New on FinoLib · Volume I: Global Economy
My latest article is now live on FinoLib, the free finance library I write: National Debt and the US Dollar as the World’s Reserve Currency, from Volume I: Global Economy. Read the summary below for the substance of the topic, then continue to FinoLib for the complete treatment.
2.4 Government Spending, Taxes, and the National Debt
The idea in plain words
Fiscal policy, meaning taxes and spending, is set by Congress and the President, separately from the Fed’s monetary policy. US federal debt passed $40 trillion in 2026. The debt ratio rises when the primary deficit outweighs the gap between growth and the interest rate.
Key points
■Federal debt was $40.26 trillion on October 1, 2026: $32.4 trillion held by the public and $7.8 trillion owed to federal trust funds such as Social Security.
■In fiscal year 2025 Washington collected $5.23 trillion, spent $7.01 trillion and so borrowed $1.78 trillion.
■Net interest on the debt ($970 billion) was larger than defense spending ($917 billion).
A closer look
Fiscal policy is the government’s use of spending and taxation to influence the economy — entirely separate from the Fed’s monetary policy. The key distinction: monetary policy is set by an independent central bank (the Fed); fiscal policy is set by the elected government (the President proposes, Congress appropriates). This separation is deliberate — it prevents elected officials from printing money to fund their spending promises.
A worked example
Worked Example: Is the US Debt Ratio Rising?
The standard approximation: change in the debt ratio ≈ primary deficit (as % of GDP) + (r − g) ÷ (1 + g) × debt ratio. Approximate US inputs for 2025 (fiscal-year budget data mixed with calendar-year GDP, so treat the result as a sketch): Input Value How it is derived Debt ratio (d) 98.1% $30.28T ÷ $30.86T Average interest rate (r) 3.36% Average rate on marketable Treasury debt, December 2025 Nominal GDP growth (g) 5.04% $30.86T ÷ $29.38T − 1 Primary deficit 2.61% of GDP $1,775B deficit − $970B net interest = $805B; $805B ÷ $30.86T Interest-growth term: (0.0336 − 0.0504) ÷ 1.0504 × 98.1% ≈ −1.57 percentage points.
Analogy
It works much like a household budget at a vast scale. If you spend more than your salary each month, you put the difference on a credit card. Do that every month for years, and the outstanding balance keeps growing — and you keep paying interest on it. A government’s national debt is that same idea multiplied by trillions and running across many decades.
Recap
Fiscal policy is set by Congress and the President: US federal debt passed $40 trillion in 2026, debt held by the public is about 98% of GDP, and net interest ($970 billion in fiscal 2025) now exceeds defense spending. The debt ratio rises when the primary deficit outweighs the gap between growth and the interest rate, currently by about 1 point a year.
2.5 The US Dollar as the World’s Reserve Currency
The idea in plain words
A reserve currency is one that other countries hold in large quantities and use to price trade and financial contracts. The US dollar has held that role since the Bretton Woods agreement of 1944, which gives the United States what Valéry Giscard d’Estaing called an “exorbitant privilege”.
Key points
■The dollar’s position was further cemented by the petrodollar system of the 1970s.
■The privilege lets the US borrow in its own currency at lower interest rates, run persistent trade deficits without currency collapses, and fund its government with debt the world buys as a safe asset.
A closer look
A reserve currency is one that other countries and institutions hold in large quantities as part of their foreign exchange reserves and use to denominate international trade and financial contracts. The US dollar has been the world’s dominant reserve currency since the Bretton Woods agreement of 1944, and its position was further cemented by the petrodollar system of the 1970s.
A worked example
Worked Example — A Reserve Manager’s Exposure (Illustrative)
A central bank holds $600bn of reserves, 58% of them in dollars. The dollar then falls 10% against the basket of its other currencies. Step Calculation Result 1. Dollar holdings 58% × $600bn $348 billion 2. Fall in value 10% × $348bn $34.8 billion 3. Share of total reserves $34.8bn ÷ $600bn 5.8% Result: a 10% dollar fall costs this central bank 5.8% of its reserves in local-currency terms. Reducing the dollar share to 48% would cut that loss to 4.8%, which is one reason reserve managers diversify.
Recap
A reserve currency is held in large quantities by other countries and used to price trade and contracts. The dollar has held the role since Bretton Woods in 1944, which gives the US cheaper borrowing, room to run deficits and a government debt the world buys as a safe asset.
What the full article covers
In the full article I take you through these sections:
■2.4 Government Spending, Taxes, and the National Debt
■2.5 The US Dollar as the World’s Reserve Currency
It includes worked examples, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume I: Global Economy
Read the full article on FinoLib
The complete article, National Debt and the US Dollar as the World’s Reserve Currency, with every worked example, diagram, quiz and source, is free to read in Volume I, Global Economy on finolib.com.
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