Written by: Zhu Weisha, Scott Shields

August 27, 2026

A recent report from Morgan Stanley regarding the $40 trillion in U.S. Treasury debt raises an old question: Is the issuance of U.S. government debt too much?

This question appears simple, but it is actually difficult to answer. The United States took about 240 years from its founding until around 2016 to accumulate federal debt to about $20 trillion, and in the subsequent decade, it increased by approximately another $20 trillion.

$40 trillion is certainly a huge figure, but merely declaring it "big" doesn't indicate the level of danger.

Morgan Stanley's analysis progresses beyond simply stating "40 trillion is too much," but the question remains: Why do we mainly use the U.S. government's balance sheet to examine Treasury debt?

The U.S. dollar and Treasury debt are closely related, but the influence of the dollar and Treasury debt has already extended beyond U.S. borders, gradually forming a dollar-centered ecosystem that covers global financial activities.

Given this, assessing the risk of Treasury debt cannot rely solely on the measurement of "U.S. debt ÷ U.S. GDP." We need to establish a set of indicators capable of examining the entire dollar ecosystem and put the $40 trillion through measurement.

This article does not aim to predict when a crisis in Treasury debt might occur but rather attempts to answer a more fundamental question:

What metric should we use to measure Treasury debt?

This article first constructs the "metric"; the specific calibers, thresholds, and weights will need to be gradually calibrated using historical data.

1. Financing Rates for U.S. Treasury Debt Are More Important Than Total Amounts

The issuance of U.S. Treasury bonds is primarily a market demand issue. As long as the debt can be sold, it indicates there is demand. The real question is not "Is there anyone to buy?" but rather At what high rate must the U.S. government pay for the market to be willing to continue purchasing newly issued Treasury debt? If a 4% yield cannot be fully absorbed, 4.5% can be sold out, and at 5%, there is significant demand, then the market has already assigned a price to this batch of newly issued debt. Of course, the totals of $40 trillion, $50 trillion, or even $60 trillion are important, but the marginal financing cost is more closely aligned with the point of danger.

A rapid rise in long-term Treasury yields will increase costs for real estate loans, corporate bonds, and other long-term financing, while also lowering stock valuations; its financial tightening effect is similar to the Federal Reserve's interest rate hikes. However, the reasons for the two cannot be conflated: the Federal Reserve primarily controls short-term policy rates while long bond yields also include factors such as economic growth expectations, inflation expectations, term premiums, and the supply and demand of Treasury debt. Thus, it's necessary to look not just at "rates have risen" but also to explore why they have risen.

This is also why the stock market is particularly sensitive to Treasury yields. The stock market trades future prospects; when long-term financing costs suddenly rise, the market will immediately reassess future profits and valuations, naturally asking: Can the high-growth, high-profit, high-valuation narrative brought about by AI still hold?

Negative news will thus quickly translate into trading value. When the U.S. stock market moves, global stocks, currency exchanges, and capital flows will all be affected. From this perspective, Treasury yields themselves are crucial price indicators within the dollar ecosystem.

More worth observing than the total debt alone are: long-term real interest rates, term premiums, Treasury auction tails, net foreign purchases, primary dealer absorption ratios, and the so-called convenience yield of Treasury securities.

The "convenience yield" can be simply understood as: because Treasury debt is exceptionally safe, liquid, easy to pledge, and accepted by global financial institutions, investors are willing to accept lower interest rates for these additional features.

A 2026 NBER study found that the value of dollar convenience has diverged significantly from the convenience value of U.S. Treasury debt in recent years: the global financial system still highly values dollars, but the special convenience of medium- to long-term Treasury securities relative to other developed country government bonds has noticeably decreased. [1] A decline in convenience yield does not equate to "no one buying Treasury bonds," but rather means that investors are willing to accept lower interest rates for its security, liquidity, and pledge capabilities, possibly resulting in higher marginal financing costs.

2. The Dollar Is More Than Just a Currency; It Constitutes an Ecosystem

Why do U.S. Treasury bonds hold a special status as government debt? It is not due to the Fed possessing a money-printing technology that other central banks lack. The People's Bank of China can create Renminbi, the European Central Bank can create euros, and the Japanese Central Bank can create yen, while the Federal Reserve can create dollars. From the technical principles on the balance sheets of central banks, there is no fundamental difference. The real difference is that a large amount of economic activity globally is already using dollars.

