Fiscal Firepower and Big Debt: Can the U.S. Afford to Win the Tech Race?

Summary: America’s ambitions in the tech competition with China, from funding AI and chip fabs to strengthening defense, all come with a hefty price tag. But the U.S. is entering this high-stakes contest at a time when its public debt is soaring, and financial pressures are mounting. This article examines the often overlooked factor of fiscal constraints: how the United States’ debt and budget issues could impact its ability to invest in critical technologies and military capabilities. We’ll explore the current debt landscape, why rising interest costs could squeeze innovation funding, how a weakening dollar or credit rating might undercut U.S. economic power, and what choices policymakers face to sustain both economic vitality and security commitments in the era of the “Big Debt Cycle.”

Debt, Interest, and the Squeeze on Strategy

The numbers are eye-opening: U.S. federal debt has surged past $38 trillion, roughly 100% of GDP, the highest debt-to-GDP ratio since just after World War II. Servicing that debt now costs over $1.1 trillion per year. To put that in perspective, the U.S. is spending more on interest payments than on its entire defense budget. In FY2024, interest outlays (~$882B) actually exceeded what the U.S. spent on national defense (~$874B). And almost a quarter of those interest payments are flowing to foreign creditors (including, ironically, China), rather than funding domestic needs.

This situation is what investor Ray Dalio and others call the late stage of a “Big Debt Cycle,” a point where difficult choices can no longer be deferred. Policymakers face a dilemma: either raise interest rates to contain inflation (which increases borrowing costs) or print more money to ease the debt burden (which risks more inflation). Dalio warns this could usher in “huge and unimaginable changes” in the next few years if not carefully managed. In any event, these fiscal realities will directly affect America’s ability to invest in critical technologies at the heart of its competition with China.

One immediate effect is a strained fiscal capacity for strategic priorities. Because so much of the budget is being eaten up by interest payments, there’s less room for discretionary spending on things like R&D, infrastructure, or defense modernization. As noted, every dollar going to interest is a dollar not going to AI research, semiconductor fabs, quantum computing labs, or securing rare earth supply chains. If the trajectory continues, rising debt service costs will “crowd out” these public investments, undermining the nation’s ability to both innovate and protect itself.

The private sector can’t fully substitute either; certain investments (like next-gen military systems or large infrastructure) really require government funding. High debt thus erodes the financial flexibility needed to maintain a technological edge. There’s a scenario, not far-fetched, where U.S. leaders might soon find that after covering mandatory expenses (like Social Security, Medicare, and interest), there’s little budget left for new tech initiatives, forcing brutal trade-offs among strategic programs.

The End of Cheap Money and Its Implications

For much of the past two decades, the U.S. enjoyed historically low interest rates, which made carrying debt easier. That era is decisively over. In response to the post-pandemic inflation surge, the Federal Reserve has raised rates significantly, adopting a “higher for longer” stance. As old debt rolls over, the Treasury has to refinance at these higher rates, which means interest expenses are snowballing. This creates a self-reinforcing cycle: big government borrowing raises the cost of money economy-wide, which can crowd out private investment and put upward pressure on prices (as the government absorbs available capital).

In a worst-case scenario, this could lead to a debt spiral: higher interest costs lead to bigger deficits, which leads to more borrowing at even higher rates, and so on. The U.S. isn’t there yet, and outright default risk is minimal (the U.S. can always print dollars to pay dollar debts), but the “solutions” short of default are all painful in their own way. One is high inflation, letting prices rise so that in real terms the debt burden erodes (this silently transfers pain to consumers through reduced purchasing power). Historically, heavily indebted countries often end up inflating away some debt. Another path is austerity, raising taxes or cutting spending to stabilize debt, which can be politically toxic and potentially choke growth if overdone.

Already, we’re seeing investors demand higher yields on U.S. Treasurys as compensation for inflation and fiscal risks. The era when the U.S. could borrow for basically free is gone. This has broad implications: it means it’s more expensive for both the government and businesses to finance long-term projects. A company that might build a new semiconductor fab or an AI supercomputing center will face pricier credit, which could slow innovation unless offset by public funding, but that public funding is also constrained by the higher cost of money.

This late-stage debt cycle thus sets up a tough macroeconomic backdrop: tighten policy to tame inflation (which raises borrowing costs today), or loosen to spur growth (which could reignite inflation). The policy whiplash can deter the very private investment in emerging tech that the U.S. counts on to compete with China. Startups and R&D ventures especially suffer in high-interest environments because funding dries up or becomes very expensive.

