Investment Contrarians

U.S. National Debt to Surpass GDP for Third Year in a Row

By for Investment Contrarians |

National DebtThe more I look at the size of the national debt, the more I get squeamish. With the national debt at $16.7 trillion and growing, something needs to be done, as the Federal Reserve continues to print money, creating the artificial economy that is making people think America is faring well and forgetting about the national debt.

The sequestration program will help, but will it hold as the two parties continue to argue about where the cuts should be from and alternative revenue sources? Budget cuts due to the sequestration are already at $17.2 billion and running (source: U.S. Debt Clock web site, last accessed March 14, 2013), but as I have said on numerous occasions, $85.0 billion a year will likely do very little to tackle the mounting national debt. Just the interest on the national debt is already around $223 billion, so the national debt will continue to expand in spite of the sequestration cuts. I wonder if the government gets it. You have $17.2 billion in cuts as of March 14, but $223 billion in interest costs. Something just doesn’t add up here.

The U.S. national debt as a percentage of the country’s gross domestic product (GDP) stood at 102.9% in 2011. (Source: “List of Countries by Public Debt,” Wikipedia, last accessed March 15, 2013.) This was just below the massive 208.2% in Japan and the 160.8% in Greece, according to the International Monetary Fund (IMF).

Translation: America is in a financial mess, and it will not be easy to get out of it.

And despite the national debt burden, the Federal Reserve has its hands tied. There is a need to cut the national debt and the free flow of easy money, but at the same time, with the jobs market still in a fragile state and the economy recovering at a snail’s pace, a stoppage to the easy money could be a problem to the economy.

Nobel Prize economist Paul Krugman was opposed to the spending cuts due to their negative impact on the economy. (Source: Blodget, H., “Krugman: Yes, We Have To Fix The Deficit Eventually–But Not Now,” The Daily Ticker, January 29, 2013, last accessed March 15, 2013.) While I agree with Krugman to some degree and understand that the impact of spending cuts on the country’s economic recovery must be evaluated carefully so as not to stall it, I also believe there must be something done with the massive debt levels and deficit.

So here we are, nearly $16.7 trillion in debt and with very little financial flexibility to do things to steer the country straight, the risk will continue to be high.

Do too little, and the debt and deficit will grow even more out of control. Do too much, and the economy will likely stall at this sensitive stage of the economic recovery.

The only plus here is the country’s low bond yields; albeit, a credit rating cut will not help. If the U.S. had to pay out high yields similar to those of Spain or Italy, the U.S. would be broke, given its massive interest payments on its national debt.

With the possibility of further financial distress for America down the road, you will need to be proactive and look for ways to help shelter your investments. My favorite holdings in case the U.S. falters include: gold and silver, dividend-paying blue-chip stocks, T-bills, and “AAA”-rated bonds from America’s top companies.

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  • Royalty

    This is kinda over my head. But it is well-written nonetheless. This number is obviously out of control. Let's just blame the IT people and software glitches.