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?


{ 19 comments… read them below or add one }

krantcents January 10, 2012 at 12:10 pm

I invest in TIPS (Treasury inflation protection securities) as part of my portfolio.


Darwin January 10, 2012 at 12:55 pm

I guess if you believe the government measures of inflation represent your personal rate of inflation, TIPS can help. Personally, my family’s inflation has been WAY higher than the 2-3% headline CPI each year. So, I need things that reflect college tuition, healthcare, food, energy, clothing – the stuff I actually have to pay for in the future which are moving like 5-10% a year, not 2-3%. But for some, CPI makes sense.


Investor Junkie January 18, 2012 at 9:25 pm

You are correct personal inflation rate is what matters to you, but if you look at MIT’s billion price index:

It closely follows CPI, though not perfect. While as much I would like to believe, I’m not too sure based upon MIT’s data.


Kathryn C January 10, 2012 at 12:32 pm

Great post. Did you see this article below? I agree with you. We’re going to have a big problem on our hands. Actually, kids and grandkids will. I picked up the NY times link through my friend Kenny Kellogg’s blog (below).


Darwin January 10, 2012 at 12:53 pm

My god, I can’t even fathom how the NYTimes publishes this screed. It is wrong, wrong, wrong on so many levels. First off, he confuses Americans with the federal government. Just because Americans own debt of the US Treasury, it doesn’t mean it’s all well and good. The debt is still owed! And as more debt is issued and the likelihood of being repaid decreases, investors demand a higher interest rate. This is what we’re seeing in Europe. Why does this ass presume America would be any different. The ONLY reason we see low interest rates now is because of a) the artificial manipulation from the Fed (QE 1, 2, operation Twist and more games) and b) because the Euro is so screwed up and everyone’s freaking out. What does he presume will happen in a few years after the Euro is routed? The 10-year US will still be a 1.9%? This man is insane – anything to push his liberal agenda of spend what you want and tax the rich to pay for it. Ridiculous!


retirebyforty January 10, 2012 at 1:17 pm

My favorite inflation play is also real estate. Might as well borrow as much as we can now while the interest rate is low. Once the inflation shoots up, we can increase the rent and the income should outpace mortgage quite quickly.
I’ll probably invest in TIPS as well.


Darwin January 11, 2012 at 9:02 pm

I went so far as to borrow from my 401K to make it happen!


YFS January 13, 2012 at 1:29 am

Ditto! I have 2 properties and trying to buy 4 more this year. Rental properties are the way to go


Ken Faulkenberry January 11, 2012 at 8:30 am

Great Post! Can you imagine what servicing our debt will cost when interest rates rise! The average maturity of our debt is insanely low. When interest rates rise the interest expense is going to explode the deficit beyond anything we can even imagine. We really don’t know whether this will cause inflation or deflation though. The political restraints put on the fed could cause them to not be able to print enough money fast enough to offset deflationary forces. I think the odds are about 50/50, which means you mush prepare for both scenarios. I have written an article titled “How does the inflation TREND affect your asset allocation” for anyone interested at:


Darwin January 11, 2012 at 9:03 pm

The average American doesn’t take notice; politicians only do what buys the next vote. Pretty much assured we won’t do the right thing


AverageJoe January 11, 2012 at 4:11 pm

I find your farmland idea interesting, and like it. The problem I’m having trouble getting my head around is the holding cost (property taxes). I’m wondering if I could rent the farming rights for a high enough dollar amount to justify that expense. I think so, but haven’t explored this yet….interesting idea.


Darwin January 11, 2012 at 9:04 pm

Yeah, it’s not exactly the most liquid trade; not real familiar with anyone that’s done this personally – just that a lot of the “inflation” bloggers are all recommending arable land. Makes sense in concept, not sure about in practice.


101 Centavos January 14, 2012 at 12:03 pm

Property taxes are unavoidable, Joe. About the only way to minimize those are to be in the county vs the city, and not expect much in the way of services, except for rural electric.


Dan January 12, 2012 at 11:01 am

My favorite is still gold. It may or may not be in a speculative bubble, but it still plays a role in a well diversified portfolio.


MoneyCone January 12, 2012 at 12:10 pm

Good suggestion on MLPs. This is one asset class that is poorly understood and most stay away due to the extra overhead come tax time.

But the returns are definitely worth the effort.


Juan January 12, 2012 at 5:52 pm

Those MLPs really can be a great trade, though with such yield based investments one must watch for when the US gov starts to raise rates.


101 Centavos January 13, 2012 at 8:22 am

Great post, Darwin. We bought some acreage, although it’s more pasture than farmland. Part of it is a productive garden, and my goals are to make it even more productive. Acreage with fruit and nut trees sell at a premium over mere pastureland.


Wayne @ Young Family Finance January 13, 2012 at 11:07 pm

Thanks for the doom and the investment suggestions 🙂

Our debt wouldn’t seem like such a problem, if it were possible to get our government to spend slower than the economy grows. Until then, having a game plan to deal with inflation makes a lot of sense.


Maggie@SquarePennies January 15, 2012 at 1:36 am

My budget is pretty small, so I buy some basics, like food and clothing, when they are on sale or decently priced. If I had more money I’d become a landlord of a 4-plex. I think people will be renting more than buying homes for quite a while.


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