The $40 Trillion Empire: How Debt Built American Power and Began to Consume It

by Jaffa Levy · August 20, 2026

For half a century, the United States exchanged dollars and financial claims for the world’s goods, savings and obedience. The arrangement financed consumption, Wall Street and military reach on an unprecedented scale. It still sustains American power, but the costs are rising while its political returns are shrinking.

On August 18, the gross national debt of the United States passed $40 trillion. There was no national emergency, no sudden market collapse and scarcely a pause in Washington. Another trillion had been added to a figure so large that it had almost ceased to convey meaning. Yet the milestone was more than another warning about government spending. It illuminated the bargain on which American power has rested for more than half a century.

Debt has never been merely a weakness of the American empire. It has been one of the principal instruments through which that empire operated.

The United States could import more than it exported, consume more than it produced and maintain military forces across the world because other countries were willing—often compelled by the structure of the international system—to accumulate American money and American assets.

For decades, the arrangement worked remarkably well. The rest of the world supplied factories, labour, commodities and manufactured goods. The United States supplied dollars, Treasury securities and access to its financial markets.

The question is not whether the system has already collapsed. It plainly has not. The question is whether the privilege that sustained American power is beginning to consume too much of the power it created.

The empire that paid in its own currency

When Washington ended the dollar’s convertibility into gold in 1971, it did not end the dollar system. It transformed it.

The dollar remained the principal currency of international trade, banking, commodity pricing and central-bank reserves. Oil was largely priced in dollars. International loans were denominated in dollars. Governments requiring protection against financial crises accumulated dollar assets, particularly US government securities.

This allowed the United States to do something no ordinary debtor could sustain. It could purchase real goods from abroad with liabilities denominated in a currency it controlled.

When an American company imported machinery from Germany, electronics from Japan or consumer goods from China, the dollars paid abroad did not disappear. They might pass through several banks and investors, but someone ultimately had to hold them or invest them in dollar-denominated assets.

That did not mean every exporter bought Treasury bonds or directly financed the Pentagon. Foreign money entered equities, corporate debt, property, bank deposits and direct investment as well as government securities. By June 2025, foreign investors held approximately $35.3 trillion in US securities: $19.9 trillion in equities, $13.8 trillion in long-term debt and $1.65 trillion in short-term securities, according to the US Treasury.

The mechanism nevertheless mattered. America’s current-account deficit was matched by capital flowing back into the United States. Demand for American assets strengthened Wall Street, supported the dollar and lowered the cost of borrowing across the economy. Because capital is fungible, cheaper federal borrowing made every form of government expenditure—including military expenditure—easier to sustain.

This was the dollar’s “exorbitant privilege”. Other countries generally had to earn foreign currency before they could import on a large scale. The United States could pay in its own.

The privilege also changed the domestic economy. Cheap imports suppressed prices and enabled American consumers to buy more. Multinational companies shifted production abroad while retaining control over brands, finance, design and intellectual property. Profits rose even as industrial communities lost factories, unions and bargaining power.

The resulting trade deficits were not simply evidence that America had become weak. For many years they were evidence that the world remained willing to exchange its production for claims on American wealth.

THE AMERICAN BALANCE SHEET

Gross federal debt: $40.05 trillion

Debt held by the public in 2026: 101% of GDP

Projected 2026 deficit: $1.9 trillion

Projected 2026 net interest bill: about $1 trillion

Dollar share of disclosed foreign-exchange reserves: 57.1%

Dollar’s share of global foreign-exchange transactions: 89.2%

When privilege becomes a bill

The arrangement becomes more dangerous when the cost of maintaining it rises faster than the economy that supports it.

The Congressional Budget Office expects debt held by the public to rise from 101% of GDP in 2026 to 120% by 2036. The annual deficit is projected to increase from $1.9 trillion to $3.1 trillion. Net interest payments are expected to rise from 3.3% to 4.6% of GDP. CBO projections put interest expenditure above defence spending throughout the coming decade.

That does not mean the United States is about to become insolvent in the manner of a household or a country that has borrowed in somebody else’s currency. Its government issues debt in dollars, and the Federal Reserve can supply dollar liquidity during a crisis.

The constraint would arrive differently: through higher interest rates, inflation, currency weakness, political conflict over taxation and the diversion of public revenue from investment into servicing past borrowing.

The danger is already visible. Interest is becoming one of the largest items in the federal budget without providing a school, road, hospital, ship or missile. It is payment for decisions already taken.