Dollar Dominance: Eroding the “Exorbitant Privilege”

One often underappreciated facet of U.S. power is the dominance of the dollar as the world’s reserve currency. This “exorbitant privilege” has allowed the U.S. to finance large deficits at low rates and wield sanctions power effectively. But excessive fiscal and monetary expansion are now testing the resilience of that privilege. We touched earlier on how rivals like China and Russia are pursuing “de-dollarization,” using other currencies for trade, diversifying reserves away from dollars, and establishing alternative payment systems to circumvent U.S.-centric finance. They aim explicitly to dilute U.S. financial influence and make it harder for the U.S. to use tools like sanctions.

While no other currency is ready to fully replace the dollar (the euro and yen have issues, the RMB isn’t freely convertible enough, etc.), even a partial shift matters. If global investors lose some faith in the dollar’s long-term value, we could see higher inflation and interest rates domestically, as a weaker dollar makes imports pricier and foreign capital demands a premium. In strategic terms, an erosion of dollar dominance would undermine a key element of U.S. power: the ability to impose financial sanctions that bite. If countries can do more business outside the dollar system, sanctions and export controls become easier to evade.

Right now, the U.S. still enjoys safe-haven status; in crises, money still floods into U.S. bonds, and allies still trust the dollar. But confidence can be brittle. U.S. debt-ceiling dramas or government shutdowns, for instance, shake faith in U.S. political stability. If global sentiment shifts such that holding U.S. debt is seen as riskier, America’s borrowing costs could jump significantly, forcing very hard budget choices. Analysts have noted that even a small move away from the dollar in international reserves could cause a broad depreciation of the dollar and higher inflation in the U.S..

For Washington, preserving dollar stability is not just about economics; it’s a national security imperative. The post-WWII order was built on U.S. economic leadership, which reinforced military primacy. If the dollar’s role erodes, it could reverse that virtuous cycle: less economic leverage, harder to fund the military cheaply, and so on. Policymakers recognize this, hence efforts to manage inflation, signal fiscal responsibility (at least rhetorically), and maintain the image of U.S. financial solidity.

Competing with China Under Fiscal Constraints

The competition with China adds another layer of urgency. While the U.S. is grappling with debt limits, China continues to channel vast resources into strategic industries, using state banks and funds to finance infrastructure and tech development. Beijing doesn’t have to go through Congress for budget approval; if it wants a new quantum research center or to subsidize a chip fab, it can often allocate funding more swiftly (albeit not always efficiently). The U.S., in a fiscally constrained environment, risks underinvesting in precisely the areas (AI, chips, defense R&D, etc.) that will decide the future balance of power.

There’s already a real opportunity cost visible: interest payments on the debt now eclipse the entire annual budget for non-defense R&D and other discretionary programs. In other words, money that could have gone to NASA, NSF, tech grants, etc., is instead going to bondholders. Vital projects might get delayed or scaled back because creditors get priority. Moreover, a chunk of those interest payments essentially transfers wealth to creditor nations (like China, Japan, oil states), who can then reinvest it in their own innovation or military, creating a weird feedback loop where U.S. debt is indirectly funding others’ rise.

If nothing changes, over the next 4-5 years, this dynamic could narrow the U.S. advantage. A scenario of high debt, high interest, low growth in America would make it very difficult to match China’s strides in critical areas. For example, China’s advantages of a huge domestic market, ample data, and government subsidies in AI could become decisive if the U.S. can’t muster the investment to counter them.

Conversely, if the U.S. can enact a credible plan to regain fiscal sustainability, it could bolster global confidence and free up capital for strategic investments. Such a plan would likely involve a mix of more efficient spending, possibly higher revenues (tax reforms), and pro-growth measures to expand the economy. But it’s a politically heavy lift; it might entail cutting popular programs or raising taxes, which is why it hasn’t happened yet. Dalio and others caution that the confluence of debt pressures, domestic political discord, and rapid tech change is a combustible mix that could lead to upheavals if not addressed.

The implication is stark: if the U.S. doesn’t find a way to reinvest in future industries while also controlling its debt, its long-run position relative to China could deteriorate. It’s not just about budgets; it’s about maintaining leadership in technology standards, supply chain control, and innovation ecosystems, all of which require sustained investment.

Debt vs. Defense: Security Readiness at Risk

One especially worrisome feedback loop is between mounting debt obligations and national security readiness. Already, U.S. defense spending as a share of GDP is near historic lows (around 3% of GDP, down from Cold War peaks of 5-10%). This isn’t because threats disappeared, but because the economy grew and other spending took priority. If interest costs keep skyrocketing, there will be intense pressure to curb discretionary spending, and defense is by far the largest discretionary item. We could see calls to flatten or cut the defense budget to help balance finances.

