US Debt Crisis: Impact, Risks And Top Investment Strategies 2025
Investors often shy away from companies burdened with excessive debt, fearing financial instability and diminished returns. Now, imagine this scenario on a much larger scale-not with a single corporation, but with an entire nation. The United States, as the world’s largest economy, is currently facing unprecedented levels of national debt. This situation carries significant implications, not only for the American economy but also for global markets and investors everywhere, including those in India.
As of the January-March quarter of FY25, the US national debt has reached $36.21 trillion, which is 120% of the US GDP1. The rising debt has alarmed investors and has prompted a deeper look into the US debt crisis, what is causing it and what this means for investors.
US Debt Crisis: What Is Happening And Why It Matters
The government of any nation has its revenues and expenses. The revenues come from taxes, fees, etc, and the expenditures are towards public facilities, infrastructure, defence, subsidies, etc.
When the expenses exceed the revenues, the government faces a fiscal deficit, and the government borrows money. A government can borrow money in various ways, including by selling bonds, taking international loans and through savings schemes to fulfil these deficits.
As of FY24, the US government faced a massive deficit of $1.83 trillion.
Sometimes, the fiscal deficit can continue to widen, and debts can become unmanageable, leading to a possible debt trap and, potentially, a debt crisis, where a country may become unable to repay its debt obligations.
What Is The US Debt Ceiling And How Does It Work?
To prevent the debt from getting out of control, the US Congress (equivalent to the Indian Parliament) sets a limit on how much debt the US government can take. This limit is called the debt ceiling.
Since 1960, the US debt ceiling has been revised and increased 78 times. The latest debt ceiling of $36.1 trillion was already hit in January 2025 and will be up for either extension or suspension in mid-July 20252.
Key Drivers Behind The Current Debt Crisis
Here are some key drivers of the consistently increasing US debt:
1. Fiscal Deficit: A fiscal deficit is a situation in which government expenses are higher than its revenues. This gap is fulfilled by borrowing money. The US has consistently run a fiscal deficit since 2001, prompting increased borrowing.
2. Rising Interest Payment: As the amount of debt increases, so does the payable interest, which is a major expense of the government and leads to even bigger deficits.
With the US government bond yields at around 4.5%, the US government is expected to pay $1 trillion as interest payments on its national debt3.
4. Government Spending: The government spending on various programs can also be a burden on the national debt.
For example, US President Donald Trump passed a Tax Cut and Jobs Act of 2017, which added between $1 - 2 trillion (estimated) in national debt from 2018 to 20254.
5. Rating Downgrades: The bonds issued by the US government are considered as one of the safest assets in the world5. Any downgrade of these bonds can lead to investors demanding higher interest rates, putting more pressure on the US government.
For example, on 16th May 2025, Moody’s ratings downgraded the US Government debt from Aaa to Aa1, citing increased national debt concerns6.
Sector-Wise Impact: Winners And Losers Globally
Let us look at how different sectors and asset classes will be affected by the increasing US national debt:
1. Safe havens: Gold, Treasuries, And Defensive Stocks
Usually, during financial and geopolitical uncertainties, the primary investment strategy is to buy safe-haven assets.
The increased US debt has sparked central bank gold buying worldwide. Central banks accumulated 1,180 tonnes of gold worldwide in 2024 amid rising uncertainty7.
As a result, in the last 1-year (as of 4th June 2025), gold has rallied 42.3% in international markets.
The US treasury securities, or the bonds issued by the US government, are also witnessing a selloff throughout the globe. The bond selloff can increase the yields on US bonds.
For example, the yield on US 30-year government bonds has risen consistently in the past year, and has touched 4.98% (as of 5th June 2025). Rising yields indicate a bond selloff.
Also Read: Government Bonds Vs Corporate Bonds
During uncertain times, investors increase their investment in defensive stocks. These are the companies that provide necessary products and services like healthcare and FMCG.
For example, the Morningstar US Consumer Defensive index has returned 10.38% in the past year (as of 5th June 2025), indicating increased investor buying in defensive stocks.
2. Risk Assets Under Pressure: Tech, Crypto, And Startups
During uncertain times, investors generally do not invest in high-risk assets. The uncertainty makes these assets less attractive, and their prices can drop as a result.
High-risk assets include cryptocurrencies, sectors like technology, etc. Investors can also become reluctant to invest in startups at such times.
For example, if the US government shows clear signs of uncontrollable debt, like missed interest payments, then it can trigger a selloff in high-risk assets.
3. Regional Impact: Asia, Europe, And India
Investors who pull money from the US have the option to invest in other countries in Europe and Asia. Recently, Europe has not seen a surge in investment in 20258. On the other hand, Asian countries are seeing significant growth in foreign investments.
An increasing US debt crisis has the potential global market impact to increase investor interest in the European and Asian markets.
What This Means For Indian Investors
Increasing US debt and global recession fears are major concerts of investors. Let us see what the increasing US debt means for the Indian investors:
INR vs USD: Currency Impact On Returns
A US debt crisis could mean a fall in the value of the US dollar. This means other currencies, such as Indian Rupee, can strengthen against the dollar.
