The mounting U.S. national debt, coupled with its rapid pace of growth, has catapulted this economic indicator to the forefront of investors’ minds – a concern that might have been absent only a few years ago. While it’s evident that US borrowing is out of control, the conversation surrounding national debt is often too simplistic to be beneficial.
Investors looking to optimize their returns and fully protect their nest eggs must understand the upsides and drawbacks of US debt. This nuanced perspective allows for informed and timely decisions in an economic environment where debt plays an increasingly significant role.
Advantages of Government Debt
One of the biggest advantages of taking on national debt is fiscal flexibility. The quicker and more the government can borrow, the more effectively it can respond to unforeseen economic challenges. This allows the government to rapidly inject funds into the economy to curb the negative financial effects of recessions, natural disasters, geopolitical conflicts, and other costly emergencies. The ability to stabilize the economy and provide immediate relief to affected sectors has allowed the US to bounce back from every conceivable obstacle, paving the way for ongoing economic growth and impressive fiscal resilience.
There’s a reason some of the most advanced and profitable nations have the highest debts: flexible borrowing spurs economic growth. A robust borrowing capacity enables investment in long-term projects such as infrastructure, healthcare, education, and research and development which improves economic health and boosts future development. When funds are severely restricted, only a country’s most immediate needs are addressed. By taking on significant debt, the US has been able to invest in long-term projects that further contribute to economic development and prosperity.
Global Reserve Status
The US dollar became the world reserve currency following the British pound’s collapse in the wake of consecutive World Wars. This coveted status pays dividends when it comes to national debt. Through strong borrowing relationships, the US provides an abundance of USD for eager buyers who benefit from its strength and stability. In turn, the US government profits from a deep well of accessible credit. The resulting positive feedback loop reinforces the dollar’s dominance in international markets as the majority of trade and debt is held in USD. The US dollar’s position as a world reserve currency allows the US to borrow at relatively low rates. This is partially why the country can sustain larger levels of debt when compared to other nations.
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Downsides of Government Debt
The untethering of the US economy from the gold standard laid the groundwork for almost unlimited government borrowing. The resulting tower of debt has created an economic climate of turbulence, instability, and uncertainty. Unchecked spending inevitably leads to uncontrollable inflation which the Fed attempts to combat with adjusting the interest rate. These unpredictable factors foster hesitancy among investors who view the market as a wild roller coaster ride of unforeseen ups and downs. Volatility has become an accepted norm of economic activity, and could only get worse as debt rises.
Risk of Government Shutdown
Since 1976, the federal government has suffered 22 shutdowns due to a lack of sufficient funds. While people enjoy pointing the finger at politicians who are reluctant to raise the debt ceiling, the real fault lies with the shopaholic spending habits of the federal government. There’s reason to believe these closures are increasing in severity as debt rises. The longest shutdown, which lasted for 35 days from late 2018 to early 2019, is far from ancient history. The fallout from federal closures is no longer restricted to national parks and other low-stake operations. The longer this problem remains unaddressed, the greater the risk of a catastrophic and prolonged government shutdown.
👉 Related read: Wondering what happens if the US defaults on its debt?
Rising Interest Cost
Currently, a staggering 16% of federal spending goes toward paying off US debt. That $169 billion price tag is on pace to become the largest federal expense in a matter of decades. To put things in perspective, the government spends more on managing and servicing its borrowing than it does on disaster relief, foreign aid, veterans’ benefits, agriculture and science initiatives, and environmental security. This rapidly expanding cost hamstrings the federal budget from spending in crucial areas such as infrastructure, domestic security, and international stability.
A considerable portion of the US national debt is held by its geopolitical and ideological adversaries. China alone owns 11.9% of the debt which gives it a disconcerting amount of influence over the US both economically and geopolitically. The Biden administration has already made a frightening amount of overtures toward Xi Jinping and the Communist Party by backing down from a dominant position in the Middle East and allowing for Chinese expansion in the South China Sea. A US indebted to China won’t be able to effectively combat the clear risks posed by this increasingly powerful foe.
The government’s ability to take on debt has always depended on the confidence of other countries in the stability, liquidity, and power of the dollar. Over the past few years, that trust has waned as the US government’s fiscal maneuvers scare away potential buyers. Countries around the world, led by China, Russia, and other BRICS nations, are actively pursuing a policy of de-dollarization. Foreign governments increasingly view the dollar as a risk to their economies rather than a boon. The BRICS consortium is even flirting with the creation of its own BRICS currency to directly challenge the dollar’s hegemony.
Visualizing the $34 trillion US debt is a challenge given its monumental size and never-ending growth. However, this deficit isn’t some nebulous metric without consequences for the average American. The rapid increase in national debt is reflected in the steady increase of federal taxes. According to a Gallup poll, 60% of Americans think they’re paying Uncle Sam too much, which is the highest amount in more than two decades of survey results. The government’s addiction to borrowing and spending puts an unfair tax burden on the average person which is only going to worsen as the debt situation spirals out of control.
Why is national debt a problem?
Debt isn’t a problem, per se. The real problem is the lack of control and responsibility the government has over its debt accumulation. There’s a worthwhile analogy between national debt and personal debt. When managed judiciously, debt is an effective way to build strong credit, start businesses, and make sizeable investments in long-term projects. The main issue is the questionable and potentially reckless fiscal leaders who support the experimental Modern Monetary Theory (MMT). Unless the US makes a complete 180-degree pivot towards fiscal accountability, the negative effects of debt will progressively outweigh and even nullify the benefits.
Protect Yourself From Growing National Debt
Many investors are poorly positioned to withstand the repercussions of surging US debt. This out-of-control borrowing could have lasting consequences for the American people including diminished savings, diluted buying power, and volatile retirement investing. Protection can be found in safe-haven assets such as precious metals which boast inherent value, independent of economic conditions.
If you’re interested in learning more about diversifying your portfolio and hedging against economic turbulence with gold and silver, grab a FREE copy of our Precious Metals Investment Guide.