America’s finances are sinking into a quagmire.
Last week, the government released final figures for its Fiscal Year 2023. The report came just weeks after President Biden’s claims that the government is running a budget surplus.
The numbers show that’s not true. In fact, for the fiscal year ending in September, the government spent $2 trillion more than what it brought in.
To cover the shortfall, it has slapped on about the same amount to the national debt.
I won’t sugarcoat it. These numbers are downright appalling… a telling sign of America’s financial deterioration.
What’s worse, I don’t see the government’s reliance on debt and spending cooling off anytime soon. The national debt ballooned by over $469 billion just this month alone.
What does our nation’s skyrocketing debt really mean? And how can you protect yourself against this unstoppable trend? Let’s look into it.
We Owe It to Ourselves?
Some folks argue that fretting over the national debt is overblown. They say it’s just “money we owe to ourselves.”
Nobel Prize laureate Paul Krugman made this argument back in 2015.
His words must have struck a chord with those in power, as our debt levels have rocketed from “only” $18 trillion in 2015 to over $33.6 trillion today.
That’s an 87% increase in under 9 years. Take a look…
The only times in U.S. history when debt increased faster were during major wars and financial crises, such as the Panic of 1837, the Civil War, and World War II.
Unlike these short-lived spikes, the recent increase stands out for its sustained nature, without any one big, exceptional event behind it.
Now, going back to Krugman’s “we owe it to ourselves” argument, he’s completely off the mark here.
First, only about 21%, or $7.1 trillion, of the national debt is held by agencies and departments within our own federal government.
That must be the “we” Krugman’s talking about when he says “we” owe the debt to “ourselves.”
Most of that $7.1 trillion is on the tab for Social Security and government retirement schemes for civilian and military personnel.
The bulk of the U.S. national debt – about 56%, or $18.8 trillion – is held by big businesses, financial institutions, money market funds, and state and local governments.
Money market funds and pension funds hold trillions of dollars in government bonds. These institutions manage the retirement assets of millions of Americans.
Is this the “we” it would be alright for the government to default on? I don’t think so.
Then, there’s the remaining 23%, or $7.7 trillion. This is the chunk of U.S. government debt held by foreign nations.
Japan is the largest foreign holder of U.S. debt. In August 2023, it owned $1.1 trillion. China owns $805 billion. And the United Kingdom owns about $668 billion.
Defaulting on this debt isn’t an option either. It would damage the U.S.’ reputation and trust with other countries, which would scare off international investors. And that could trigger a global financial meltdown.
In short, the “we owe it to ourselves” mentality is wrong. It overlooks the catastrophic consequences of failing to make payments on the national debt.
Spiraling Out of Control
The nonchalant attitude toward our ballooning debt is a huge problem when you consider how much the government is paying in interest.
According to the latest Treasury report, the federal government had to shell out $879 billion on interest payments in fiscal 2023. And that was with an average interest rate below 3%.
But the days of 3% interest rates are behind us, thanks to a string of bad decisions by the Federal Reserve.
Rates crossed the 5.30% threshold this year, for the first time in two decades. In other words, interest costs on the national debt are spiraling out of control.
What’s worse, this is happening at the same time that tax revenue is falling.
This bring us back to that Treasury report I mentioned up top. Tax revenue was $4.4 trillion in fiscal 2023. That’s down 12% from almost $5 trillion the previous year.
Picture this: A few years from now, the national debt will go beyond $40 trillion. At this rate, that’s a fact.
With interest rates above 5%, the government would have to pay $2 trillion every year just to cover interest charges.
Numbers that big soon start to lose meaning. But consider this: The entire U.S. federal budget for 2020 was around $4.8 trillion.
So, $2 trillion on interest alone would account for nearly 42% of the 2020 federal budget.
That’s not affordable.
What This Means for Your Money Today
To be clear, I don’t see the U.S. government ever defaulting on the national debt. If anything, it would issue more debt to ensure it can pay the interest on outstanding debt.
It’s an endless cycle that ends up hurting Main Street with a weaker and weaker dollar.
And that’s not the only thing that points to more inflation.
All of the above also tells me that the Fed can’t keep raising interest rates much longer.
If it keeps raising rates, the government won’t be able to keep creating money out of thin air as fast as it has been.
That’s because the more debt the government creates, the higher the interest payments on that debt will be.
Now, I don’t expect the Fed to pause or cut rates right away. It’s still trying to look like it has everything under control.
But no Fed chairman wants to go down in history as the first to ever steer the U.S. into insolvency.
That’s why I’m not buying the “higher for longer” narrative. The Fed will have no choice but to start cutting rates in 2024.
And that shift to rate-cutting will lead to more inflation, and thus, a weaker U.S. dollar.
That’s because when the Fed lowers interest rates, it encourages individuals and businesses to borrow and spend more. That extra demand, plus the cheaper borrowing costs, tend to drive up prices for things we buy.
As prices rise, the purchasing power of the U.S. dollar diminishes.
Add to that the money creation policies the Fed tends to deploy after it adopts more lenient interest rate policies. If history is any guide, these, too, will put downward pressure on the value of the dollar.
That’s why I advocate for hard assets as part of a well-rounded portfolio. It’s the best defense against a weaker dollar.
And gold is one of the “hardest” assets there are. You can’t print gold like dollars.
If you’re new to investing in gold, one of the best ways to get exposure is through a gold exchange-traded fund (ETF).
A gold ETF invests primarily in hard gold assets. And you can buy it through your brokerage account.
Consider the SPDR Gold Shares ETF (GLD). It closely tracks the price of gold. And it offers convenient exposure, without the worry or extra cost of storage and security.
Editor, Inside Wall Street with Nomi Prins