Could an America-first debt default solve the debt issue?

The IMF’s warning about rising debt and interest costs provides a useful entry into the problem. Its underlying framework is the interest–growth differential, usually written as r − g. Here, r means the effective interest cost of the debt stock, while g means the growth rate of the income against which that stock is measured. Using nominal interest alongside nominal GDP growth keeps the comparison consistent. Comparing a current ten-year Treasury yield with real GDP growth answers a different question. IMF Fiscal Monitor release

When interest exceeds growth, yesterday’s debt tends to rise relative to today’s economy unless the primary budget offsets it. The primary balance measures revenue against spending before interest. A government running a primary surplus can counter the unfavorable differential; one running a primary deficit adds new borrowing on top. The relationship is an accounting constraint, rather than a timetable for inevitable default.

There is a relevant correction to the starting premise. In the IMF’s matched 2026 U.S. debt-sustainability table, projected effective nominal interest is 3.7% and nominal GDP growth is 5.2%. Those general-government assumptions imply a negative differential for that year. They should not be mixed with a different growth forecast or substituted directly into a federal Treasury model. They also illustrate why the sign of r − g cannot carry the whole argument: sufficiently large primary deficits can push the debt ratio upward even while growth exceeds the effective interest rate. IMF U.S. Article IV, Annex II

For a stripped-down illustration, a debt ratio of 100% of GDP, effective interest of 4%, and nominal growth of 5% generate a favorable interest–growth contribution of about one percentage point of GDP. A primary deficit of 3% of GDP more than absorbs that advantage. These are teaching assumptions, not estimates of the current United States. They show why a country can face a worsening debt trajectory without already paying an effective interest rate above its growth rate.

This distinction sets the test for an America-first default. Reducing the stock can make a given fiscal path easier to finance. Establishing a sustainable path also requires examining the remaining primary deficit, the new interest rate, and the growth of the economy. The article therefore follows both the level of debt and its ratio to GDP, rather than treating a lower opening balance as the end of the calculation.

The Treasury snapshot frozen for this research records approximately $40.30 trillion of gross federal debt on 9 October 2026. About $32.45 trillion is debt held by the public, while $7.85 trillion is held by federal government accounts. “The public” includes the Federal Reserve as well as domestic and foreign investors. It is an accounting category, not another name for private American households. Treasury Debt to the Penny

The latest country breakdown available at the research cutoff is older. Treasury International Capital data report $9.2481 trillion of foreign Treasury holdings for July 2026. Of that, $3.7731 trillion belongs to foreign official institutions. The remaining $5.4750 trillion is foreign private holdings, calculated by subtraction. A policy targeting everyone abroad would consequently reach far beyond governments: it would also affect the banks, insurers, funds, and other private portfolios represented in the total. Treasury TIC Table 5

Mainland China’s reported holdings are $618 billion. That is about 6.7% of the foreign total and, using the more recent gross-debt snapshot only as a scale comparison, approximately 1.5% of total federal debt. Japan’s reported holdings are about $1.104 trillion and the United Kingdom’s about $998 billion. The country label describes the reporting location. It does not mean that the government of that country owns the entire amount, nor does it resolve every custodial chain back to an ultimate investor. Treasury country holdings

The distinction between a reported exposure and a principal amount also matters. Long-term securities in these holdings statistics are valued at market prices. A bond trading below par can represent a repayment promise larger than its current reported value; a bond above par produces the reverse relationship. Meanwhile, the Treasury debt stock and the Fed’s securities holdings have their own reporting conventions. Subtracting all three headline figures gives a useful rough picture, but it does not manufacture a perfectly measured domestic principal stock. Treasury methodology

The model therefore identifies its target as a principal proxy, explains its timing and valuation bridge, and tests alternative portfolio durations. July’s foreign share is applied to CBO’s projected FY2026 public-debt stock of $32.095 trillion, producing a modeled all-foreign target of $9.262 trillion. This assumes reported market exposure equals face principal before scaling; the dossier tests values 10% lower and higher. Its “foreign” category follows residence-based data rather than citizenship. These limits affect how confidently the initial relief can be measured before any judgment is made about the market response.

