Uncle Sam’s Debt Spiral: Time to Protect Our Finances

“In that direction,” the Cat said, waving its right paw round, “lives a Hatter. And in that direction,” waving the other paw, “lives a March Hare. Visit either you like: They’re both mad.” 

“But I don’t want to go among mad people,” Alice remarked. 

“Oh, you can’t help that,” said the Cat. “We’re all mad here.” 

Welcome to Uncle Sam in Blunderland.  

If only it were a fantastical children’s tale. 

Alas, not so much. The U.S. has fallen through the mirror into a not-so-whimsical world of pending economic pain. That’s bad for me and you.  

For unlike Alice, Uncle Sam will not escape his warped reality by finding a tree with a door back to the great hall of normalcy. Or, to steal a quote from Alice: “If one drinks much from a bottle marked ‘poison,’ it’s almost certain to disagree with one sooner or later.” 

In today’s missive, debt will play the role of poison, while inflation will be the disagreeable situation that creeps upon us sooner or later. And by “sooner or later,” I mean over the remaining months of 2021 and into 2022. 

See, we find ourselves in a pickle. 

I’ve noted numerous times that America’s debt is unsustainably large—$28 trillion.  

And that’s before accounting for all the recent COVID relief spending, and the Biden administration’s new multi-trillion-dollar infrastructure plan, and the run-of-the-mill deficit spending the U.S. relies on every year to run the country. 

It’s history’s largest ever sum of debt.  

Here’s how that’s going to play out: 

1. Interest rates are already rising, and they will continue to rise—a result of inflation that is already in the system and which the bond market is 100% certain will arrive. 

2. Higher interest rates mean that Uncle Sam will have to offer investors fatter yields to entice them into lending him the money he desperately needs (he borrows trillions of dollars every year to run the country). 

3. Those higher yields mean he has to pay larger interest payments. 

4. Which means he has to borrow even more money just to afford those interest payments. 

5. But borrowing more money means that he has even higher debt-repayment obligations. 

6. Which means he has to borrow even more money… 

You can see the spiral beginning.  

Now, overlay on top of that higher and higher interest rates, and the pending catastrophe becomes clear. 

Right now, our debt-drunken Uncle pays about 0.74% on loans of three months. He pays 1.13%, on average, when he borrows for 10 years, all according to the Congressional Budget Office. That’s incredibly cheap. 

As recently as 2007, he was paying 4.7% for both of those periods. And throughout the 1990s, a period of economic normalcy, he was paying between 3% and more than 8%. 

The only reason he’s effectively paying nothing today is because the Federal Reserve has engineered a zero interest rate environment for more than a decade.  

Just yesterday, however, Federal Reserve Governor Christopher Waller promised us that the Fed is not keeping interest rates low so that Dear Uncle can more easily afford his debt. 

OK. Let’s take Mr. Waller at his word. Well, then, that raises a big ol’ issue: If the Fed isn’t keeping rates low to help the government, then the only reason rates are low is because…the economy is in a terrible spot, even after a decade of pumping stimulants into the system. 

The U.S. has a false sense of economic vigor. Our economy acts like it’s a tough, Jersey boy gangster, but it’s really just a skinny-armed, mamma’s boy playing the role of tough guy. Waller is telling us directly that the economy needs the financial equivalent of methamphetamines just to function. 

But after shoving all this poison into the system over all these years, the system is finding it disagreeable and is looking to rebel in the form of inflation. The system has to repair itself. It’s what economies do at some point on their own. 

Will interest rates roar to 15%, as they did in the 1970s? 

Probably not. 

Will they push toward 5%? 

Yep. 

And, frankly, I’m not ruling out a move toward 10% going into next year. 

It’s going to get ugly. 

Life is going to cost a lot more. People are going to suffer financially. More jobs will be lost. The stock market—currently at levels that make sense only if you’re an absurdist—is going to tumble. 

But there are ways we can protect our nest eggs from this impending crisis. This is precisely why I went looking for one particular type of investment for the April issue of our monthly Global Intelligence Letter.  

Inflation doesn’t hurt all companies. Some, it helps, as was demonstrated in the 1970s, when commodity companies performed quite well. (You can read my recommendation in the April issue.) 

Now is the time we want to be prepping for what lurks in the offing.  

Or as the Cheshire Cat told Alice: “I’m not strange, weird, off, nor crazy; my reality is just different than yours.”  

A different reality is coming…