How To Prepare For The Dire Consequences Of U.S. Debt

Originally written by Marc Emmer for Forbes .

The U.S. economy has weathered the storm of the pandemic in part because of the swift and steady hand of the Federal Reserve. But in a world with escalating volatility and emerging risks including extreme weather events, cyberattacks and competition with countries like China, the Fed may not have the same ammunition for the next black swan event.

History is riddled with empires and nations that have expanded and contracted credit. These cycles have directly led to the rise and fall of economies — sometimes in productive ways, and other times through war or political unrest.?

The Fed has?announced ?its intentions to pass on three interest rate hikes next year and dramatically scale back its bond-buying program. This is what the Fed’s monetary policy is designed to do: Provide liquidity when the economy is teetering, and cool things off when inflation emerges. But, we are becoming conditioned to accept interest rates that are artificially low.?

To give context, before the dot-com crash, the federal funds rate normalized around 5%. As of December, it was hovering at a historically low 0.25%.?The 10 Year Treasury ?has been trading at around 1.7%.?

These conditions could directly affect businesses if they lead to the eventual devaluation of the U.S. dollar and higher inflation; due to this, there are certain things that should be on your radar heading into the future.?

The Cost of Money

I see the Fed moving into uncharted territory, where many of its tools may be ineffective in the years ahead. According to the Congressional Budget Office, the U.S. debt will be?$27 trillion by 2025 , and the debt-to-GDP ratio will swell to over 109%, or over $225,000 per?household .

The U.S. has had the luxury of piling on debt because of a theory known as?the debt overhang . The debt overhang presumes that if the economy is growing at a fast enough rate, tax receipts will outpace the government’s borrowing costs. However, as the U.S. continues to?add debt , it will have to pay higher interest rates, as investors migrate to debt that is perceived as less risky. China, for example, has a?debt-to-GDP? ratio of 67. During the pandemic, industrialized nations with the highest debt loads such as Japan, Italy and Greece were among?the worst-performing nations .

Far more troubling is where our country seems to be?heading be in 10 years . Before the pandemic began, U.S. government projections called for all U.S. tax revenues to be consumed entirely by entitlements and interest?by roughly 2031 . That was before the massive Covid stimulus, the infrastructure investment bill and any additional social programs the current administration may pass. In other words, the timetable for the U.S. to run out of money has accelerated.

The Medicare Part A trust fund is predicted to run out of money?by 2026 , and a report says the social security reserve will be depleted?by 2034 . Many state, local and private pensions are also underfunded.

Over the next decade, incoming tax receipts may only be sufficient to cover things like social security, Medicare, veterans’ benefits and other miscellaneous entitlements and interest payments. All discretionary spending, including military spending, will be deficit spending.?

Potential Ramifications Of Debt

The U.S. will have the following options available.

• Default on its bonds.
• Massive tax increases.
• Print more money.
• Cut all federal programs other than social security, Medicare, veterans’ benefits and interest.
• Cut military spending.
• Sell land, gold or mining rights.

I see all of these as poor choices. Social security is considered the third rail of politics. Efforts to arrest Medicare inflation have only been marginally successful. Selling mineral rights during a time of greater climate change awareness would not be popular. Selling gold would be very destabilizing.

Recent proposals by this administration have focused on elevating taxes for those making?more than $400,000 per year , which represents the top 1.8% of wage earners. Many believe this will not be sufficient to pay down the existing and resulting debt.

There are potentially a lot of challenges ahead of us in this regard. The most likely scenario is that the government will continue to do what it has historically done and is doing now — print more money.

If this happens and deficits mount, the most likely outcomes are devaluation of the U.S. dollar, much higher interest rates and possibly hyperinflation. Based on these possible outcomes, business leaders should prepare.?

What Business Owners Should Be Thinking About

• Purchasing currency hedges and other instruments that protect against dollar devaluations (versus other currencies).
• Securing long-term debt at low rates.
• Reevaluating their import versus export strategy-potentially limiting exposure to imports.?
• Protecting against inflation in hard assets such as gold and commodities (Note: We are not investment professionals and do not dispense investment advice.).
• Maintaining awareness of emerging blockchain and crypto technologies that will disrupt the banking system and become harbors of value.
• Minimizing holding cash that is depreciating in value during periods of inflation.
• Resetting expectations on enterprise valuations and their ambition to exit in the years ahead.

The import and export strategies you choose will depend on your industry, your percentage of imports, etc.

There may be some difficult days ahead; now would be the time to recalibrate where and how you store value.

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The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.