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| | | | Elon’s Fury: The Investment Implications of America’s Ever-growing Debt |
| | If this continues, America goes de facto bankrupt and all tax revenue will go to paying interest on the national debt with nothing left for anything else. - Elon Musk (6/16/2025) |
| | Debt and relationship troubles, very sadly, go hand in hand. Few things are as damaging to a relationship as financial challenges and disagreements.
Many relationship problems are emotional or psychological. A couple can often address these issues by changing their behavior or talking it out.
Financial issues are entirely different. The main problem with having a lot of debt is that debt really doesn’t care about your feelings.
No marriage counselor can make your credit card balance disappear. With many reportedly charging hundreds of dollars per hour, one might only make it worse.
Debt not only doesn’t go away on its own… it grows.
If compound interest on your savings is the key to achieving long-term wealth, compound interest on debt is the path to financial annihilation.
Although there have been some very promising signs of reconciliation lately, debt seems to have claimed yet another once close relationship in recent weeks.
The MAGA movement has been rocked by the very public divorce between Donald Trump and Elon Musk, who was until recently among Trump’s closest advisors and biggest supporters.
Of course, the marriage between Trump and Musk was political, and both men remain billionaires. And the debt, which is closing in on $37 trillion, belongs to the U.S. government, not either of them personally.
But the harsh reality of America’s grim fiscal outlook appears to be the reason the two men have parted ways.
Relationships hit rock bottom when solutions to problems cannot be found.
The disturbing truth, which the Trump/Musk dust-up is arguably signaling, is that there may indeed be no good solution to America’s debt problem.
Investors need to be prepared for a wide range of outcomes as the U.S. federal government grapples with its vast liabilities.
For many investors, this might require a reconsideration of basic risk management concepts.
Cash no longer king
Most people think of volatile assets, like stocks, as adding risk to their portfolio. If you took finance classes in college or business school, this is what you were taught.
In standard frameworks, U.S. Treasuries are considered the “risk-free” asset.
Other securities, like stocks or corporate bonds, require higher rates of return relative to Treasuries because they are more volatile and involve greater risk of default or insolvency.
Traditional academic finance teaches us that if you want to de-risk a portfolio, you move to cash or cash equivalents, like Treasury bills or bonds.
This approach works in an environment of monetary stability, like the U.S. has seen for most of the last 50 years. It fails when the monetary system becomes unstable.
After many decades of falling interest rates and low inflation, investors got a sense in recent years of just how risky the “risk-free” asset can be. Massive fiscal and monetary stimulus post-Covid led to surging inflation and a step-up in long-term interest rates.
Assets connected to the real economy, like stocks and gold, appreciated significantly, while long-term bonds suffered as interest rates rose.
Over the past five years, long-term government bonds, as reflected in the performance of the iShares 20+ Year Treasury Bond ETF (TLT), delivered a severely negative total return approaching -40%. Meanwhile, the S&P 500 and gold approximately doubled. |
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| Long-Term Treasuries vs. S&P 500, Gold(Total Return - Last 5 Years) |
| The value destruction in bonds is even more appalling if you consider the impact of inflation on real purchasing power.
Using government Consumer Price Index (CPI) statistics as a reference, a basket of goods in U.S. dollars has become 25% more expensive over the past five years. |
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| Consumer Price Index (CPI)(Last 5 Years) |
| | Even if a “risk averse'“ investor had all his money in bank accounts or very short-dated Treasuries, and therefore was not affected by the impact of rising long-term rates on bond prices, the value of his savings likely declined in real terms.
It is important to understand, amidst all this value destruction, at no point did the U.S. government or major banks fail to make agreed upon interest payments. The value destruction came silently through rising interest rates and inflation.
Investors who had exposure to assets like stocks and gold, by contrast, saw substantial improvement in the value of their savings in real terms.
Just an anomaly?
One could argue that Covid was just a one-time “black swan” event and therefore conditions should now normalize.
As part of its strategy to control the spread of the virus, the government shut the economy down. In order to prevent economic collapse, since bills still needed to be paid, vast quantities of money were injected into the economy.
This occurred through direct cash payments to citizens, funded by government borrowing, and the extension of credit at near-zero interest rates to households and businesses.
The idea that the Covid inflation was just a one-time thing has some some merit. The events of 2020 were indeed extraordinary and are unlikely to be repeated anytime soon.
The government needed to “paper over” the lost economic output that took place during the pandemic. People who had their money in cash (bank accounts) and bonds unfortunately got diluted.
If you owned assets, especially if they were leveraged, you were likely protected by rising prices.
But if you owned cash and bonds, you sustained a hit. You never agreed to it, but you basically paid for the lockdowns.
Lingering debts
The problem is that pandemic policies also left the U.S. government with an immense debt burden that, just like an irresponsible husband or wife’s credit card balance, will not just go away on its own.
After the Global Financial Crisis of 2008-2009, government deficit spending took U.S. public debt as a percentage of Gross Domestic Product (GDP) from roughly 60% to 100%.
