Despite massive deficits, the US Treasury market hasn't broken because the economy is in a depressionary state. Similar to the 1930s, the overwhelming demand for safety and liquidity from global investors surpasses concerns about the government's fiscal irresponsibility, keeping interest rates low.

When a bank loan is repaid, the money created for that loan ceases to exist; it isn't just transferred. Widespread debt paydown, often seen as financially responsible, reduces the overall money supply. This directly shrinks GDP and can trigger recessions.

Unlike past crises like 2008, the coming debt sustainability crisis will be different because the government's own balance sheet is the source of the instability. This means it will lack the capacity to bail out the market in the same way, fundamentally changing the nature of the crisis.

In a model where government spending injects new money into the system, government debt is intrinsically linked to GDP growth. The idea that this debt can grow unsustainably faster than the economy is flawed, as the debt itself is a mechanism for that economic growth.

Despite recent concerns about private credit quality, the most rapid and substantial growth in debt since the GFC has occurred in the government sector. This makes the government bond market, not private credit, the most likely source of a future systemic crisis, especially in a rising rate environment.

In a world where the government is the largest debtor, raising interest rates acts as a fiscal transfer, increasing income for the private sector (bondholders). When this is financed through monetized bill issuance, higher rates can paradoxically become an economic stimulus, not a contractionary force.

Investor Ray Dalio explains that national debt reaches a crisis point not because of its size, but when two things happen: debt payments squeeze out essential spending, and low demand for new debt forces central banks to print money to buy it, thus devaluing the currency.

Governments with massive debt cannot afford to keep interest rates high, as refinancing becomes prohibitively expensive. This forces central banks to lower rates and print money, even when it fuels asset bubbles. The only exits are an unprecedented productivity boom (like from AI) or a devastating economic collapse.

Large, ongoing fiscal deficits are now the primary driver of the U.S. economy, a factor many macro analysts are missing. This sustained government spending creates a higher floor for economic activity and asset prices, rendering traditional monetary policy indicators less effective and making the economy behave more like a fiscally dominant state.