Nor is reducing the deficit straightforward. American liabilities supply much of the world’s reserve assets and financial collateral. A rapid withdrawal of government borrowing could tighten global liquidity and weaken domestic demand. Continuing indefinitely, however, requires investors to absorb an ever-growing quantity of securities without demanding substantially higher returns.

This is the trap at the centre of the system. The world needs dollars, but the deficits required to supply them gradually raise questions about the value and governance of the assets being supplied.

There is evidence of diversification. The dollar’s share of disclosed foreign-exchange reserves has fallen from approximately 72% in 2001 to 57.1% in the first quarter of 2026. Central banks have increased their holdings of gold and smaller currencies. China’s Treasury holdings have fallen sharply from their earlier peak.

But de-dollarisation should not be invented where it has not occurred. The dollar’s reserve share actually rose slightly in early 2026, partly because of valuation movements. More decisively, it remained on one side of 89.2% of all foreign-exchange transactions in 2025—an increase from 2022—according to the Bank for International Settlements.

There is still no single replacement possessing the dollar’s combination of liquidity, convertibility, institutional infrastructure and enormous supply of supposedly safe assets. The euro remains constrained by a fragmented sovereign-debt market. China maintains capital controls and has not opened its financial system sufficiently for the renminbi to perform the same function.

The dollar system is therefore eroding at its margins without yet being displaced at its centre. Empires can remain dominant long after the conditions that created their dominance have begun to disappear.

Military supremacy without political victory

The same contradiction can be seen in American military power.

The United States spent approximately $954 billion on its military in 2025, roughly one-third of total global military expenditure, according to the Stockholm International Peace Research Institute. It possesses global bases, carrier groups, strategic bombers, satellites, nuclear forces and intelligence capabilities no other country can reproduce in full.

But military expenditure measures capacity, not political success.

The United States could devastate Vietnam but could not determine its political future. It occupied Afghanistan for two decades, only to watch the Taliban return to Kabul as American forces withdrew. It overthrew Saddam Hussein within weeks, but the Iraq war strengthened Iranian influence, fractured the Iraqi state and helped create the conditions from which Islamic State emerged.

Those conflicts were not identical, and every current confrontation cannot simply be declared another American defeat. The war in Ukraine remains unsettled. So does the confrontation with Iran. Yet both demonstrate how difficult it has become for Washington to convert financial sanctions, advanced weapons and overwhelming expenditure into the political outcomes it originally demanded.

By May, the Pentagon had placed the direct military cost of the Iran war at $29 billion. That estimate did not encompass all the economic damage, the future replacement of munitions or the higher energy costs imposed on American households. The subsequent strain on missile inventories has prompted vast new procurement commitments, including a $22.9 billion programme intended to increase annual Tomahawk production dramatically.

Military spending may stimulate factories, employment and corporate revenues. It can sustain demand when other investment is weak. But a war economy that repeatedly fails to produce durable settlements begins to resemble an expensive method of transferring public money into private military industry.

A hegemon is not simply a country capable of destroying an adversary. It is a country able to shape the conduct of other states at an acceptable price. On that measure, American power is becoming more costly and less reliable.

The settlement that was hollowed out

The external crisis is inseparable from the domestic one.

During the 1930s, economic collapse and organised pressure from below forced the American state to construct a new social settlement. Social Security, unemployment insurance, minimum wages, public employment and stronger labour protections did not abolish capitalism. They made it more tolerable to millions who might otherwise have rejected it.

The settlement survived because workers possessed institutions capable of defending it. Trade unions could organise workplaces, finance political campaigns and impose costs on employers. Progressive taxation limited the accumulation of private fortunes, while rising wages gave workers a material interest in the continuation of the system.

Much of the formal architecture remains. Social Security was not abolished. Unemployment insurance still operates. Labour law and the minimum wage still exist.

What disappeared was the balance of power around them.

Union membership fell to 10% of employed wage and salary workers in 2025, approximately half its level when comparable Bureau of Labor Statistics records began in 1983. In the private sector, it is lower still. The federal minimum wage has remained at $7.25 since 2009. Capital has become internationally mobile while most labour remains tied to locality.

The distributional consequences are measurable. The CBO found that the share of income before taxes and transfers received by the richest 1% doubled from 9% in 1979 to 18% in 2022. The wealthiest 10% now hold approximately 67% of household wealth, while the bottom half hold about 2.5%, according to Federal Reserve data analysed by the St Louis Fed.