After foreign central banks hold Treasury bonds, if they encounter a need for dollar liquidity, they can utilize the Federal Reserve's FIMA Repo Facility, temporarily exchanging U.S. Treasury securities held at the New York Fed for dollars, with an agreement to buy them back later. The transaction is completed entirely in dollars, without needing to sell it for another currency first. [2] Thus, for eligible official institutions, Treasury bonds are not merely an interest-generating IOU from the U.S. government; they are also an asset that can be rapidly converted into global primary liquidity.

On this basis, a dollar-centered financial ecosystem covering global trade settlement, financial settlement, foreign exchange reserves, bank financing, bond financing, cross-border investment, asset pricing, repo pledging, derivatives margin, safe asset storage, and crisis liquidity support has gradually formed. The dollar serves as one of the main valuation, payment, and settlement bases, while Treasury bonds simultaneously serve functions of reserve assets, safe assets, and important collateral. This is one of the biggest distinctions between Treasury bonds and ordinary government bonds.

Treasury bonds are an indispensable part of the dollar ecosystem, but the dollar and Treasury bonds do not have a price correlation relationship, so they should be observed separately in the indicator system.

3. The Global Dollar Ecosystem Has Not Significantly Shrunk

If the global dollar ecosystem were shrinking, the rapid increase in U.S. debt would certainly become increasingly dangerous. At least from the perspective of offshore dollar credit, there has not been a significant contraction. BIS statistics show that by the end of 2025, dollar credit for U.S. offshore non-bank borrowers will reach about $14.3 trillion, growing by 8.5% in 2025, the fastest annual growth since 2014. [3] Of course, a single indicator cannot represent the entire dollar ecosystem and should be cross-verified with official reserves, payment settlements, securities holdings, stablecoins, and cross-border financing indicators.

Central bank reserves are just one layer; bank loans, dollar bonds, cross-border trade, securities investment, corporate financing, derivatives, and personal value savings represent additional layers. Now, a very important new entry has been added: Dollar Stablecoins.

The U.S. GENIUS Act stipulates that payment stablecoins must hold at least 1:1 in qualified reserves, with U.S. Treasury securities limited in principle to those with a remaining maturity of within 93 days. The law also specifies that stablecoin issuers cannot pay interest or returns just because users hold the stablecoins. [4]

This means that the current dollar stablecoins primarily increase the demand for dollars and short-term Treasury bond requests. The U.S. Treasury Borrowing Advisory Committee also believes that the continued expansion of stablecoins could generate new structural demand for short-term Treasury bonds. [5] Therefore, while stablecoins reinforce the dollar, it does not automatically mean resolving issues related to 10-year, 20-year, or 30-year Treasury bonds; these maturities must be observed separately.

Of course, stablecoins can also innovate further. For example, they could develop into transparent stablecoins or transparent yield-generating dollar assets: making the assets, prices, maturities, interest rates, and reserves of long-term bonds completely transparent, so that users clearly know what assets they hold, what price risks they bear, thus linking the returns from long-term bonds with the circulation and verification abilities of digital currency. This is a different topic that will not be unfolded further in this article.

4. Tokenization Changes the Radius of Demand and Speed of Liquidity

Tokenization itself does not create wealth out of thin air. However, that does not mean it won’t generate new effective demand.

If an asset previously required a bank account, broker, trading time, a high minimum purchase amount, and complex cross-border procedures to obtain, while after tokenization it allows users worldwide to hold, transfer, and pledge instantly with small amounts 24/7, then two important variables that change are: user reach and asset turnover rate. Potential demand that was "wealthy but found it inconvenient to buy" may transform into actual purchases.

Research by the U.S. Treasury's TBAC also suggests that tokenization could expand the accessibility of Treasury bonds to the domestic and global savings pools, bringing incremental demand and improving liquidity by reducing operational and settlement frictions. [5] Therefore, tokenization cannot be simply understood as "old assets in a new package".

