Editor’s note: The U.S. national debt just edged past the $34.5 trillion mark… And at the rate it’s rising, it’ll likely hit $36 trillion by the end of the year.
Meanwhile, it’s taken Congress six months to agree on a budget for fiscal year 2024… And neither side is overly happy with the outcome.
The dust has only just settled and we’re already looking ahead to the next round of the congressional budget battle for 2025. It’s shaping up to be even more exhausting than the last one.
So what does this all mean for your money?
We turned to our resident Fed whisperer, Nomi Prins for some insight into the situation.
She’s an investigative journalist who’s dedicated her research to uncovering how corrupt practices in the banking industry are manipulated to serve an elite few at the expense of many.
And in today’s issue, she digs into the inefficiency of the government’s budgeting process… what makes the U.S. debt situation so sinister… and what you can do about it.
But first, the markets…
Market Data
The S&P 500 closed down 0.2% to end the day at 5,243.77… the NASDAQ added 0.1% to close at 16,396.83.
In commodities, West Texas Intermediate crude oil trades at $83.92, up $2.22 from Tuesday…
Gold is $2,264 per troy ounce, up $72 from Thursday…
And bitcoin is $69,597, up $750 since Thursday.
Congress finally did its job.
After four extensions that spanned six months after the fiscal year was supposed to start on October 1, 2023, Congress passed the current fiscal year 2024 budget.
President Biden signed the resulting $1.2 trillion spending bill this week. Both parties grumbled about what they didn’t get and settled for what they did.
Democrats conceded some minor spending cuts and policy adjustments. House Speaker Mike Johnson faces a motion to vacate after the House returns from its two-week recess.
So, as we move into the November elections, with all the political machinations that entails, the next round of budget and policy battles for fiscal year 2025 will likely be more challenging.
Let me explain why that’s a problem.
The Lack of Government Efficiency and Abundance of Debt
There are some obvious efficiency problems with this process.
First, the four extensions this budget encountered.
Second, the time and taxpayer money this budget navigation soaked up that could have been spent (pun intended) on other matters of national importance.
Third, there will be ongoing arguments over remaining items, such as the Middle East, Ukraine, and Taiwan-related money.
Fourth, the matter of the House speaker deciding whether issues can even come to the floor for a vote or not.
And fifth, interest-on-debt payments are a significant chunk of U.S. spending. These are a noose around finances for any party’s policy initiatives and for any bipartisan ones.
The U.S. national debt just edged past the $34.5 trillion mark. At the rate it’s rising this calendar year (which is half a trillion dollars per quarter), we can expect U.S. debt to hit $36 trillion by the end of the year.
When Congress voted to suspend the debt ceiling last June, U.S. debt stood at $31.4 trillion. Since then, national debt has expanded by $3 trillion.
That means the rate of that increase has dropped from an average $1 trillion per quarter to half a trillion dollars.
It’s similar to the current price inflation. The rate of increase has declined, but the direction remains upward.
Debt payments are getting more expensive – just like your grocery bill, which I discussed last week.
It’s the Debt Interest Payments
Now, debt in itself isn’t the problem. The U.S. has carried debt on its books since the Revolutionary War.
The practice of borrowing from the future to fund present programs or initiatives isn’t the issue either. U.S. debt has financed initiatives from our national highways to oil processing.
The more sinister underlying issue is the magnitude and acceleration of our debt and the ratio of that debt to our GDP. The higher these factors are today, the more they detract from financing future economic growth.
The U.S. has the fifth highest ratio in the world at approximately 124%. This figure is still below the pandemic period historical high of 130%, but it’s trending upwards.
Japan’s debt-to-GDP ratio is a mind-boggling 255%. Greece, Singapore, and Italy’s ratios lie between the Japan and the U.S.
But there is a key difference in debt servicing costs between the U.S. and Japan, though. Japan’s interest rates are effectively zero.
In contrast, U.S. rates have risen since March 2022. That’s when the Fed first began its tightening period. You can see that increase in the chart below…
Since then, the U.S. debt has increased from $24 trillion to $34.5 trillion due to the Fed’s tightening policies that have inflated the cost of servicing that rising debt.
The Congressional Budget Office predicts that the cost of servicing U.S. debt will hit $870 billion by the end of fiscal year 2024.
It also estimates that the grand total of U.S. interest rate payments over will hit $12.4 trillion over the next decade.
Let me put that into context.
U.S. Debt Payments Eclipsing Other Budget Items
The U.S. government is paying more each year to service its debt than on the $822 billion defense budget.
The amount the government forks out in interest payments each year is also fast approaching the amount it spends for Medicare.
Let’s say the Fed does begin to cut interest rates at its summer FOMC meeting (a cut that will likely be no more than 0.25%). And then it cuts rates by another 0.5% before year-end.
Even then, that will not move the needle on debt servicing costs that are already in play for existing debt.
The high amount and high cost of service debt prompted Fitch, the rating agency, to downgrade the rating on U.S. debt last year. It downgraded it to AA+ from AAA.
In general, when credit ratings are lowered, it means the borrower (in this case, the U.S.) might have to pay more in interest to borrow that money.
Now, I don’t believe the U.S. will default on its debt. But I do believe that the cost of this debt will remain a prominent piece of U.S. spending, no matter who is sitting in the White House.
Plus, no matter what happens with other inflation figures, like core-PCE, which I discussed here recently, the inflation of our federal debt and interest on our debt will continue to grow.
And that’s why I recommend that you protect your money in two ways.
First, don’t be like the U.S. government. Consider reducing any of your highest-interest rate credit card or loan balances. Even small adjustments to your balance can reduce the total amount of interest you are paying overtime on your debt.
Second, invest in “real” assets. As the size of U.S. debt and debt payments inflates, some of that borrowed money will be used to build things like chip maker factories, defense systems, and the power grid.
That’s why it makes sense to invest in the assets that are used to build them – such as copper, aluminum, and steel. Such materials can protect and grow your money in an environment where the ratio of debt to GDP increases.
One great way to position yourself in real assets is to buy the Invesco DB Base Metals Fund (DBB). It captures a basket of those commodities.
Regards,
Nomi Prins
Editor, Inside Wall Street with Nomi Prins
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