While the Israeli economy continues to show resilience despite the war and global geopolitical conditions, a giant financial sinkhole in the form of US public debt has opened up overseas and is threatening to halt the trend of interest rate reductions.ETF specialized firms in the debt market estimate that Israel is among the countries already paying part of the price for the expanding US debt through higher interest rates, a more volatile capital market, and pension savings that are increasingly exposed to Wall Street. For Israeli consumers and businesses, this means higher repayments on loans and mortgages, wage erosion, and even the potential for savings erosion.The regulator has even mandated institutional entities to maintain a foreign currency liquidity buffer of about 10% following their increased exposure to US stock indices, so that a sudden margin call during sharp Wall Street volatility will not paralyze the local foreign exchange market. In other words, the bill for $40 trillion may be arriving in the mailboxes of Americans, but its payment is also passing through the Israeli pocket – and the final bill could be large.$40 trillion – and the debt keeps climbingUS public debt is soaring at a dizzying pace of $7 billion a day, having recently crossed the $40 trillion mark. Net interest payments on American public debt also crossed a new threshold, reaching approximately $970 billion in fiscal year 2025, with the Congressional Budget Office (CBO) estimating that they will surpass the $1 trillion mark for the first time in the current fiscal year – an amount exceeding total annual US national defense spending.The CBO also forecasts that interest costs will double again to about $2.1 trillion by 2036, consuming nearly a quarter of the entire federal budget. As a percentage of GDP, interest costs are expected to pass the 3.3% mark this year, surpassing the record set in 1991, according to an analysis by the Peter G. Peterson Foundation, a nonpartisan economic organization that tracks the US national debt.More debt to fund debtHow is the administration handling the debt? By taking on more debt. From the beginning of 2026 until July, the US administration issued bonds amounting to about $18.9 trillion, a 10.2% jump compared to the corresponding period last year. In doing so, it is effectively sucking liquidity out of global markets and forcing bond yields to jump to levels that some argue even threaten market stability.Crossing the new debt threshold comes just roughly 4.5 years after crossing the $30 trillion mark. Officials in the US Treasury Department attributed the acceleration of the debt expansion to the Supreme Court’s striking down of the emergency tariff package imposed by US President Donald Trump. In doing so, the court forced the administration to refund money to importers, turning tariff revenues negative for three consecutive months.In the dollar we trustTo understand the magnitude of the debt surge, consider that over 241 years, until 2017 when Trump entered his first term in the White House, the US public debt stood at $19.95 trillion. Since then, it has doubled. About a third of the increase was recorded in the two years following the outbreak of the coronavirus pandemic, which pushed the debt-to-GDP ratio to a historic peak of about 130%. The main reason was attributed to an increase in borrowing to fund direct relief payments, unemployment benefit expansions, and business support. Since Trump returned to the role of “Commander-in-Chief” in January 2025, the debt has grown by an additional $3.8 trillion.Compounding this are two decades of tax cuts that reduced federal government revenues relative to the size of the economy, alongside a budget adjustment law to lower taxes and add about $300 billion to defense and immigration matters, which the CBO estimates will add $4.2 trillion to the debt by fiscal year 2034. Meanwhile, the retirement of the baby boomer generation has pushed Social Security and Medicare spending into a steep upward trajectory, while payroll tax revenues struggle to keep pace.The International Monetary Fund forecasts that US debt will pass the 140% of GDP mark by 2031, with the federal deficit remaining in the 7%-8% range of GDP for years to come. The CBO even estimates that if current policy is maintained, federal debt held by the public and investors could grow to about 175% of GDP by the mid-2050s. To understand how severe the situation is, one can examine the projected depletion of the Highway Trust Fund by 2028, the Social Security retirement trust fund by 2032, and the Medicare hospital insurance trust fund about a year later, according to forecasts by the CBO and the Social Security Administration.Michael Peterson, CEO of the Peter G. Peterson Foundation – named after his billionaire father who established it in 2008 – said that the United States “has been running deficits for 26 years, and we have ignored many of the structural challenges that exist in our budget. Many administrations and many Congresses have taken steps in the wrong direction.”What sets the crossing of this new threshold apart from previous debt waves is the cost of servicing the debt, which deducts every dollar directed toward it