What needs to be measured are new users, offshore users, asset turnover rates, collateral usage, and the final net new demand. Before continuous data formation, tokenization is more suitable as a leading indicator and cannot be directly regarded as a fact that "Treasury debt capacity has improved".

This is also a new variable that is difficult to include in traditional debt cycle models.

Tokenization is enhancing the speed of financial asset circulation and user reach, while cryptocurrency and AI can be seen as two crucial wheels of this new era.

AI primarily alters productivity, while cryptocurrency changes more of the production relations, asset relations, and financial organizational methods.

The debate about whether AI improves efficiency is relatively minor; the real question is how much it increases.

Cryptocurrency, however, is different. While everyone can see the general direction, once we delve into specific issues of currency, banking, securities, regulation, and credit structures, due to the lack of a mature and unified theoretical scale, even intelligent individuals can hesitate. For those who do not understand, choosing to pause and observe is also entirely reasonable. Today’s cryptocurrency finance is roughly at such a stage.

Another new variable that can be continuously verified by real data is AI.

5. AI May Change the Speed of Capital Formation

Traditional debt cycle studies can easily view economic growth as a relatively slow variable.

However, AI may alter not only the growth rate, but also the speed of discovering opportunities—forming investments—generating income—forming new assets—the entire cycle.

Stanford's 2026 AI Index statistics show that global corporate investments related to AI reached $581.69 billion in 2025, growing by 129.9% year over year. [6]

SpaceX raised about $75 billion in its IPO in 2026, setting a record for IPO financing. [7]

$75 billion does not itself prove that these capital allocations are necessarily correct, nor can it account for all funds as foreign capital. However, it at least indicates: When a new opportunity arises in the U.S. that the world believes in, the U.S. capital markets can concentrate an enormous amount of savings in a very short time.

The money from the IPO will not disappear in a day. Once the funds enter the company's accounts, they will gradually be used to purchase equipment, pay salaries, build infrastructure, and invest in suppliers; after being paid out, they will become deposits and income for other enterprises and individuals.

Meanwhile, the modern banking system is not a fixed pool of money. Banks can expand their balance sheets under capital, liquidity, and regulatory constraints by creating new bank deposits through lending. Therefore, AI investments should not be simplistically understood as:

"AI takes away $100, thus $100 less for buying Treasury bonds."

What truly needs research are two new indicators.

The first is the AI productivity improvement indicator: how much increase in output per unit time, how much improvement in product quality, how much decrease in error rates, and how much complexity in problems an individual can handle.

Simply counting "saved a few hours" is far from sufficient. The real changes that AI might bring are that tasks which were impossible to complete due to substantial knowledge gaps or high time costs are now economically feasible for the first time.

The second is the AI capital formation speed indicator: how quickly, after the emergence of new opportunities, can global capital be attracted to the U.S. and transformed into real productive capacity through IPOs, stocks, corporate bonds, banking credit, and corporate reinvestment.

If this ultimately manifests as synchronized growth in U.S. corporate income, profits, productivity, real wages, tax bases, and global capital inflow, then AI is not merely a stock concept but a real variable increasing the capacity of U.S. debt. If investments soar while income, productivity, and tax bases do not keep up, data will reveal this discrepancy. Ultimately, whether U.S. debt capacity is enhanced still hinges on whether income, profits, productivity, and tax bases can keep pace.

6. Gold and Bitcoin Are Another Side of the Pressure Gauge

World savings do not only have U.S. Treasury bonds as an outlet.

When people worry about the risks of sovereign currencies and sovereign debts, there are also two classes of assets without corresponding sovereign debtors:

Gold and Bitcoin.

Gold has already provided very strong real signals. In 2022, global central banks net purchased about 1,136 tons of gold, the highest level since 1950; in 2024, they net purchased about 1,045 tons, exceeding 1,000 tons for three consecutive years. [8]

This indicates that gold must be included in Treasury bond analysis.

The history of Bitcoin is much shorter than that of gold, and it cannot yet be said that it possesses the same stable risk-hedging properties as gold. However, it offers a large-scale, non-sovereign scarce digital asset that did not exist in the past.

Therefore, three groups of data can be observed simultaneously:

Market capitalization changes, net capital flows, and global share of savings assets.

