National Debt Now Tops 100% of GDP

Anyone with a credit card knows how interest on debt can pile up fast. If you don’t pay your balance in full, the credit card company tacks on interest so the amount you owe gets bigger.

It works the same way for our government. This year, our U.S. government will pay out over $1 trillion on interest for its debt.

The Wall Street Journal recently announced: “National Debt Now Tops 100% of GDP.”

• At the end of March, the total U.S. debt stood at $31.265 trillion.
• That compares to GDP over the last year at $31.216 trillion.
• That puts the government’s debt as a ratio to GDP at 100.2% and is expected to hit 101% this year.

The numbers can be hard to relate to, but the math is simple. The U.S. government spends more money than it collects.

You may have heard warnings about a debt crisis before and are thinking “Well it hasn’t happened yet.”

“It hasn’t happened yet” doesn’t mean a crisis never will. In fact, the risks are growing.

Elected officials are gambling with the economic future of our country. Unless we see elected officials who make getting debt under control a top priority over new tax cuts and more spending, the risks will continue to rise.

• Over the next three years, annual deficits are estimated to run between $1.8 trillion to $2 trillion, adding even more public debt issuance and then interest payments.
• A decade from now, more than 2 out of every 3 dollars the government borrows will go to financing interest on debt.

So, what can Americans do to protect themselves against a debt crisis?

A looming debt crisis is one reason many investors have steadily been buying gold and silver over the past year.

Gold and silver are recognized as highly effective hedges against a debt crisis for several reasons. When governments become bogged down by excessive debt levels or devalue their fiat currencies, precious metals preserve purchasing power because gold and silver’s value are not tied to any one government or currency.

If a fiscal crisis were to emerge, meaning the U.S. government decides to default on a portion of its debt or becomes unable to keep up with its interest payments, gold and silver would go through the roof. Here’s why:

Precious metals have no counter-party risk.

Unlike the U.S. dollar, stocks or bank deposits, gold and silver are independent assets that don’t rely on a government promise or a financial institution’s solvency.

Precious metals protect against currency debasement.

If central banks lower interest rates or print money to respond to a crisis, fiat currencies like the U.S. dollar become worth less. Gold and silver aren’t affected because they are tangible assets outside of the financial system that can’t be arbitrarily printed or created.

Precious metals are a safe-haven in a crisis.

During periods of financial crisis—like the 2008 Global Financial Crisis, gold increases in value as investors shift their wealth into save haven assets. Periods of economic uncertainty drive the price of precious metals higher as other paper assets like stocks and even bonds can crash or even go to zero.

What’s next?

How likely is it that policymakers in Washington D.C. will decide to stop their runaway spending spree? Are you seeing any evidence of that today? Unless policymakers decide to face the music and choose higher taxes and lower spending, the large and rising deficits will continue. There is a silver lining and action you can take today to protect yourself.

The Bottom Line

This is not a partisan issue. No matter your political party, the U.S. federal debt is on a unsustainable path. It’s a simple issue of math.

Everyone knows that you can’t ignore rising debt levels forever, eventually the debt catches up with you and suddenly there is a crisis. The dollar collapses, stocks crash and interest rates soar.

While you can’t control the federal debt, you can control where you put your money. Portfolio diversification is a foundational principle in investing that allows you reduce your personal risk. Diversification allows you to proactively prepare for scenarios like a debt crisis.

Increasing your allocation to physical gold and silver is strategy you can start today to reduce the impact of a government fiscal crisis on your personal wealth level. Buying gold and silver is like buying home insurance or car insurance. Precious metals are insurance to protect your hard earned money. Take steps today to protect and grow your wealth for tomorrow. Blanchard is here to help.