America’s national debt is spiraling out of control. It’s at $34.4T right now and is increasing at a rate of $2T per year. Today I am going to prognosticate what will likely happen and what it will mean for us investors.

To make the projection, I will  assume things will stay largely as they are:

1. Inflation around 4%
2. Interest rate about 5%
3. Budge deficit around at $2T

At this rate, in five years, the total federal debt will be over $44T. At an average interest rate of 5%, the total interest payments in the federal budget will be $2.2T. In 2023, the total federal tax revenue came at only $4.6T. In other words, in five years or so, the interest payments alone will amount to nearly half of the federal tax revenue. 

With a budgetary shortfall at that level, there will be no other option but to “print’ more dollars. Today I will not discuss the mechanism of printing money. Suffice to say that printing money will lead to inflation and inflation necessitates that the Fed keeps the Fed fund rate high. 

This is great news for savers and retirees who have a good amount of money put aside. Once they earned 0.5% for their money, now they can earn 5% and even more. 

It’s a mixed prognosis for stock investors, however. On the positive side, some parts of the economy will definitely get a boost from government deficit spending. On the negative side, with higher interest rates, it’s much more costly to finance a project. 

Compared to say two years ago, I think it makes sense to tilt the portfolio a bit toward bonds, especially short-term bonds. 

The most important lesson I want to convey is that bad news for the federal budget does not have to mean bad news for your budget. If you keep your financial house in good order and if you save diligently, you might actually benefit from the debt spiral!

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