Suppose every targeted claim could be identified, made permanently ineligible for repayment, and extinguished with zero recovery. If the principal proxy were $9.25 trillion, a 100% haircut would remove that amount from the modeled federal liability. The first-round losses are assigned to foreign-resident holders in this experiment. American investors may still be exposed through foreign funds and counterparties, so residence does not settle the ultimate distribution of losses. The write-off changes external creditor claims rather than merely rearranging accounts inside the federal government.

The benefit is strongest when the remaining borrowing rate, domestic financial system, tax base, and primary spending path stay unchanged. Under those conditions, fewer liabilities generate fewer coupon payments and less principal to refinance. Future debt starts lower and the government also avoids interest on some borrowing it would otherwise have needed. Our zero-premium case makes that favorable mechanism visible instead of assuming away the attraction of the proposal.

The initial creditor loss is not an equivalent loss of world GDP. A bond is an asset to one party and a liability to another. Its repudiation changes those financial positions. Lost output arises through later changes in production, lending, investment, employment, and trade. Adding the full creditor loss to an estimate of lost GDP would combine distinct concepts and could exaggerate a supposed total economic cost.

Cancelling debt held by the Federal Reserve works differently. Treasury would lose a liability and the Fed would lose an asset, while the currency and reserve balances on the Fed’s liability side would remain. Interest flows between Treasury and the Fed also have to be considered alongside remittances and the Fed’s other costs. The government cannot infer an equal gain in consolidated resources simply by deleting one side of that internal relationship. The model therefore displays its Treasury cash-budget calculation separately from a sensitivity that offsets incremental interest received by the Fed. Federal Reserve balance sheet

Government trust funds present another internal accounting case. Their Treasury securities are assets set aside against program commitments. If the securities vanished while benefits remained payable, the underlying cash requirements would remain. Actual fiscal savings would require a change in benefits, contributions, other revenue, or spending. A lower gross-debt headline would not by itself show that those commitments had become easier to meet.

Foreign repudiation consequently deserves its own calculation. The first-round transfer can be large. The remaining issue is how much of that advantage survives once the government continues to run its budget and refinance its debt on different terms.

Start with the simple arithmetic in the original research. A $9.25 trillion target carrying an illustrative 4% financing cost generates $370 billion of annual interest. If $18.6 trillion of surviving debt outside the Fed eventually costs more to finance, each additional percentage point adds $186 billion a year. Dividing $370 billion by $18.6 trillion gives approximately 1.99 percentage points, or 199 basis points.

That calculation is internally useful, provided its meaning stays narrow. It compares the canceled portfolio’s initial annual cost with a hypothetical rate surcharge on a fixed surviving stock. The numerator stays at its initial coupon-equivalent value; it does not reprice the canceled debt at future baseline rates. This makes it a static benchmark, not a fully refinanced steady-state forecast. It also uses the original rough ownership reconstruction. The 4% rate is an assumption, rather than an observed average coupon of foreign investors’ exact portfolios.

A percentage point is a change in the level of a rate. Moving from 4% to 6% is a two-percentage-point increase, equal to 200 basis points. It is also a 50% proportional increase in that rate. The figures and explorer use percentage points and basis points so that these different descriptions do not become interchangeable.

The China-only comparison operates on a much smaller target. With the original illustrative $600 billion target and 4% financing cost, annual savings are $24 billion. Spread over $27 trillion of surviving non-Fed debt, only about 0.089 percentage points, or nine basis points, matches that flow. Replacing the illustrative inputs with the model’s portfolio proxy changes the exact number, but the arithmetic explains why a narrow target offers less room for a broad increase in financing costs.

The current model’s annual-interest thresholds are 1.49 percentage points in the Treasury cash view and 1.87 percentage points in the Fed-offset sensitivity for the all-foreign case. The corresponding China thresholds are 0.072 and 0.084 percentage points. These figures use the displayed principal and coupon proxies. They remain a steady-stock benchmark, rather than a forecast of the government’s actual interest bill in a particular year.