That poses a direct threat to military modernization plans. Upgrading aging naval fleets, developing AI-enabled systems, and fortifying space and cyber defenses, all these big projects could be slowed or shelved if funds dry up. Unlike some civilian projects, you can’t really turn to the private sector to fund an aircraft carrier or a new ICBM; if the government doesn’t pay, it doesn’t happen. We’ve seen glimpses: in 2013, the Budget Control Act’s sequestration led the Pentagon to cancel training exercises, ground aircraft, and defer maintenance; readiness clearly suffered to meet budget caps. A far larger fiscal crunch would force even deeper compromises: perhaps reducing force structure (fewer ships/brigades), foregoing cutting-edge but expensive tech, or scaling back global deployments.

There’s also the scenario of a sudden crisis. Recently, the U.S. managed to fund military aid for Ukraine and others (over $136B in supplemental allocations) due to bipartisan support. But imagine a major Indo-Pacific contingency, like a conflict over Taiwan, which could require trillions in rapid outlays if the U.S. were directly involved. In a debt-constrained scenario, financing a big war effort would either mean gutting domestic programs for money (which would be politically and socially destabilizing) or the Federal Reserve essentially printing money to fund it (which could trigger runaway inflation). Adversaries might calculate that America, drowning in debt, cannot afford a prolonged conflict or arms race, and that might embolden them. If U.S. commitments look financially unsustainable, deterrence could weaken, foes might doubt the U.S. would truly spend blood and treasure for, say, an ally in Asia if it’s financially strapped.

This is why some say a weakened fiscal position narrows U.S. strategic options. It not only limits military preparedness today but could undermine credibility tomorrow. One can imagine, for instance, China using U.S. debt as propaganda: “America is an empire in decline, it can’t even pay its bills, why trust its security promises?” Indeed, if not addressed, insufficient investment in security now may lead to greater (and more expensive) threats later, but meeting those threats later will be harder if debt has eaten away the cushion.

Allies, Alliances, and Economic Warfare

Fiscal health doesn’t just affect hard power; it also underpins alliances and economic warfare capacity. U.S. allies have long taken confidence in the idea that the U.S. has the economic might to honor its security commitments and assist partners under duress. If ballooning debt undermines that ability, alliance cohesion could suffer. For example, if the U.S. is too cash-strapped to co-fund joint technology initiatives (like NATO’s innovation fund or Indo-Pacific infrastructure projects), allies might doubt U.S. resolve or look to make other arrangements. Or if the U.S. pressures allies to shoulder much more of the defense burden because it has to tighten its belt, that could cause friction (burden-sharing debates can turn ugly if allies feel the U.S. is pulling back).

Granted, greater allied burden-sharing isn’t necessarily bad; NATO countries upping their defense budgets is a current objective. But it needs to be done in a coordinated, transparent way to avoid perceptions that the U.S. is no longer reliable. If allies start questioning U.S. economic resilience, they may hedge bets in ways that weaken collective stances (for instance, being less willing to confront China on tech standards if they think the U.S. might falter).

On the economic warfare front (sanctions, trade measures), heavy U.S. debt complicates matters. Using sanctions or export controls freely can backfire on a debt-ridden economy. For instance, a broad trade war with China, beyond targeted decoupling, could disrupt supply chains and drive up prices at home, fueling inflation at a time when containing inflation is crucial due to debt concerns. So the U.S. has to be careful: it might want to sanction an adversary, but if that adversary is a key supplier (like China in many categories), doing so could hurt the U.S. consumer and economy and thus its ability to manage its debt and inflation. This means while economic measures remain key to competing with and constraining China, the Big Debt Cycle constrains how freely the U.S. can deploy these tools without collateral damage. It’s a bit like a boxer who can punch, but each punch also jars his own weakening arms.

Foreign adversaries are already strategizing around U.S. debt vulnerabilities. By conducting more energy sales in yuan or building payment networks outside SWIFT, they aim to immunize themselves from U.S. sanctions over time. The more they succeed, the less bite U.S. economic tools have in a confrontation. The U.S., being aware of this, must use those tools judiciously, especially in a high-inflation environment where any extra shock can be problematic.

Facing the Future: Strategic Choices and Reforms

So, what can the U.S. do in the next 4-5 years to navigate this period of fiscal strain without losing the tech race or jeopardizing security? It basically comes down to strategic choices and trade-offs that leaders must confront now, rather than later when choices would be harsher.

