US Debt Now Equivalent to Entire US Economy – Investing in This New Era

by Darwin on January 9, 2012

The United States has just reached the dreaded 100% Debt-to-GDP ratio with its $15.2 Trillion debt level surpassing the value of all goods and services produced in-country.  This is important because it vaults us into a whole new echelon of debt-ridden societies with financial crises of their own: only Greece, Iceland, Ireland, Italy, Japan and Portugal have debt-to-GDP ratios exceeding 100%.  That’s some fine company we keep.

Compare This to Your Personal Debt-to-GDP Ratio

I was thinking about this from a personal finance standpoint and at face value, you’d think this isn’t really that big of a deal, right?  I mean, is it uncommon for a guy making $100,000/year to take on $300,000 in debt to buy a home?  Add to it the fact that while mortgage rates are at all time lows (insane but true as evidenced by today’s rates), US Treasury Bills are trading at EVEN LOWER interest rates!  The 10 year continues to hover below 2%. So, you might say the government could take on 3 times the current debt and have a similar profile to a typical American? Add in a car payment and a credit card and that’s like a 330% Debt-to-GDP ratio!  And with stats like that, as long as there are no blemishes on the credit report, he’s free to keep borrowing!  Plenty of banks and credit card companies would feel fine lending out more money.

So, What’s the Problem?

There’s one primary factor at play (aside from the fact that an individual can make their own decisions and pay down debt accordingly whereas our politicians cannot agree on anything but increasing the debt through continued tax breaks, entitlements and gimmicks to garner votes)…and that primary factor is that while the typical American is expected to DECREASE the debt load over time by paying down a conventional mortgage, the US is projected to increase its debt in horrific fashion as far as the eye can see.

Obama’s 2012 budget shows the debt soaring past $26 trillion a decade from now (source).  And we all know the US never underspends.  When all is said and done with Healthcare Reform turning out to be way more expensive than projected, a wave of retirements and interest rates increasing on our debt, you can bet we’ll be at that 3X debt-to-GDP within no time.

So there’s the rub.  It’s not so much the current debt load that’s the problem – we could continue to make good on interest payments so long as the net debt level stayed the same.  But our debt level is increasing at such a rapid pace and we lack the leadership to reign it in, so there’s a runaway situation here.  The only possible way out is to inflate our way out.  Many view the US as highly unlikely to ever truly default under any circumstances because we can simply print more currency.  However, as you print more, each dollar’s worth less, so in essence, isn’t this a default of sorts?

How To Prepare for Hyperinflation

Should this scenario play out as anticipated, we would expect to see an era of high inflation and high unemployment as a result.  While gold has stolen all the headlines in recent years, it has lost its luster as of late 2011 losing 18% from the peak – this could be indicative of the end of a speculative bubble.  But there will always be other asset classes that perform well with rising inflation.  Here are a few:

  • Real Estate – As outlined in this post on why I bought into college real estate specifically, I like the prospect of being able to increase rents with college tuition inflation, take a depreciation and expense tax deduction each year and rely on current renters to pay down the principal on my loan.  We anticipate (even with some headaches along the way) returns of 15% or more conservatively over the long-term.
  • Farmland – While it’s not as simple as buying a stock or some gold bullion, buying arable land capable of producing a crop is a surefire way to combat high food inflation.  There’s only so much arable land to go around and if the US Dollar craters, importing food will become increasingly expensive.  This bodes well for US landowners and speculators.  Many large investors have caught on and prices around the world (not just the US) have started to rise.
  • MLPsMaster Limited Partnerships trade as regular issues on major exchanges and can be bought and sold just like stocks.  They are often tied to the delivery of energy be it gasoline, natural gas or oil, and offer some surprising benefits to retail investors.  Because of the way they are structured, they have very high dividend yields due to their favored tax status; however for this very reason, many institutional clients like pension and retirement plans cannot hold them.  Therefore, many retail investors snap them up with little competition that other conventional asset classes see.  Beware trying to do an MLP IRA for this very reason, but holding them in a traditional trading account is the way to go if you don’t mind filling out an additional K-1 tax form each year.

Do You Have a Favorite Inflation Play?


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