A market-rate increase does not immediately rewrite every Treasury coupon. Existing fixed-rate securities continue to pay their contractual rate until they mature. Bills turn over quickly, longer-dated bonds transmit the change more slowly, and floating-rate instruments have their own reset mechanism. Treating the entire outstanding debt as though it repriced on the day of default would accelerate the modeled interest cost and distort the comparison.

The financing model starts with maturity cohorts and preserves their original coupons. A haircut removes a share of the targeted cohorts. Surviving maturities are refinanced, while primary deficits and interest require additional borrowing. New issuance receives the baseline financing rate plus the scenario premium. Refinancing replaces a maturing liability; only the net financing requirement adds to the debt stock. For inflation-protected securities, annual interest cost includes a nominal equivalent of CPI indexation, financed each year. It is a funding-cost approximation, rather than an exact forecast of coupon cash payments.

The precise securities owned by each foreign investor are not observable in the aggregate country table. The central allocation therefore treats the targeted portfolio as a proportional share of the relevant marketable debt, with shorter- and longer-duration variants. TIC’s aggregate also includes nonmarketable Treasuries, so allocating the entire target to marketable cohorts is an additional perimeter proxy. A concentration in short bills would deliver avoided repayments and new-rate exposure differently from a concentration in long fixed-rate bonds.

A temporary loss of market confidence can also leave a long footprint. In the five-year premium scenario, new borrowing stops receiving the additional rate after year five. Fixed-rate securities issued before that point retain their higher coupons until maturity. Setting all borrowing costs back to baseline immediately in year six would erase obligations that the government had already contracted to pay.

The first practical obstacle is the ownership rule itself. A Treasury security can change hands. If a foreign investor could sell a threatened bond to an American investor entitled to full payment, the policy would create an avoidance route. A government seeking to prevent that would need a rule that followed the claim, froze ownership at a cutoff, or restricted transfers. Each approach changes the meaning of a supposedly uniform security. This is an inference from the proposed mechanism, not a description of an existing U.S. repayment system.

Custody complicates the distinction further. A country entry in a holdings table may reflect an intermediary rather than the final economic beneficiary. A U.S. investor can have exposure through an overseas fund, while a foreign investor can use an American institution. Protecting every American economic interest while imposing losses on every foreign interest requires more information than the headline ownership table supplies. The model grants perfect targeting precisely so that this operational uncertainty does not conceal the proposal’s strongest accounting result.

Repudiation would also leave legal claims. Federal law pledges the faith of the United States to payment of principal and interest on its obligations, and the Fourteenth Amendment addresses the validity of authorized public debt. How a particular discriminatory measure would be litigated is a legal question that the financing model cannot resolve. Zero recovery is an assumption about the eventual economic outcome, not a finding that announcing nonpayment would automatically extinguish every enforceable claim. 31 U.S.C. §3123; Fourteenth Amendment

The second obstacle is the financial role of Treasuries. They serve as investments and as collateral supporting other transactions. Losses and uncertainty can prompt lenders to require more collateral, counterparties to reduce exposures, and investors to seek liquidity at the same time. GAO’s analysis of a U.S. debt-limit default describes channels involving funding stress, forced sales, and wider financial disruption. A deliberate foreign-holder repudiation is a different event, so those documented channels support a mechanism discussion rather than a calibrated estimate of this policy’s effects. GAO default-risk assessment

Keeping domestic Treasury coupons current would protect one contractual payment stream. American institutions could still face losses through foreign counterparties, funds, trade finance, and a weaker economy. Foreign demand for new Treasury issuance could also change. The government would continue to need buyers for surviving maturities and new deficits, while higher sovereign financing costs could affect the rates faced by businesses and households. The direction and scale of those responses cannot be read directly from the amount written off.