One path is fiscal rejuvenation: combining more efficient spending, higher revenues, and pro-growth reforms to stabilize debt over time. This might mean politically tough measures like entitlement reforms (slowing the growth of Social Security/Medicare costs), closing tax loopholes or adjusting taxes, and cutting wasteful or lower-priority programs. The upside is that gradually the interest burden would ease and budget flexibility would return, allowing more investment in strategic tech. The downside is the political cost; budget cuts or tax increases are never popular, and they can have short-term economic downsides that politicians are loath to accept.

Another path is to double down on strategic spending despite the debt, betting that investing in technology and defense will spur economic growth or is worth the added debt because of the security payoff. Essentially, choose guns (and silicon) over butter; prioritize what keeps you competitive, even if it means borrowing more in the short term. This could work if, for instance, breakthroughs in AI or new industries from these investments significantly boost GDP or generate new revenue down the line. But it’s risky: too much added debt could spook markets, raise rates further, or weaken the dollar, undercutting the very benefits sought.

Realistically, the U.S. will likely do a bit of both: try to rein in debt growth while also protecting critical investments, essentially a reprioritization exercise. We might see more explicit “guns vs. butter” debates, meaning weighing military and innovation spending against domestic social programs under tighter budgets. Prioritization will be key: areas with the highest strategic leverage (like foundational AI infrastructure that catalyzes broader innovation, or chip fabs that ensure supply chains) will need to come first, potentially at the expense of less urgent expenditures.

Additionally, we’re likely to see a push for greater allied cooperation and burden-sharing as a force multiplier. If the U.S. can’t unilaterally spend its way out of every challenge, it will lean on allies to contribute more. This is already happening: Japan and Europe are investing more in their own defense and tech ecosystems, often in coordination with the U.S. Joint projects, say, co-developing a next-gen fighter jet or sharing the load on semiconductor research, can stretch dollars further for everyone. Essentially, pool resources so that critical capabilities are built collectively, reducing the burden on any single nation’s budget.

Another lever is incentivizing private investment in strategic industries to supplement federal dollars. The CHIPS Act’s model of using tax credits and matching funds to draw in corporate investment for fabs is one example. The hope is to use policy to unlock private capital (which is much larger than government budgets) for national goals. However, private capital demands returns and stability, which circles back to keeping the economy stable and investor confidence high, tying into credible fiscal stewardship.

Interestingly, foreign direct investment (FDI) also comes into play. The U.S., despite everything, still attracts capital from allies; e.g., TSMC building in Arizona, European carmakers building plants in America. These inflows help finance tech development. The U.S. will want to continue being an attractive destination for allied capital, even as it screens out adversarial capital (like Chinese investment in sensitive sectors). Meanwhile, China, facing its own growth slowdown, is trying to keep FDI coming (opening some sectors to foreign investment, etc.) and using its funds abroad to secure resources. So there’s an FDI chess match that ties into fiscal conditions; a country with better fiscal health is generally more attractive for investors.

In conclusion, the Big Debt Cycle is more than an economic phase, it’s a strategic factor shaping power dynamics. If mismanaged, it could become America’s Achilles’ heel by constraining decisive action on national priorities. Allies and adversaries alike are watching whether the U.S. can reinvigorate its economic foundations or if fiscal strain will undercut its global leadership.

The next few years will likely be a delicate balancing act, taming inflation and debt without choking off investment in the future. It will require sober policymaking that recognizes economic security and national security are inextricably linked. The tech race with China can’t be won if the economic base erodes. Preserving America’s competitive edge in AI, quantum, manufacturing, and defense demands confronting the debt challenge head-on.

This means making tough choices now; because, as the report notes, decisions deferred now could become dire decisions later. Prudent fiscal and strategic planning today can ensure the U.S. continues to lead in technology and is ready to meet global threats, even as it works through unwinding the debt excesses. There is an implicit call to action here: don’t let short-term politics or denial derail the long-term necessities. If the U.S. proactively adjusts (through reform, innovation, and alliances), it can navigate this storm of financial stress and stay on top in the U.S.-China competition. If not, the risk is that economic weakness will translate into strategic vulnerability just when the stakes are highest.

For the American public and leaders alike, the key takeaway is that fiscal strength is strategic strength. As the saying goes, “the foundation of military strength is economic strength.” Therefore, shoring up the nation’s finances is as much a part of winning the tech race as any new invention or treaty. It’s less glamorous, perhaps, but no less vital.