By: Tom White
Joel MacDonald says America’s ever-growing national debt has long been a hot topic for financiers across the U.S. and globally. Increasingly serious conversations persist among international finance leaders from Davos to the Future Investment Initiative Institute. The consensus is that the massive U.S. national debt is becoming wholly unsustainable.
The country’s national debt—the U.S. federal government’s total outstanding, accumulated borrowing—now tops $34 trillion. And that number is climbing by over $100 billion monthly. The current figures are astonishing. Nowhere is this more apparent than in federal debt having risen by almost $1 trillion since just the third quarter of last year.
In the past 100 years, U.S. national debt has snowballed from $403 billion to $34.16 trillion. Of course, a lot has changed in the last century, both in finance and elsewhere. It’s helpful, therefore, to look at national debt as a percentage of gross domestic product. Fifty years ago, the ratio of national debt to GDP trended positively.
However, Joel MacDonald suggests that since the 1980s, the same ratio has drifted in the opposite direction. The current ratio of American national debt to gross domestic product is over 120 percent. What’s crucial, then, isn’t necessarily the sheer amount of debt but the cost of holding it. The U.S. government is currently paying over $1 trillion in interest annually.
What’s more, with interest rates at record highs, there’s no sign of relief soon. Ultimately, the more interest that the U.S. government pays, the worse off American citizens find themselves. The country, saddled with massive national debt, has less money to invest in its future. That includes vital public investments focused on education, infrastructure, and fueling economic growth.
Unfortunately, the Congressional Budget Office—the federal agency responsible for providing budget and economic information to the United States Congress—predicts that matters will worsen further. That includes the U.S. government running persistent trillion-dollar deficits over the next decade. The result is a predicted cumulative further deficit of over $20 trillion by the end of 2033.
America’s vast national debt and record interest rates have, in essence, become the new normal. Society has to borrow more money than ever to fund existing debt payments. Furthermore, the government has no other option but to find new ways to increase taxes. There’s also the risk that the government will debase the dollar in the long term to help monetize its debt in the short term.
For the most part, none of this is good news. That said, it does highlight the pressing importance of exploring new investment opportunities. Investors today must think critically and laterally about alternative ways of allocating new and existing capital to benefit from the current financial landscape.
This alternative capital allocation may range from stocks and value assets to numerous emerging private market opportunities. Either way, the world as we know it is changing.
Asset classes that do well in inflationary environments protect purchasing power. Examples include commodities, small caps, REITs.
Joel MacDonald explains that, by contrast, neither stocks nor real estate have grown at all when you denominate their growth rates to that of the Federal Reserve balance sheet growth rate.
As such, investors must keep abreast of the latest facts and figures to predict where value will likely accrue. It’s about rethinking the way everyone sees opportunities and subsequent investments. It’s a real-life case of adapt or die for investors and financiers across the U.S. and, increasingly, worldwide.
