$40 Trillion Debt Black Hole: Is A Financial Crisis Coming?

The United States is closing in on a milestone that would have been almost unimaginable not long ago: $40 trillion in national debt.

That staggering figure framed the latest episode of the Money Metals Midweek Memo, as host Mike Maharrey examined what he calls the economy’s “debt black hole” and zeroed in on a relatively obscure corner of the financial system that could become a much bigger problem: the $1.4 trillion private credit market.

Maharrey’s central concern is that mounting defaults and deteriorating loans in private credit could spread into the broader financial system. Meanwhile, massive federal deficits and rapidly growing interest expenses are making the Federal Reserve’s inflation fight increasingly difficult.

And against that backdrop, central banks continue accumulating gold.

Putting $1 Trillion Into Perspective

Before considering a $40 trillion national debt, Maharrey tried to put just $1 trillion into human terms.

One million seconds equals about 11.5 days. One trillion seconds amounts to roughly 32,000 years. If somebody could count one number every second, reaching one trillion would take approximately 11.5 million days.

Even spending $1 million every day since the birth of Jesus Christ wouldn't exhaust $1 trillion.

Dollar bills placed end-to-end could stretch to the moon and back about 203 times, or wrap around the Earth approximately 3,893 times. A stack of one trillion dollar bills would rise roughly 67,866 miles.

At $3 apiece, $1 trillion could buy roughly 333 billion cups of coffee, while distributing that money across the world would amount to approximately $125 for every person on Earth. Even one trillion grains of rice would weigh around 20,000 metric tons.

And the U.S. national debt is nearly 40 times larger.

The National Debt Approaches $40 Trillion

As of August 17, Maharrey reported the national debt at approximately $39.987 trillion, putting the government on the verge of crossing the $40 trillion threshold.

But federal debt represents only one piece of the problem. U.S. consumers carry another $5.17 trillion in debt, while corporate borrowing has also climbed to record levels.

Maharrey describes this accumulation as a “debt black hole” — a term he credits to Greg Weldon. Like a real black hole warping everything around it, Maharrey argues that excessive debt distorts monetary policy, bond markets, interest rates, and ultimately the wider economy.

It also helps explain his skepticism that the Federal Reserve can meaningfully raise interest rates and keep them elevated. Higher rates make servicing the existing mountain of debt progressively more expensive.

Washington Runs a $432 Billion Monthly Deficit

The July Treasury statement offered a dramatic illustration of the problem.

The federal government spent $432.31 billion more than it collected in July, producing the largest monthly budget deficit since March 2021 and the third-largest monthly deficit on record.

There was an important calendar distortion. Because August began on a weekend, approximately $99 billion in August benefits were paid during July. Adjusting for that shift lowers July's deficit to approximately $333 billion.

Even then, the deficit was 18% higher than the prior year.

More significantly, July pushed the fiscal 2026 deficit to roughly $1.8 trillion, with August and September still remaining in the fiscal year. The deficit had already surpassed the total for the previous fiscal year, and Maharrey said Washington was on pace to eclipse $2 trillion.

That is occurring not amid a Great Recession or pandemic shutdown, but while the economy is ostensibly expanding.

Federal Spending Surges 22%

Tariff refunds contributed to July's ugly numbers.

Following the Supreme Court's ruling against tariffs imposed unilaterally by the Trump administration, the federal government refunded $33.38 billion in tariffs during July. That drove net tariff revenue to negative $8.55 billion for the month.

Earlier tariff collections of roughly $30 billion to $40 billion per month had helped mask Washington's underlying spending problem. Once that revenue disappeared and refunds began flowing, the fiscal picture deteriorated.

The federal government spent $766.31 billion in July, a whopping 22% increase from July 2025. Even excluding the roughly $99 billion calendar adjustment, spending totaled approximately $677.31 billion.

That relentless borrowing brings another increasingly expensive problem: interest.

Interest on the Debt Tops $1 Trillion

Interest expense has become the second-largest category in the federal budget, trailing only Social Security. Washington now spends more servicing its debt than it spends on either national defense or Medicare.

