June 2025 Newsletter: 3 Misconceptions About US Debt

This newsletter analyzes misconceptions about the US federal debt and deficits, arguing that while the debt is a real and growing concern with investment implications, fears of an imminent dollar collapse are overblown. The author contends that the US has significant capacity to absorb money supply growth due to high global dollar demand, and that the debt issue is a slow-motion train wreck rather than an immediate catastrophe; however, the author suggests that the era where deficits matter has begun, and taking them seriously has been a good way to successfully run a portfolio.

Analysis

The US federal debt and deficit situation is presented as a significant, ongoing macroeconomic concern, with current deficits around 7% of GDP, projected to persist. The analysis debunks several common misconceptions: firstly, the notion that the $36 trillion federal debt is merely "owed to ourselves" is refuted by detailing its ownership by specific domestic and international entities (foreign entities hold approximately $9 trillion, the Federal Reserve over $4 trillion), making any default, even selective, highly disruptive and impairing central bank independence or international relations. Secondly, the argument that past unmaterialized warnings about the debt render current concerns moot is countered by highlighting critical structural shifts since the late 2010s, including the end of declining interest rates and peak globalization, which now make deficits more impactful on inflation and asset prices, a view the author supports with a track record of accurate macro predictions since 2019. Thirdly, fears of an imminent dollar collapse are deemed overstated due to the substantial entrenched global demand for dollars, exemplified by $18 trillion in foreign-owed dollar-denominated debt versus a $6 trillion monetary base, suggesting the US financial system can absorb considerable monetary expansion before a true crisis, though this implies a path of gradual debasement rather than acute collapse. The author characterizes the fiscal trajectory as a "long slow motion train wreck," indicating that while not an immediate catastrophe, it is an intractable issue with increasing consequences, necessitating a shift from traditional 60/40 portfolios towards scarce assets, including high-quality equities and potentially Bitcoin, which is seen as having further upside in an environment of expanding credit.

Key Decisions for Investors

• Investors should incorporate the persistence of large US fiscal deficits, currently around 7% of GDP, as a central theme in their investment framework, anticipating sustained inflationary pressures and impacts on relative asset valuations.
• Re-evaluate exposure to long-duration government bonds due to heightened risks of currency debasement and fiscal dominance, and consider increasing allocations to scarce assets such as precious metals, real estate in non-bubbly markets, select high-quality equities, and potentially Bitcoin, as hedges against ongoing monetary expansion.
• While an imminent, catastrophic dollar collapse is not the base case presented due to significant global dollar demand, investors should prepare for potential long-term dollar depreciation and consider strategies for global diversification and holding alternative stores of value.
• Monitor geopolitical factors that could influence foreign demand for US Treasuries and the stability of the sovereign debt market, recognizing that while a broad default is highly improbable, events like the freezing of Russian reserves have set precedents that could affect investor sentiment and capital flows over time.