Market capitalization does not equal dollar inflows, but it reflects the trend of market repricing; net flows inform us where marginal funds are actually directed. If the proportion of gold and Bitcoin continues to increase in global wealth, while the convenience yield of Treasury bonds continues to decline, this combination holds much more significance than a mere statement of "de-dollarization."

7. It Is Necessary to Study How the U.S. Government "Solves Problems"

The government is not a passive accounting unit.

Modern nations can choose different means to respond to problems they encounter, including direct fiscal expenditure, taxes, tariffs, regulatory reforms, financial innovations, private capital, sharing burdens with allies, and technological policies. Therefore, when faced with a problem, different governments may result in completely different amounts of new debt.

Judging a government should entail not just listening to what it says, but examining what it actually does and how the balance sheet ultimately changes. For instance, the regulation of stablecoins itself does not involve the Treasury directly spending money to purchase Treasury bonds but establishes new systems that may generate new short-term demand in the private stablecoin market.

By 2025, the U.S. officially established a Strategic Bitcoin Reserve, stating that BTC included in the strategic reserve will generally not be sold, while allowing the Treasury and the Commerce Department to study further acquisition methods that "do not increase taxpayer costs." [9] We cannot yet conclude whether these actions will ultimately be effective. Thus, a "government problem-solving efficiency" indicator can be established:

Comparing different government periods in terms of new debt, fiscal deficits, inflation, interest costs, direct fiscal costs of resolving international disputes, leveraging of private capital, new tax bases, and new dollar demand.

Do not evaluate party affiliation, simply compare results. An active government can also make mistakes, but the inherent proactivity will alter future balance sheets, which cannot be excluded from debt models. Different governments face different problems, and comparisons also must take into account the scale, duration, and ultimate results of the problems, not just the absolute amounts of new debt.

8. Whose Wealth Has Increased Due to the Growth in Treasury Issuance?

When the government issues Treasury bonds, there are always assets acquired on the other side. The Morgan Stanley report has noted an important fact: while the public sector's balance sheet deteriorates, businesses and households may acquire more income, liquidity, and investment capacity; from a macro accounting perspective, changes in one sector's balance sheet often correspond to another sector.

Yet, another question must be asked: Ultimately, whose hands did this new wealth end up in?

"Private sector wealth growth" is not the end goal, because the private sector is not comprised of just one person. If government debt grows, followed by currency and credit expansion, and subsequently stock and real estate prices rise, while the assets are primarily held by wealthy individuals, it may lead to:

Increased government debt—Increased private financial assets—Rising asset prices—Further concentration of wealth.

Thus, it becomes important to observe not just CPI. At a minimum, one should concurrently observe:

Consumer prices, wages, stocks, real estate, and wealth concentration.

If asset prices significantly outpace median real income over the long term, while asset ownership remains highly concentrated, then as overall wealth increases, the disparity in social wealth may instead widen. This is part of the current systemic pressure in the U.S. Consequently, assessing the long-term sustainability of Treasury debt requires at least differentiating between three issues:

Fiscal sustainability; financial system sustainability; social distribution sustainability.

The third factor will ultimately impact the first two through elections, taxations, and fiscal spending. Hence, wealth concentration is not a peripheral social issue but a slow variable that will influence future fiscal policies and financing costs.

9. History Tells Us That Single Indicators Often Fail

In 2013, the reverse happened. The U.S. fiscal situation did not suddenly undergo a credit crisis of the same magnitude, but the market began to anticipate the Fed tapering its asset purchases, causing 10-year Treasury yields to rise rapidly from about 1.63% in early May to about 2.74% by early July. [11] This indicates that Treasury bond prices cannot be explained solely by the total debt amount.

Fiscal credit, economic growth, inflation, the Fed, Treasury supply, dollar demand, global risk appetite, and market positioning can all simultaneously come into play. Therefore, our goal is not to find a universal metric but to establish a combination of mutually independent and verifiable indicators.

10. Establish a Verifiable "Dollar World" Dashboard

If we only say "consider all aspects comprehensively," it remains a qualitative explanation. The next step must translate that into numbers.