The Treasury paid $117.57 billion in interest during July. That was actually below the roughly $185 billion record set in June.

Through the first 10 months of fiscal 2026, however, federal interest expense had reached approximately $1.17 trillion, up 15.5% from the comparable period in fiscal 2025.

This creates what Maharrey describes as a vicious feedback loop. Higher interest expenses enlarge deficits. Larger deficits require additional borrowing. That borrowing adds more debt that must itself be serviced at relatively high interest rates.

It is also why Maharrey remains deeply skeptical of predictions that the Fed can aggressively raise rates without creating serious consequences elsewhere in the financial system.

America's $14.45 Trillion Corporate Debt Mountain

Government and consumer debt aren't alone.

According to Federal Reserve data cited by Maharrey, total U.S. non-financial corporate debt reached $14.45 trillion in the first quarter, approximately 5% higher than a year earlier.

Within that enormous market sits a smaller but increasingly important category: private credit.

Private loans total approximately $1.4 trillion, equivalent to roughly 10% of non-financial corporate debt.

Unlike traditional bank lending, private credit generally involves non-bank lenders funded by institutional investors, pension funds, endowments, wealthy individuals, and other investors. These funds then lend directly to businesses and projects.

Private credit became increasingly important after the 2008 financial crisis, when tougher capital requirements and lending regulations made traditional banks less willing to finance riskier borrowers. Private lenders stepped into the gap.

Investors also poured money into the sector in pursuit of higher yields.

But higher yields generally come with higher risk.

Private Credit Starts Flashing Warning Signs

According to The Wall Street Journal analysis discussed by Maharrey, that risk is becoming increasingly visible.

High-profile defaults, allegations of fraud involving some funds, and concerns about loans made to software companies vulnerable to artificial intelligence disruption began rattling the industry last year.

Investors responded by asking for their money back. Some private credit funds, facing record redemption requests, subsequently restricted redemptions and limited withdrawals.

Despite assurances from fund managers that the problems were overblown, quarterly reports from some of the industry's largest players indicated worsening loan health and investor returns.

Funds overseen by Ares Management (ARES), Blackstone (BX), Blue Owl Capital (OWL), and Golub Capital (GBDC) reported loan defaults reaching their highest levels since 2021, according to the Journal analysis discussed during the episode.

At a Blue Owl fund, for instance, the default rate reached 2.8% during the second quarter, its highest level in at least five years. Nonperforming loans at other funds also reportedly reached five-year highs, surpassing levels experienced when the Federal Reserve was tightening monetary policy during 2023.

Meanwhile, Fitch Ratings put the overall U.S. private credit default rate at 6% at the end of May.

Fourteen Defaults in One Month

The problems have thus far been concentrated in certain industries.

According to Maharrey's discussion of the data, private credit defaults have been particularly evident in healthcare, industrial and manufacturing companies, and business services, along with businesses heavily exposed to rising oil prices.

Fitch reported 14 defaults during May alone.

One example cited was Loparex, a manufacturer of plastic film that recently defaulted on its private loan.

But another industry could become particularly consequential: software.

Software companies account for 20% or more of outstanding debt at many private credit funds. If AI disruption produces severe financial stress across that sector, Maharrey warned that it could provide the proverbial bump that shakes an already unstable table.

Funds are also reporting increases in companies placed on internal watch lists — borrowers exhibiting signs of financial trouble before an outright default occurs.

Why a $1.4 Trillion Market Could Matter Much More

At roughly 10% of non-financial corporate debt, private credit might initially seem too small to threaten the broader economy.

History suggests otherwise.

Maharrey compared the situation with the subprime mortgage market before the 2008 financial crisis. At the height of the housing bubble, subprime mortgages represented only around 13% to 15% of all mortgages.

Yet when that relatively small segment collapsed, the damage spread through housing and financial markets, ultimately contributing to the Great Recession.

Financial crises are rarely contained neatly within the sector where trouble begins. Defaults create losses. Losses encourage investors to withdraw capital. Falling liquidity makes refinancing more difficult. That creates additional defaults, which produce still more losses.

