.S. SWF. Yet a fundamental tension remains: creating such a fund would require capital that could otherwise reduce the debt, and for a heavily indebted country like the United States facing rising costs of borrowing, this significantly impacts an SWF’s political and economic desirability.

In lieu of its own funds, the United States has become increasingly reliant on foreign SWF capital, especially from the Gulf. SWFs from the UAE, Saudi Arabia, Qatar, and Kuwait manage over $3 trillion combined, much of it deployed in the United States. Unlike China’s relatively transparent treasury holdings, these investments often blend commercial, diplomatic, and military objectives.

When asked about the downgrading of U.S. debt on Sunday, May 18, Secretary of the Treasury Scott Bessent quipped, “On the Moody’s downgrade, who cares? Qatar doesn’t. Saudi doesn’t. UAE doesn’t.” This remarkable statement underscores the strategic weight of foreign capital in sustaining U.S. debt-fueled investment and the leverage that may come with it.

Recent decisions reinforce this concern. Take the recent decision to permit the most advanced AI chip sales to the UAE, timed with a multibillion-dollar Emirati investment in U.S. AI ventures. The prior administration had restricted such sales due to the UAE’s role in sanctions evasion and technology diversion to Iran, Russia, and the PRC. This policy reversal reflects the deeper dynamic Ferguson warned about—debt-fueled dependencies that undermine sovereign decisionmaking. Ultimately, fiscal sovereignty requires domestic reform. The path forward is narrowing, but it remains open—if policymakers are willing to act before market forces impose harder constraints.

The Narrowing Path to Fiscal Sustainability

According to the Congressional Budget Office, U.S. debt held by the public will reach 156 percent of GDP by 2055 under current law. More concerning is the projection that annual interest payments will consume nearly 7 percent of GDP by mid-century. That is more than triple the historical average.

These trends suggest that the window for enacting meaningful reforms, particularly in entitlement programs, tax policy, and discretionary spending caps, without painful consequences, is closing. The longer reform is delayed, the more disruptive eventual adjustments will need to be. This is what thinkers like Ferguson and Rueff feared most: that debt, once entrenched, alters a nation’s political economy, making reform politically unpalatable until market or geopolitical shocks impose discipline.

The good news is that if addressed soon, these challenges are eminently surmountable. On the expenditure side of the ledger, by gradually increasing the age of eligibility for some entitlements, implementing income-related premiums that increase cost sharing for high-income beneficiaries, and expanding negotiation authorities for federal purchase of prescription drugs, the United States can make meaningful progress toward curbing nondiscretionary spending. On the revenue side, raising the taxable earnings cap for Social Security, broadening the tax base, implementing a 15 percent minimum effective corporate tax rate with targeted research and development exemptions, and reforming international tax provisions to curb profit shifting will provide significant revenue—to reduce the national deficit and create fiscal space for strategic investments.

A Choice Between Leadership and Illusion

In the years ahead, the United States will face stark choices about spending, taxation, and the burdens of global leadership. Perhaps the most dangerous threat is not economic but psychological: the false belief that dollar dominance insulates the United States from the consequences of fiscal recklessness. As federal debt climbs toward 160 percent of GDP and interest payments consume a growing share of the budget, critical investments in defense, diplomacy, and domestic priorities are increasingly at risk. The United States may forfeit not just its credit rating, but its global leadership—exactly the kind of decline Ferguson warned of. The United States still commands unparalleled economic and strategic strengths. But without serious fiscal reform, those strengths will wither. History teaches that great powers seldom fall to external forces alone; more often, they crumble under the weight of their own unsustainable choices.

Philip A. Luck is director of the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C.