A strengthening rupee can hurt the returns of Indian investors invested in foreign markets. At the same time, it can boost the returns of foreign investors invested in India, making Indian investments more appealing.
The dollar index (value of dollar against 6 major currencies), has declined 5.17% in the past year.
FII Flows And Market Liquidity In India
India remains a bright spot for foreign investments at such times, because of its increasing GDP, and attractive future prospects. The GDP in the March quarter (2025) increased by 7.4%, making India attractive to foreign investors9.
India is a developing nation with a rapidly growing economy. India attracted $81 billion worth of Foreign Direct Investment (FDI) in FY2510.
A widespread US debt crisis can enable more foreign investment in India.
Should You Rebalance Your Portfolio?
Diversification across asset classes, tailored to the risk appetite of individual investors, remains a fundamental principle.
Given the current market dynamics, Indian investors can consider rebalancing their portfolios to manage risk. Taking proactive steps becomes essential to preserve wealth and reduce downside risk, so let us look at some strategies to mitigate these risks.
Strategies To Safeguard Your Portfolio
Investing during the US debt crisis needs higher caution, Indian investors can consider the following strategies to safeguard their portfolios.
1. Diversification Across Geographies And Asset Classes
Indian investors can diversify their portfolios by investing in different asset classes like bonds, gold, government securities, etc. Indian investors can also consider buying international equities for further portfolio diversification.
Investors can consider European and other Asian markets for investment (apart from the US markets).
2. Considerations For Fixed Income And Gold
Fixed-income securities like Indian government bonds and Indian corporate bonds can help investors in reducing their portfolio risks. Indian investors can use the Grip Invest platform to add exposure to Indian bonds.
Additionally, Gold can be added to portfolios since a US debt crisis can boost gold prices further. Apart from physical gold, investors can buy gold in digital format through gold funds, gold ETFs, etc.
Also Read: 18k Gold Investment Plans
3. Leveraging SIPs And Dynamic Asset Allocation
During periods of high global financial markets volatility, investors can use SIPs, which help the investor by lowering their average buying price through market ups and downs.
SIPs can be combined with dynamic asset allocation, which involves a balanced portfolio of different asset classes designed to lower risk.
Investors can create dynamic portfolios, or opt for hybrid mutual funds with dynamic portfolios and continue their SIPs in these portfolios. This can help the investors to protect and grow their money over time.
Conclusion
The piling of US debt can send shock waves among the financial markets worldwide if it is not controlled. The effects of the US debt crisis might not be immediate and can take years to unfold. Investors can consider adding safe heaven bets to their portfolios to deal with any such occurrences.
If you want to add debt instruments and bonds to your portfolio , Sign up to Grip Invest and explore a wide range of 30+ corporate bond options!
FAQs On US Debt Crisis
1. Is gold a good hedge during the US debt crisis?
Yes, Gold can be a good hedge against a US debt crisis. Investors rush to buy Gold when there is financial or geopolitical uncertainty. This is the reason central banks around the world purchased 1,180 tons of Gold in 2024. The gold price has rallied almost 40% in the last year (as of June 2025).
2. How can I diversify my portfolio to reduce exposure to US-related risks?
To diversify from US-related risks, investors should diversify their foreign investments from the US to other countries in Europe and Asia. Additionally, Indian investors can consider adding bonds and gold to their portfolios to lower risk. Investors can also reduce their holdings in high-risk assets like cryptocurrencies.
3. What are key economic indicators to track during the US debt crisis?
The key economic indicators that investors can track during a US debt crisis include the yields on US government bonds, US bond holding by foreign governments, credit ratings of US sovereign debt, gold buying by central banks, the value of the dollar index, are some key indicators that you should track during the US debt crisis.
References
1. Fred, accessed from: https://fred.stlouisfed.org/series/GFDEGDQ188S
2. Bloomberg, accessed from: https://www.bloomberg.com/news/articles/2025-05-09/bessent-says-debt-limit-measures-could-run-out-in-august
3. Committee For A Responsible Budget, accessed from: https://www.crfb.org/blogs/interest-costs-could-explode-high-rates-and-more-debt
4. Tax Policy Center, accessed from: https://taxpolicycenter.org/briefing-book/how-did-tcja-affect-federal-budget-outlook
5. Investor Gov., accessed from: https://www.investor.gov/introduction-investing/investing-basics/glossary/treasury-securities
6. Peter G Peterson Foundation, accessed from: https://www.pgpf.org/article/moodys-downgraded-its-us-credit-rating-and-warns-that-recent-policy-decisions-will-worsen-fiscal-outlook/
7. Financial Express, accessed from: https://www.financialexpress.com/market/gold-pulse-global-central-banks-are-accumulating-gold-why-not-you-3756595/
8. EY, accessed from: https://www.ey.com/en_gl/newsroom/2025/05/fdi-in-europe-slows-but-confidence-remains-for-long-term-rebound
9. Trading Economics, accessed from: https://tradingeconomics.com/india/gdp-growth-annual
10. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2131716
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