from the services citizens receive and raises the possibility of tax hikes.Marino: “The dollar gives the U.S. a unique status”. (credit: Themes ETFs, official site)The dollar’s advantage – and its limitHowever, it is not certain that Americans have reason to fear the increasing debt. Much of the public discussion on American debt relies on the assumption that the dollar’s status as the global reserve currency protects the US from scenarios that hit other indebted nations in the past.Paul Marino, Chief Revenue Officer at US firm Themes ETFs, explains that “the dollar’s status as the global reserve currency gives the United States a unique advantage in that it can finance its debt in a currency it produces itself, and will never reach a situation of foreign capital flight or a liquidity crisis like in emerging markets. To understand the situation, one can compare it to Japan, which has the highest debt-to-GDP ratio in the world, but the debt is considered controlled because it is mostly held by local citizens and entities. If Japan holds such debt levels solely thanks to domestic capital, the United States, which enjoys a captive global buyer base, enjoys far broader maneuvering space.”However, this privilege is not a blank check. Reserve currency status does not change basic mathematics: Interest payments grow and take up a broader share of the US budget. Reserve currency status is essentially a higher credit line, but not an unlimited one. The central question currently dividing economists is how close the United States is to the edge of this credit line, and the truth is that no one knows for sure until the markets themselves mark the red line.”Marino does not spare criticism of policymakers, adding that “the problem is that all monetary policymakers worldwide studied at the same prestigious universities, where they were educated to believe that debt is solved with more debt. They simply lack the courage to think differently. I am not in favor of burning books, but if the economic theories of John Maynard Keynes were to disappear from libraries, it is possible that we would all be in a much better position.”Warning: Erosion of savingsVioleta Todorova, research analyst at European firm Leverage Shares, explains that “the main concern over crossing the $40 trillion threshold in US debt is not a sudden default, but the heavy price absorbed in financing the debt. For the risk premium is widening: Yields at 4.7% for 10-year and 5.2% for 30-year reflect investor demand for compensation against inflation risks, debt duration, and massive securities supply.”Todorova also warns of a self-feeding mechanism: “The US debt market has historically relied on global demand. If foreign investors reduce debt absorption, the domestic market will be required to absorb higher supply, forcing the Treasury Department to offer even higher yields in a dangerous feedback loop.”Todorova. Fears of a self-reinforcing mechanism. (credit: Official website, LS)The government intervenes – The market remains unconvincedAgainst this backdrop, the US Treasury Department recently took an unusual step, announcing a doubling of the scope of buybacks of long-term government bonds, from $2 billion per operation to at least $4 billion, as part of actions beginning September 9 and continuing through early November. The US Treasury Secretary even hinted in the Senate that the scope might increase beyond that.In immediate reaction, the 10-year yield fell to about 4.647% and the 30-year yield to about 5.196%. However, Todorova says that “while the goal is indeed to improve market liquidity and exert downward pressure on long-term yields, the administration cannot sweeten the fiscal reality. The initial market reaction faded quickly, and 10-year bond yields climbed back toward 4.7%, while 30-year yields reached around 5.24%. This is a clear warning sign: Investors are pricing in economic fundamentals and not just technical intervention.”She also points to the factors fueling the pressure: The widening fiscal deficit, broad issuance volumes, and inflation concerns strengthening against the backdrop of rising oil prices. “High long-term yields raise the discount rate at which investors value stocks. This is particularly critical for technology and growth companies, as a significant portion of their valuation is based on future earnings. If investors interpret the intervention as a sign that the administration fears rising debt costs, they will demand an even higher risk premium. High yields will translate quickly into pricier mortgages, costlier corporate credit, and delays in infrastructure and consumer investments. The current intervention is a temporary stabilizer, not a root solution,” Todorova analyzes.The cost, however, is rolled over as always to the citizens, whose wages and savings will erode and who will be forced to bear higher tax payments while receiving fewer government services. This is already evident in the United States.Locomotives of the economy in dangerFor Israeli citizens, this is nothing less than a financial earthquake for their private wallets, because when government bond yields in the United States and Israel climb, they set a new and more expensive “floor price” for