Oh My... US Debt Hits $30 Trillion
Years ahead of schedule, the big question now is debt affordability
Tonight we examine why inflation is only part of the bigger picture that investors must be aware of surrounding debt and its impact on markets and the US economy.
"Blessed are the young, for they shall inherit the national debt."
– Herbert Hoover
Today, the US National Debt eclipsed $30 trillion -- a full decade ahead of previous CBO projections.
At this point, most Americans realize that our national debt has exploded into “unpayable” territory. At the same time, seeing a 3 handle on our national debt is getting attention. But don’t be surprised when we see a 4 handle within the next four years.
It doesn’t take a rocket scientist to do the math – In 2001 our national debt was $5.7 trillion. Just twenty years later, it has reached $30 trillion. Our national debt has increased by an average of 52.5% every five years since 2001. This means that by the end of 2025, we can expect our national debt to exceed $40 trillion.
In our story, Mr. Wendell borrows $100,000 from the bank at an interest rate of 5%. When interest rates fall lower, dropping to 2%, Mr. Wendell is able to increase his loan of $100k to $250k without increasing the amount of his payments.
This is not complicated. Lower rates enable Mr. Wendell’s ability to take on more debt without negatively impacting the affordability of his debt. After all, 5% interest rate costs on $100,000 of debt are the equivalent of 2% on debt of $250,000. He would still owe $5,000 in interest charges every year in either scenario.
The ability to restructure debt at lower interest costs is not uncommon to homeowners who’ve refinanced their mortgages at lower rates, or to business owners who’ve managed to increase their debt loads without increasing their costs to service their debt.
When considered through this lens, interest rates that go lower actually strengthen our ability to cover debt costs. This is why, when considering our national debt over time, one would be better suited looking at the costs to service debt rather than the total amount of debt owed.
We believe this is the key to understanding why gold has underperformed over the last decade, why it’s up 50% in just the last three and a half years, and most importantly why it’s likely to explode above $5,000 per ounce in the next few years. A look at the progression of our national debt and the costs to service that debt over time gives us all the information we need to draw a clear conclusion.
Today our national debt is not $24 trillion as we predicted, but officially above $30 trillion!
Interest rates are not at 3.3%, but at zero percent.
What this has done has allowed for our country’s debt affordability to stay within a “payable” range, but it’s what comes next that’s going to knock the socks off gold bugs around the world.
The Federal Reserve is stuck, and now officially forced to address inflation.
Over the last two months, through their investment bank proxies, the Federal Reserve has signaled that rate hikes will begin in March, and are promising a minimum of 4 interest rate hikes all in 2022.
Estimates from investment banks have gotten worse. Goldman Sachs anticipates 5 rate hikes, while Bank of America assumes 7 hikes, all in 2022.
Take a second and think about what a 7-hike raise in 2022 means to the cost of servicing our debt. The way the central bank is talking today, they could get there within the next 12 months.
And this reveals why gold loves higher costs to service debt.
As the United States has more and more trouble paying our bills, and as we must go further and further into debt to do so (especially if that action is happening in a rising interest rate environment), it’s not hard to understand why the dollar is about to drop dramatically in the next 3-5 years.
People thought we were crazy when we said gold was going to outperform paper assets and the 60/40 portfolio model 8:1 by the year 2028. And yet we have surprised everyone. In just 3.5 years – at a time when stocks and bonds have been consistently at, or near, all-time highs – gold is outperforming the 60/40 model.
Gold is up 50% in 3.5 years vs just 41% from the 60/40 model.
The story of Mr. Wendell is why we’ve been screaming from the rooftops. Rising rates are going to be rocket fuel for gold prices. And now the Fed will be forced to launch gold prices since they must deal with inflation.
Assuming the pace established over the last 50 years, the current national debt will hit a minimum of $60 trillion by the year 2031.
The Federal Reserve is telling us rates will normalize somewhere around 3% – 3.5%. We are highly doubtful. Simply do the math on $60 trillion at 3%. The cost to service our national debt could be $1.8 trillion a year and would likely account for a full 40% of all annual tax revenue brought in by the US.
This is why the oldest adages are always the best. “When interest rates are low, stocks grow. When interest rates are high, stocks die.”
As we’ve just explained, it doesn’t take a whole lot of interest rate hikes with debt levels at today’s extremes to create an impossible to overcome math problem.
But don’t take our word for it. Watch the story of Mr. Wendell and see for yourself.
Best,
Adam Baratta
Editor-in-Chief
Brentwood Research
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