US Debt Bubble: How to Protect Yourself as an Investor

The national debt when Bill Clinton took office in 1993 was $4.188 trillion. By the time he left office in 2001, it was $5.727 trillion, an increase of 37 percent. As profligate as that seemed at the time, it has been overshadowed by even greater subsequent debt increases. By the time President George W. Bush left office in 2009, the total debt outstanding had increased again to $10.626 trillion, an increase of 86 percent. And when President Obama left office earlier this year, the total public debt outstanding was $19.947 trillion, an increase of 88 percent from eight years ago. Just last week the national debt topped $20 trillion for the first time. If this near-doubling of the national debt every eight years continues to occur, we can expect a total national debt approaching nearly $40 trillion by 2025.

Rather than attempting to rein in spending, both Congress and the Trump Administration continue to push for an increase in the debt ceiling. The entire debt ceiling situation is an ongoing farce. For one thing, the debt ceiling increases are always relatively short-term, lasting at most for about two years. They have become another issue around which politicians can posture. Successive Presidents come to Congress to ask for increases in the debt ceiling, while some Congressmen pontificate about the necessity of curbing federal spending before proceeding to vote for both debt ceiling increases and boosts to federal spending in other areas. Congress couldn’t even agree to cut the budget of the Department of the Interior by 1 percent, so the prospects for reining in federal spending are slim.

National Debt Will Never Be Paid Off

The fact is that the national debt will never be paid off, the government will eventually default on it. It’s not a matter of if, but when. Debt markets that deal in Treasury securities are engaged in one big game of musical chairs. Investors who hold or trade in Treasury debt hope that they can eventually sell that debt to someone else, passing on the risk to other investors. Debt that matures isn’t permanently paid off, it’s just rolled over into new debt issuances. Successive generations of investors have been duped into thinking that there is no safer investment than US government debt because it is backed by the “full faith and credit” of the US government.

All that means is that bond investors believe that the US government will always be able to raise enough tax revenue to pay back bondholders. What happens when there isn’t enough tax revenue to pay back bondholders? What happens when interest rates start to rise and interest payments as a portion of federal spending begin to rise along with it? What happens when the US government has to issue more new debt just to pay the interest costs on the old debt and then has to issue more new debt to pay the interest costs on the new debt it just issued? The whole situation will spiral out of control, and bond investors just hope that they aren’t the ones left holding the worthless debt once default takes place.

Debt Default: Overt and Covert

There are two primary ways of defaulting on debt, one of which the US government is engaged in already. The first way of defaulting on debt is an outright default, refusing to pay back bondholders. That has occurred relatively rarely in US history and the government takes great pains to avoid that, as it would spike borrowing costs and lead to less public confidence in Treasury debt issuance. The other way of defaulting, which the government is actively engaged in, is inflation. By increasing the money supply, the government devalues the dollar, enabling it to pay back bondholders in less-valuable dollars.

Inflation has always benefited debtors and harmed savers, allowing debtors to repay their debts in less-valuable currency while reducing the effective purchasing power of investors. It is nothing less than a transfer of wealth from savers to debtors. The US government, being the biggest debtor of them all, benefits from inflation more than anyone else, and has the greatest incentive to keep the debt game going. Keeping the debt ceiling issue in the public’s eye every so often just serves to further the government’s propaganda that the United States government won’t default on its debt.

But by inflating the money supply and devaluing the dollar, the US government is, in fact, defaulting on its obligations. That method may work for now, but eventually, the overall debt load will become so great that an outright default will be inevitable. That could come first in the failure to pay interest on a portion of the debt, followed by the outright repudiation of portions of the debt.

Interest Expense to Increase Exponentially

Total interest expense paid by the federal government this fiscal year is $434 billion. With a few more weeks to go until FY 2017 is closed out, this year could end up breaking a record for interest outlays. What’s even more concerning is that this record-breaking interest expense is coming at a time when interest rates are at historic lows. The overall average interest rate on Treasury debt right now is 2.282%. Compare that to the 4.517% average just before the financial crisis, or the 6.594% average interest rate back in 2001.

Interest rates will eventually head back to those levels and when they do, the amount of money the federal government will have to spend on interest will skyrocket. Imagine another $400-800 billion per year in interest expense added to an already unbalanced federal budget. How exactly do politicians expect to pay for that? They will either have to make cuts somewhere else in the federal budget or, what is more likely, increase debt issuance to pay for the increased interest expense. Of course, issuing that new debt will itself further increase interest expense until the entire national debt begins to grow exponentially faster. If the US government were a corporation, its debt wouldn’t be AAA-graded, it would probably be junk, with a deeply negative outlook.

How to Protect Yourself

So how can investors protect themselves? The first thing to do is minimize exposure to Treasury debt. While many investors have sought Treasury debt as a safe asset for their portfolios, the last investors to hold Treasury debt that eventually will be defaulted on will be the ones who lose out the most. Don’t be the last person holding the bag. And in the event of a debt default, it won’t be just Treasury debt that tanks – all financial markets will be affected. An outright US government default would be the financial equivalent of a nuclear bomb, with severe and long-term ramifications.

The next thing to do is to invest in assets that protect against inflation. The ideal asset for that purpose is gold. Gold has served as a store of wealth and a hedge against inflation for centuries and continues to serve that purpose today. It holds its value in the face of rampant inflation and maintains its purchasing power as the dollar continues to become devalued.

With the development of gold IRAs, investing in gold is easier than ever. Investors can even roll over their existing 401(k) and IRA retirement assets into a gold IRA while enjoying the same tax advantages that traditional IRAs do. Then when they choose to take or are required to take distributions, they can take those distributions either as cash payments or by taking possession of physical gold. If you’re worried about an ever-growing national debt and the likelihood of a government debt default, there’s no better way to protect your assets than by investing in gold.