A historical IMF exercise provides a sense of the channels a broader crisis can activate. Its 2012 U.S. sovereign-risk scenario generated peak output losses of 5.2–5.7% in the United States and 3.4–6.0% globally under different policy responses. The exercise imposed a bundle of interest-rate, equity-price, private-demand, fiscal-adjustment and currency shocks; it did not simulate this exact foreign-only proposal, and its results are not forecasts for 2026. Their appropriate use is to show why a sovereign crisis analysis extends beyond Treasury’s coupon bill. IMF 2012 spillover study

Our stress controls are deliberately more modest in ambition. They impose an illustrative GDP-level shortfall of 2% or 5% in the first year, recovering to baseline by year five. Revenues fall proportionally with nominal GDP while primary spending stays on its baseline nominal path. A separate option adds a one-time net fiscal intervention of 1% of baseline GDP. These settings measure sensitivity to specified disturbances. They carry no probabilities and should not be attributed to the IMF.

Weaker GDP affects the debt ratio through two routes. Lower revenue raises the numerator by increasing borrowing, while a smaller economy reduces the denominator. The model reports both debt dollars and debt/GDP so that the denominator effect remains visible. Fiscal interventions are measured as net costs; the face value of a loan or asset purchase would not automatically equal a permanent loss to the government.

Retaliation is left outside the quantified model. U.S. residents held $46.97 trillion in foreign financial assets at the end of the second quarter of 2026, according to BEA, which illustrates the scale of cross-border exposure. It does not establish how much could or would be seized. Assigning a confiscation percentage without evidence would add numerical appearance without resolving the political and legal uncertainty. BEA international investment position

The strongest result in favor of the proposal is straightforward: a large, enforceable external write-off can leave the federal government with materially less debt even after borrowing becomes more expensive. A small rate increase does not automatically erase trillions of dollars of principal relief. The annual-interest threshold and the horizon-specific debt threshold show precisely how much room the chosen assumptions create.

The strongest limitation is equally concrete. The experiment achieves its favorable starting position by assuming that the government can identify the claims, prevent avoidance, achieve zero recovery, and keep the chosen fiscal and economic path intact except for the shocks explicitly entered. A reader who believes those conditions are unrealistic should change or challenge them directly. A reader who believes markets would react mildly can use a smaller premium. Neither position supplies an observed price for a policy that has not occurred in this form.

The comparison with foreign official institutions alone also matters politically and economically. Excluding overseas private investors reduces the target and the available fiscal relief. Targeting China narrows it much further. Those policies may differ in motivation, feasibility, and international response, but the same financing arithmetic applies: the potential saving depends on the claims removed, while any broader repricing acts on the debt the government still has to issue.

A persistent primary deficit remains after the haircut unless policy or the economy changes it. The government still makes program payments, collects taxes, and finances any gap. A lower debt stock can reduce interest and postpone pressure, yet the debt ratio can resume rising from its new level. The model therefore checks the trajectory after the initial drop rather than treating the drop itself as evidence of lasting stabilization.

In the central scenario, the debt ratio does not stabilize within the modeled ten-year horizon. It falls to about 71.6% of GDP immediately after the assumed write-off, then rises to 103.8% by 2036. Even the zero-premium case ends at 91.7%, above its immediate post-haircut starting point. The remaining advantage over the baseline is economically substantial, while the continuing rise in debt relative to GDP shows that the underlying fiscal process has not been brought into balance.

The useful conclusion is conditional. An America-first default can produce substantial theoretical debt relief in a model that grants successful targeting and favorable spillovers. Establishing that it solves the debt problem would require a credible account of the surviving budget, the future financing premium, the economic response, and the enforceability of the discrimination. Ownership percentages establish the possible size of the opening transfer. The financing path determines how much of it remains, while the continuing primary budget determines whether the country has changed the process that built the debt.

The consequence returns to the IMF’s framework. A government can alter its inherited liabilities once. It then returns to the recurring relationship among revenue, spending, interest, and growth. Any claimed solution has to survive that return to ordinary budgeting.