'Hostage to its own creditors…': Financial expert flags ‘structural trap’ in US debt

Concerns about the sustainability of America’s rising debt load are resurfacing after market commentators and global investors warned that the scale of borrowing is tightening financial linkages between the United States and Japan, leaving both economies increasingly sensitive to each other’s stability.  

In a recent post on X (formally twitter), chartered accountant Nitin Kaushik argued that Washington’s vast borrowing requirements have created a situation where creditor nations wield significant indirect influence over US financial conditions.  

He pointed to Japan’s position as the largest foreign holder of US Treasury securities — estimated at over $1 trillion — as evidence of how closely the two economies are now tied.  

According to Kaushik, sharp movements in the Japanese yen could force Tokyo to defend its currency by selling portions of its US bond holdings. Such actions, if large enough, could push U.S. bond yields higher, raising borrowing costs for Washington at a time when interest payments are already consuming a growing share of federal spending.  

“The lender and borrower are locked in a room where neither can let the other fall,” he wrote, arguing that central bank coordination has become less a policy choice and more a structural necessity in an era of massive sovereign debt.  

Why currency moves matter  

Kaushik’s warning centres on the feedback loop between currency defence and debt markets.  

When the yen weakens significantly, Japanese authorities may intervene by liquidating foreign reserves — primarily US Treasuries — to stabilise their domestic financial system. Large-scale selling would depress Treasury prices and lift yields, tightening financial conditions in the United States.  

That, in turn, could compel responses from the Federal Reserve to maintain liquidity and prevent disorderly moves in global markets, reinforcing what Kaushik sees as a cycle of mutual dependence.  

Kaushik’s remarks land amid a wider chorus of concern from global investors and policymakers about America’s long-term fiscal trajectory.  

Bridgewater Associates founder Ray Dalio, speaking in a podcast conversation with Scott Galloway, warned that the US is approaching a point where the volume of debt issuance risks overwhelming demand. Dalio highlighted persistent deficits, rising refinancing needs, and escalating interest costs as structural pressures rather than short-term anomalies.  

He has argued that while the arithmetic of the problem is widely understood among economists, the solutions — spending restraint or higher taxes — remain politically difficult to implement.

Dollar vs Yen

The performance of the US dollar against the Japanese yen has been marked by sustained dollar strength in recent years, driven largely by interest-rate differentials between the two economies. Aggressive monetary tightening by the Federal Reserve to combat inflation pushed US yields higher, attracting global capital into dollar-denominated assets, while the Bank of Japan maintained an ultra-loose policy stance to support domestic growth. This divergence widened the gap between US and Japanese bond yields, weakening the yen to multi-decade lows at several points and increasing volatility in currency markets.