Three things to know about the $40 trillion federal debt

The federal debt topped $40 trillion for the first time this week. Investors who buy government bonds are demanding higher interest rates to finance the growing debt load. Mandel Ngan/AFP hide caption

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The Treasury Department reported this week that the U.S. federal debt had reached $40 trillion , an eye-popping level of red ink. Just the annual interest on that accumulated debt now tops a trillion dollars, making it the government's second-biggest expense, behind only Social Security.

Here are three things to know about the deepening financial hole the government is in.

For years, the government has spent more money than it collects in taxes. Some of that has been driven by political choices — to wage war, cut taxes or provide a more generous social safety net during the pandemic. But much of the growth in spending happens automatically, as baby boomers age into retirement, resulting in higher costs for Social Security and Medicare.

Historically, debt as a share of the economy tended to rise during recessions, then stabilize during economic expansions. More recently, the government has run large deficits even when the economy has been growing. The debt has doubled in size since 2017. And now the people who lend money to the government are demanding higher interest rates.

The federal debt affects all Americans indirectly, because it limits the government's ability to tackle other priorities. But it also affects some people more directly, by making it more expensive to borrow money.

"When the government borrows this much, and the rates for Treasurys go up, that brings up the rates for everything else, from mortgages to car loans to credit cards," says Michael Peterson, CEO of the Peter G. Peterson Foundation, which advocates for fiscal responsibility. Mortgage rates, for example, tend to rise and fall with the yield on 10-year Treasurys, and the rate on 30-year home loans has climbed near 6.7%, according to Freddie Mac.