Currently, we can first establish such a metrics table:

In the first phase, there is no urgency to weight the indicators, nor to synthesize a total index. For short-term alerts, prioritize looking at real interest rates, term premiums, auction tails, and net purchasing as price and flow indicators; for long-term capacity, focus more on the dollar ecosystem, productivity, tax bases, and wealth distribution as stock and slow variables.

These indicators also need to be back-tested against historical points like 2011, 2013, 2020, 2022, and 2025, gradually calibrating thresholds and leading, coincidental, and lagging relationships; thresholds that have not been back-tested should not be arbitrarily set for the sake of appearing "quantified."

Based on the facts already listed in this article, using the current indicators, the assessment is not simply a red or green light, but indicates that the dollar ecosystem has not shown significant shrinkage, the convenience of medium- to long-term Treasury debt has weakened, stablecoins primarily increase short-term debt demand, tokenization and AI provide potential new demand and productive capacity, and the importance of alternatives like gold and Bitcoin as stores of value has risen. The true concern is whether these indicators might converge unfavorably in the future.

This set of indicators still requires ongoing refinement and historical back-testing.

This article spans multiple fields including fiscal, monetary, banking, international capital, bonds, AI, and cryptocurrencies, and there are boundaries to knowledge and data. What can be accurately verified should be validated with factual data; for matters temporarily unable to be accurately separated, historical experience and proxy indicators should be used, clearly stating assumptions.

As data accumulates, indicators that are explanatory will continue to be refined and merged, while non-explanatory indicators will be eliminated.

This aligns with verifiable methodological thinking:

Key facts can be verified, key processes can be replayed, and key judgments must be substantiated.

11. Debt/GDP Alone Is Insufficient to Predict When the Dollar System Will Collapse

Debt/GDP is not a meaningless indicator.

However, it should not bear tasks that exceed its own capacity. The IMF's Fiscal Monitor 2026 predicts general government gross debt/GDP to be around: [12]

Japan 204.4%, the U.S. 125.8%, China 106.9%.

The systems in these three countries are entirely different.

China has capital account management and absorbs a significant amount of debt pressure through domestic financial systems, interest rates, and exchange rate management; Japan relies on domestic currency financing, its domestic financial system, and low interest rates while allowing the exchange rate considerable adjustment; the U.S. has an additional layer due to the global demand for dollars and Treasury bonds.

Japan at least provides an important counterexample:

Very high government debt/GDP does not automatically imply a country will experience a debt collapse within a few years.

Thus, simply forecasting a future collapse of the dollar based on the U.S. debt/GDP reaching a certain figure lacks sufficient evidence.

For nations without the status of a global reserve currency, debt/GDP generally reflects domestic economic capacity to handle government liabilities more directly; for currencies like the dollar and euro that have entered the international reserve, financing, and settlement systems, using only domestic GDP as the denominator fails to account for global demand dimensions.

Debt/GDP can continue to serve as a domestic fiscal pressure indicator for the U.S., but it should be discarded as a "total indicator" for assessing the safety of the entire dollar system.

What needs to be measured are two distinct matters:

Whether the U.S. Treasury has the ability to pay; and whether the global dollar ecosystem continues to have the capacity to absorb dollars and Treasury securities. Therefore, this article does not seek a new, larger singular denominator for the $40 trillion in Treasury bonds, but breaks the issue into two different metrics: one for measuring fiscal payment capability and another for assessing global market capacity.

Looking further into the long term, there is a second question: Is there anything that can genuinely replace the dollar?

Gold can undoubtedly function as a store of value and can serve as a backing for gold tokens. However, gold backing itself does not automatically generate credit. If the public cannot continually verify how much gold the issuing entity possesses, where the gold is, or whether it has been pledged multiple times, then ultimately the credit returns to the issuing entity. More crucially, the modern monetary ecosystem requires not only storage of value but also payment, settlement, credit creation, financing, pledging, asset pricing, and crisis liquidity support. Although gold can become an important reserve asset, relying solely on gold makes it challenging to form a complete modern financial ecosystem.

Other countries could establish their own fiat currency cross-border settlement, clearing, and financing systems, yet no single system currently meets the scale of the dollar ecosystem across dimensions like valuation, settlement, capital markets, safe assets, collateral, and final liquidity support.