money worldwide. Commercial banks fall in line and also raise interest rates on mortgages, auto loans, and small business credit, thereby shrinking the disposable income of the average family. At the same time, when the state itself is forced to spend additional billions of shekels solely on interest payments for its national debt, this money is deducted directly from public budgets. Meaning less money for education, healthcare, and security, alongside economic decree measures and tax hikes aimed at plugging the budgetary hole.This tension is felt within the Bank of Israel itself. The trend of monetary interest rate cuts, which has fell for the third consecutive time to 3.25% (prime rate: 4.75%), indeed points to the resilience of the Israeli economy relative to the world – but the expectation is that the surge in long-term US yields will narrow Bank of Israel Governor Prof. Amir Yaron’s room to maneuver and prevent the continuation of the rate reduction trend.Guy Parminger, Partner and Head of Technology at PwC Israel. (credit: Eli Dasa, official website)Mortgages, tech, and real estateGuy Preminger, partner and head of technology sector at PwC Israel, explains that “there is no sector in the Israeli economy that might not be damaged as a result of the shockwaves generated by rising public debt in the United States, and the main entities expected to be hurt are the two locomotives of the economy: The tech industry and the real estate sector.”The reason lies in the fact that the US administration convinces investors to buy its bonds by raising the interest rate it offers against the debt it raises. This step also leads to an increase in interest rates on other government bonds competing for investor pockets, and banks will utilize this to create an interest rate floor for loans and credit offered for business and private activity in the market. This means that mortgages, private loans, business credit, and even public savings will be affected due to the new interest rate floor created.”Since the real estate sector is a finance-heavy sector, and the interest rate offered in the market directly impacts its profit margins, as well as mortgage rates – which, when high, harm demand – the shockwaves from the swelling US debt could wash over this sector as well. In addition, when a lower-risk asset, such as a government bond, allows investors to receive a relatively high interest rate, it begins shifting investor funds toward it, with some preferring an investment in it over a high-risk asset whose potential excess yield becomes less worthwhile relative to the risk in their eyes.”A shift of this type will directly hurt Israeli tech by reducing the amount of money transferred to American and local investment funds investing in local innovation startups, lowering the volume of IPOs and exits in the sector, and potentially leading to a reduction in the opening and expansion of international development centers in Israel.”The best illustration is in the numbers: The interest rate attainable on an investment in long-term US government bonds hovers around 5%, and if it rises toward 7%, for example, then the interest rate will equal that of risk assets such as stocks, which historically yield about 8%-10% a year. This gap is calculated against the risk, and therefore the expectation is that in a scenario of this type, investors will prefer to take fewer risks given the relatively high interest rate.”Shockwaves have not yet reached IsraelThe shockwaves, however, have not yet reached Israel’s economic shores, and Preminger explains this by pointing to the diversity of Israeli tech, pent-up housing demand, and upcoming elections: “Tech is managing to compensate through the development of ‘hot’ sectors that rise while other sectors in the innovation industry lose their luster among investors. The best example of this is defense-tech, which also encompasses cybersecurity, a field that has been booming since the coronavirus period. Therefore, we still do not see the impact on the tech sector, aside from the weakening of the dollar against the shekel.”Regarding real estate, it should be remembered that the sector still enjoys demand, even if part of it is currently pent-up and will burst forth with interest rate cuts – though reductions may be halted. But most of the economy’s attention, in my view, is currently focused on election results rather than the interest rate, and mainly on whether there will be a clear resolution in the elections and some degree of forward certainty.”Alongside all this, we must remember that we live in a world where changes are very rapid. The field of artificial intelligence, for example, is completely transforming economies and with them the traditional tax model, which relies on income tax from employees. But as AI becomes more integrated, it will take time for employees to find their new niche or for the state to find the way and resources to direct its human capital to its needs, and until then, it is not certain that state revenues will rise while its expenses continue to grow. We live in a world moving so fast that it fails to reach any point of equilibrium, and therefore sometimes behaves opposite to what is written in the textbook.”