Aggregate American wealth can therefore rise while large parts of the population experience insecurity. The Federal Reserve found that 73% of adults described themselves as doing all right or living comfortably in 2025, but only 63% could meet a $400 emergency expense using cash or its equivalent. Just 55% had savings sufficient to cover three months of expenses. Federal Reserve household survey

This is not universal destitution. It is something politically more volatile: a wealthy society in which millions can see abundance but cannot depend upon security.

Rebellion without a settled destination

The resulting alienation is no longer confined to one wing of American politics.

In 2025, a record 45% of Americans identified as political independents, while only 27% identified with either major party. Average confidence in the country’s principal institutions stands at 27%, close to the lowest level recorded by Gallup in more than four decades. Congressional disapproval reached 86% in 2026.

Donald Trump and the American socialist revival are contrary responses to the same collapse of confidence. One promises national restoration, tariffs, borders and executive power. The other promises redistribution, public provision, stronger unions and restraints on corporate wealth.

Neither can be dismissed as an eccentric interruption of normal politics. The normal politics produced them.

Zohran Mamdani’s election as mayor of New York was therefore significant, though it should not be exaggerated. He won 50.8% of the vote against Andrew Cuomo’s 41.3%, in the city’s highest-turnout mayoral election for decades. His victory demonstrated that a candidate openly identifying as a democratic socialist could defeat an established political dynasty while campaigning on rent, transport, childcare and the cost of living.

It did not demonstrate that America has become socialist. Gallup found that 54% of Americans still viewed capitalism positively in 2025, against 39% for socialism. More revealingly, 81% viewed “free enterprise” positively.

The distinction suggests that many Americans have not rejected markets, personal enterprise or private property. They have rejected an economic order they perceive as monopolised, politically purchased and organised for people who already possess wealth.

Alienation may move left, but it can also move towards nationalism, racial resentment, religious reaction or authoritarian rule. Economic pain does not arrive carrying a predetermined ideology. The struggle is over who explains it first and most convincingly.

Decline is not disappearance

Any serious assessment must confront the evidence against American collapse.

The United States remains the largest economy in the world at market exchange rates, producing about a quarter of global output. It dominates international finance and possesses the world’s deepest capital markets. Foreign investors continue to purchase American assets in enormous quantities.

It also retains exceptional powers of renewal. The United States was the world’s largest exporter of liquefied natural gas in 2025. American private investment in artificial intelligence reached $285.9 billion that year—more than 23 times the recorded Chinese private total—although China’s state-backed expenditure is harder to measure. American companies continue to dominate cloud computing, advanced semiconductor design, software and global finance.

These are not the characteristics of a powerless or exhausted country.

But decline need not mean that America becomes poor, technologically backward or militarily defenceless. It means that its proportion of world power diminishes, its rivals acquire alternatives, its allies hedge their loyalties and the cost of imposing its preferences rises.

At purchasing-power parity, China now accounts for 19.9% of world output, compared with 14.5% for the United States. China also possesses a much larger manufacturing base. The old division—American finance and technology sitting above Asian production—has become harder to maintain as China moves into electric vehicles, renewable energy, shipbuilding, telecommunications, robotics and advanced computing.

Soft power has deteriorated more abruptly. Gallup found that median global approval of US leadership fell to 31% in 2025, below China’s 36%. A 2026 Pew survey across 36 countries found a median of only 37% holding a favourable view of the United States, against 57% unfavourable.

A country can compel obedience without inspiring admiration, but coercion is more expensive than consent. Tariffs, sanctions, threats and military deployments may force temporary compliance while encouraging other states to construct payment systems, supply chains and alliances less vulnerable to Washington.

That is how hegemony is lost: not in a single bankruptcy or military surrender, but through thousands of decisions by other countries to reduce their dependence.

The $40 trillion debt is not a clock counting down to an appointed day of collapse. It is the accumulated ledger of an extraordinary bargain. The world accepted American liabilities because the United States offered security, liquidity, markets and political order in return.

Those liabilities are still accepted. The dollar remains dominant. American assets remain sought after. But the bargain is becoming more expensive at home and less persuasive abroad.

More revenue must be devoted to interest on past borrowing. More military expenditure is required to produce less decisive outcomes. More political energy is consumed by movements promising to overthrow an establishment that neither major party can convincingly defend.

America has not run out of power. It is running out of cheap power and that is what imperial decline looks like long before the empire disappears.

Sources consulted

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