Government Debt and Your Investments

By Nathan Slaughter

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The United States isn't yet teetering on the brink of insolvency like Greece—but it's not for a lack of trying. In fact, we're on an eerily similar path.

According to the U.S. Treasury, our national debt is currently more than $13 trillion (that's a 13 with 12 zeroes). And that's not even counting unfunded Medicare and social security liabilities. That works out to roughly $118,477 for each and every taxpayer. But this is a clock that never stops ticking.

At the current pace, we are slipping $3.9 billion deeper in the hole every day—$163 million per hour. That means that by the time you finish reading the next paragraph, we'll have saddled our kids and grandkids with another million or two that must be repaid.

The federal government has now run a deficit for 21 consecutive months (the longest stretch of red ink on record). In April, tax receipts totaled $245 billion, but outlays hit $328 billion. That means for every $1 taken in, we spent $1.34. No household could survive long on that reckless budget—but then again, you and I can't print money.

For all of 2010, the deficit is projected to reach $1.5 trillion. That's an insane 780% increase in just three years. As a percentage of GDP, the gap is currently in the double-digits for the first time since World War II. And the combined shortfalls could total $9 trillion in the next decade—ballooning the debt past $20 trillion.

At that point, assuming an average interest rate of 5% (far below what we'd have to pay in a real crisis), interest payments alone would hit $1 trillion per year—leaving very little for anything else.

And forget about the principal. Even if we could pay down the balance at a rate of $10 million per day, it would still take 5,753 years to become debt free. Yet our leaders aren't interested in paying the tab—they're still spending like drunken sailors.

Without a dramatic economic surge to boost revenues, U.S. debt could exceed GDP within the next two or three years. And there's only so much the International Monetary Fund can do (20 cents of every IMF dollar comes from American taxpayers, and we can't bail ourselves out).

As we saw when Greece reached its tipping point, the international community could soon demand much greater incentive to lend us money. This would ravage both the debt and equity markets. And the U.S. dollar (a safe-haven currency under other circumstances) would come under direct fire.

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So where does all this lead?

Influential bond investor Bill Gross believes the United States is locked on a collision course with a “debt super cycle.” And former Fed chief Alan Greenspan is warning of painful double-digit inflation on the horizon.

Just as France deliberately stoked inflation to ease the burden of debts amassed during World War I, the only way the U.S. can make a dent is by diluting the value of a dollar. Leaving interest rates at zero is a good start, and running the printing presses overtime will finish the job.

Make no mistake: This is an indirect form of taxation. Whether the government takes a 25% upfront cut from each dollar of your paycheck, or simply devalues that dollar to the point where it can only buy $0.75 worth of products it could have before, the end result is the same.

Fortunately, there are ways to turn the tables. In fact, certain asset classes don't just protect against inflation, but profit handsomely from it. Here are a few ideas:

1.) Precious metals like gold, silver, and platinum would be a natural beneficiary and a reliable inflation hedge.

2.) Commodities (particularly dollar-denominated ones like crude oil) would likely flourish as the greenback crumbles.

3.) Foreign money markets would generate relatively safe monthly income, and currency appreciation will sweeten returns. I've personally been accumulating a position in the Franklin Hard Currency Fund (ICPHX).

4.) If the U.S. is foundering, then you'll want a portion of your money as far away as possible, like Chile, for example. The expanding South American market would remain buoyant with copper exports and relies on the U.S. for just 15% of its trade.

5.) Further depreciation of the dollar could be a boon for multinationals like Heinz (HNZ) that generate more than half of their sales overseas.

One solution I recommend to readers of my StreetAuthority Market Advisor newsletter is to buy the Jefferies Global Commodity Equity ETF (CRBQ).

Another ETF I've told my readers about is a fund that's basically a "fund-of-funds" built for a single purpose: To keep investors a step ahead of inflation. (Go here to find out more.)

If you think inflation is imminent, start accumulating small positions utilizing the strategies mentioned above.


Nathan Slaughter
Editor, Market Advisor

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