Private credit is now facing what Maharrey called a “double whammy” of contracting liquidity and deteriorating loan portfolios.

Higher Rates Could Make Matters Worse

There is a potentially benign path out.

Losses could moderate if interest rates decline while economic activity remains strong enough to support borrowers — but without simultaneously reigniting inflation.

That's a demanding combination.

Although CPI inflation has moderated, Maharrey noted that it remains above the Federal Reserve's 2% target. He also argued that inflation cannot be understood through CPI alone, pointing to money supply and the Federal Reserve's balance sheet as additional indicators.

If the Fed keeps rates higher for longer, financially stressed private borrowers receive little relief.

If the central bank actually raises rates, Maharrey believes private credit stress could intensify considerably.

And if rates fall substantially, inflation could again become a bigger concern.

That is where America's enormous debt burden comes back into the picture. The “debt black hole,” in Maharrey's view, increasingly constrains the Fed's room to maneuver.

Gold Above $4,400 and Silver Above $65

Against this unstable financial backdrop, precious metals have rallied.

At the time of the episode, gold was trading above $4,400 per ounce, while silver was solidly above $65.

Maharrey cautioned that geopolitical headlines, particularly developments surrounding the war in Iran, could produce substantial short-term volatility. Expectations surrounding interest rates also continue to weigh on precious metals.

Nevertheless, he sees continued bullish sentiment underneath those pressures.

More importantly, a serious financial crisis emanating from private credit or another overleveraged sector could accelerate investor demand for gold. Maharrey therefore characterized physical precious metals as both an inflation hedge and financial insurance that investors may want to own before a crisis becomes obvious to everybody.

Central Banks Bought 289 Tons of Gold in Q2

Individual investors aren't the only ones looking toward gold.

Central banks have continued buying the metal, and Maharrey identified four major reasons for the trend: geopolitical risk, weaponization of the dollar, deterioration in the U.S. fiscal position, and what he called “regime uncertainty.”

Wars and geopolitical tensions traditionally bolster gold's role as a safe-haven asset. Meanwhile, Western sanctions imposed after Russia invaded Ukraine, including restrictions involving the SWIFT financial system, demonstrated to other countries how dependence on the dollar can create geopolitical vulnerabilities.

That has helped accelerate the broader de-dollarization trend.

America's fiscal trajectory provides another incentive. With federal debt approaching $40 trillion and enormous deficits requiring continual borrowing, foreign governments and central banks have reason to question their exposure to U.S. debt and dollars.

Finally, uncertainty surrounding tariffs, wars, regulations, and U.S. economic policy makes long-term planning more difficult. Gold provides central banks with an asset that doesn't carry the same counterparty exposure.

Central-bank buying slowed during the first quarter amid pressure from high gold prices, but purchases accelerated beginning in April.

Central banks ultimately bought 289 metric tons of gold during the second quarter, nearly five times the Q1 total.

Financial journalist Jamie McGeever, writing in a Reuters opinion piece cited by Maharrey, argued that no single one of these factors necessarily explains gold's resurgence. Taken together, however, they create a powerful case for central-bank diversification into gold.

Debt Doesn't Stay Contained

The private credit market remains far from the levels of distress experienced during the pandemic or the 2015 oil-price collapse. Maharrey wasn't arguing that a crash has already arrived.

His warning was about the conditions developing beneath the surface.

The United States is simultaneously dealing with a national debt approaching $40 trillion, $5.17 trillion in consumer debt, $14.45 trillion in non-financial corporate debt, a federal deficit headed toward $2 trillion, and annualized interest costs already exceeding the trillion-dollar threshold.

Within that environment, a $1.4 trillion private credit market showing worsening loan quality and rising defaults cannot necessarily be dismissed as an isolated problem.

Financial instability often develops gradually before reaching a tipping point. The subprime crisis demonstrated how quickly trouble in one seemingly contained corner of the credit system can spread once confidence and liquidity disappear.

That is the danger Maharrey sees in America's growing “debt black hole.”

The warning signs can accumulate slowly.

The consequences can arrive all at once.