Recently, analyst Lyn Alden warned that the net increase in U.S. public debt over the next decade could exceed $20 trillion. The current U.S. federal deficit has reached $35.362 trillion, a historic high. Despite politicians' promises to reduce debt, Alden believes that significant deficit reduction is highly unlikely in the context of a potentially recessive global economy.
She pointed out that the Congressional Budget Office's forecasts indicate that structural deficits will remain high for the long term, especially during economic downturns, which will exacerbate the deficit further. Alden further analyzed that the U.S. is entering a "fiscal dominance" period, where the impact of the deficit on the economy and financial markets is unprecedented, and this trend will weaken the central bank's monetary policy independence.
The Five Root Causes of the Debt Problem
Alden listed five factors contributing to the high deficit. Firstly, the aging population accelerating the depletion of Social Security funds, expected to be unable to pay in full by 2035. Secondly, inefficiencies in healthcare spending, with the U.S. healthcare system being high-cost but low-efficiency, becoming a significant drag on the deficit.
The third factor is military spending, with the post-9/11 War on Terror costing $8 trillion, and current annual military expenditures exceeding $800 billion. Fourth is the accumulated debt interest; despite long-term declining interest rates, interest expenses will inevitably increase as debt grows. Finally, tax revenue being tied to stock market performance makes it closely related to market fluctuations, weakening the effectiveness of fiscal austerity.
Investment Strategy Adjustment
In the face of these issues, Alden notes that despite the difficult debt problem, she remains heavily invested in stocks and scarce assets, with a lighter position in bonds. She favors gold and Treasury bills as defensive investments and believes that the inflation-adjusted returns of major U.S. stock indices will remain neutral or even negative in the future.
Additionally, Alden believes that as the Federal Reserve's interest rate cut cycle begins in 2024, international stocks may outperform U.S. stocks, and suggests investors maintain some exposure to international stock markets.
Alden's analysis indicates that the U.S. debt issue is complex and difficult to resolve in the short term, and high deficits will have a profound impact on the future economy and investments. Investors need to adjust their strategies and appropriately allocate defensive assets to cope with potential economic fluctuations and fiscal pressures.