Thus, even if there are increasingly evident issues regarding the U.S. fiscal situation, it remains today "the relatively better one among a pile of defective apples."

However, it is essential to separate facts from the author's long-term judgments.

The following discussion on the long-term evolution of fiat currencies, Bitcoin's "public credit root," and the conversion of gold reserves belongs to the author's long-term judgments and should not be interpreted as current risk conclusions within the earlier "dollar world" dashboard.

The author's long-term judgment is that the continued credit expansion of fiat currencies presents inherent contradictions that cannot be sustained permanently. The dollar is currently the strongest fiat currency, but it does not imply that the fiat currency system can exist indefinitely.

The author has previously discussed this issue in "Predicting When the Dollar Will Collapse from the Natural Growth Curve" and emphasized that the specific year is merely a reference, with the true aim being to determine long-term trends. [13]

Thus, Bitcoin has a possibility different from gold. Gold is primarily a store of value asset without a sovereign debtor.

The author believes that Bitcoin may, in addition to serving a similar role as gold, carry a function of public credit root: if an increasing number of assets, transactions, and credit realities ultimately rely on the Bitcoin system as a foundation for public verification, then Bitcoin's value is derived not only from its scarcity of 21 million coins but also from the degree to which society depends on the entire Bitcoin system. If this judgment ultimately holds true, the functional ceiling of Bitcoin would surpass that of gold.

The U.S. has established a Strategic Bitcoin Reserve, which at least indicates that Bitcoin has entered the national balance sheet. [9]

The long-term path envisioned by the author is not one where the dollar suddenly disappears in a few years, but rather a gradual pathway that may take several decades, perhaps around 50 years:

The dollar system → The Bitcoin-enhanced dollar system → A broader decentralized digital asset standard.

From this perspective, if in the future the public credit root value of Bitcoin is fully validated by the market, a radical strategy for U.S. national balance sheets would be to gradually and periodically convert a portion of gold reserves into Bitcoin.

This is still a policy idea that requires validation.

Thus, the conclusion of this article is not "Treasury bonds are safe" or "Treasury bonds are dangerous," but rather to first establish what facts support each judgment and what facts might overthrow them; the indicators can be added, merged, and eliminated, but the rules for judgment must be verifiable by historical and future data.

Therefore, the real question regarding the $40 trillion Treasury debt is not:

When will it collapse?

But rather:

What are the individual rates of change occurring in U.S. fiscal policy, the Treasury bond market, the global dollar ecosystem, the productivity and capital formation brought by new technologies, and alternative credit assets like gold and Bitcoin?

Once these indicators are established, we will not need to believe Morgan Stanley, nor need to trust any macro investment masters, nor need to rely on this article.

Let the facts speak for themselves, and let time validate itself.

References

[1] Du, Keerati, Schreger: "Decoupling Dollar and Treasury Privilege," NBER Working Paper 35000, 2026. Original Text

[2] Federal Reserve: Common Questions about FIMA Repo Facility. Original Text

[3] BIS: "International Banking Statistics and Global Liquidity Indicators by End of 2025." Original Text

[4] U.S. Code: 12 U.S.C. §5903, Requirements for Issuing Payment Stablecoins. Original Text

[5] U.S. Treasury TBAC: Research on Treasury Issuance and Secondary Market, 2024. Original Text

[6] Stanford HAI: "AI Index Report 2026." Original Text

[7] Reuters: SpaceX Sets Record IPO, June 11, 2026. Original Text

[8] World Gold Council: "Gold Demand Trends—Central Banks." Original Text

[9] The White House: "Strategic Bitcoin Reserve and U.S. Digital Asset Stockpile," 2025. Original Text

[10] U.S. Treasury: "2012 Annual Report," Box A: Impact of U.S. Treasury Rating Downgrade. Original Text

[11] Federal Reserve: FEDS Notes, 2013 Fixed Income Market Sell-off and Dealer Balance Sheet Capacity. Original Text

[12] IMF DataMapper: General Government Gross Debt (2026 forecast). Original Text

[13] Zhu Weisha: "Predicting When the Dollar Will Collapse from the Natural Growth Curve," chainless.hk, December 11, 2024. Original Text

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