Following the pandemic in 2020, debt-to-GDP jumped again, rising from approximately 100% to 120%. |
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| Public Debt as % of GDP(Last 50 Years) |
| Persistently low rates of inflation after the financial crisis were in part of a function of immense excess capacity in the housing sector and other areas of the economy.
Low inflation allowed the Fed to keep interest rates low as the debt level rose.
Low interest rates in turn kept the servicing cost of the debt—the amount the federal government had to pay as interest to bondholders—at manageable levels.
The problem this time around is that inflation has not been persistently low.
To the contrary, Covid-era policies pushed inflation rates up well beyond acceptable levels. This forced the Fed to raise interest rates to cool down the economy.
Although inflation is now moderating and interest rates have begun to decline from peak levels, both short-term and long-term interest rates are still substantially higher than they were pre-Covid.
As a result, we now have significantly higher interest rates on significantly greater debt levels. The upshot is significantly higher interest payments that the federal government must now make. |
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| Federal Gov’t Interest Payments(Last 50 Years) |
| Interest payments have approximately doubled from pre-Covid levels and now exceed $1 trillion, which is larger than the defense budget. Credible estimates over the next ten years point to interest expense levels that will exceed $2 trillion per year.
Musk splits with Trump over BBB
The multi-decade build-up in federal debt is essential for understanding why the Musk/Trump relationship went south.
After winding down his involvement at the Department of Government Efficiency (DOGE), Elon Musk publicly attacked Trump in a shockingly harsh fashion.
The catalyst for the attack was Musk’s objection to the One Big Beautiful Bill Act, Trump’s signature tax and spending legislation.
The Big Beautiful Bill, also known as the BBB, is a high priority for President Trump as it advances many key features of his broader economic and political agenda.
Perhaps most importantly, it makes permanent the key provisions of the Tax Cuts and Jobs Act, passed in his first term.
If the BBB does not pass, tax rates could revert to much higher levels, threatening economic growth. The bill also provides significant resources for border control and defense.
The bill does cut spending in many areas, such as Medicaid, food stamps, tax credits, student loans and green energy subsidies. The White House asserts that these cuts total $1.7 trillion over 10 years.
But Elon was hoping for deeper cuts.
He was also against the President’s decision to scrap the debt ceiling mechanism, which Trump views as dangerous because it creates the potentially catastrophic risk of default. |
| | I’m sorry, but I just can’t stand it anymore. This massive, outrageous, pork-filled Congressional spending bill is a disgusting abomination. Shame on those who voted for it: you know you did wrong. You know it. - Elon Musk (6/3/2025) |
| | Battle over CBO scoring
The Congressional Budget Office (CBO) claimed the BBB would add some $3 trillion to the national debt over the next 10 years. This is comprised of some $2.4 trillion in primary deficits (excluding interest costs) and around $600 billion of incremental interest costs.
The White House has pushed back on much of this accounting.
One of the main controversies is around the impact of tax cuts on growth rates. If the economy grows faster than CBO assumes as a result of lower tax rates, tax revenue will be higher, and the deficits will be lower.
The CBO also ignored potential revenue associated with tariffs.
Importantly, the bill, as a matter of law, only addresses mandatory spending. Discretionary spending must be handled through appropriations legislation.
Notwithstanding Trump administration objections to CBO’s math, the CBO stated that the bill would only make the long-term fiscal picture worse. |
| | [T]he agency estimates that debt held by the public at the end of 2034 would increase from CBO's January 2025 baseline projection of 117.1 percent to 123.8 percent of gross domestic product. - Congressional Budget Office (6/5/2025) |
| | Practical realities
Musk wanted to see sharp cuts to mandatory spending programs that would put the U.S. on a clear path towards debt reduction, at least as a percentage of GDP.
But Trump is the President, and he must be pragmatic.
Republicans have a bare majority in the House of Representatives. Trump’s top priority appears to have been to get a bill passed that preserved his prior administration’s tax cuts.
It is possible that there were elements that made their way into the bill just to get support from certain members of Congress.
There are also areas where Republicans have little room to maneuver without alienating large swaths of voters. Voters who receive entitlements generally do not want to hear about reductions (or frankly any modifications) to their entitlements.
Defense is also an area where the federal government cannot cut back without consequences.
The U.S. faces a formidable adversary in China. Meanwhile, there are hot wars underway in Eastern Europe and the Middle East, and other potential conflicts around the world.
Efficiency within the defense department budget is a noble goal, but national security cannot be compromised.
Elon’s rage
Elon’s bitter disappointment with BBB likely builds upon his sense of frustration with DOGE.
He initially wanted $2 trillion in savings from DOGE, then scaled it back to $1 trillion, and ultimately delivered $150 billion at best (with some observers claiming it is more like $60 billion).
Our area of specialization is investments, not psychotherapy, but it does not require a Ph.D. to understand some basic facts of human psychology.
People who experience failure and hopelessness often lash out at others, even (or especially) those whom they love the most. |
| | I love @realDonaldTrump as much as a straight man can love another man. - Elon Musk (2/7/2025) |
| | Elon seems to be emotionally processing, in a very public way, a disturbing realization. Political dynamics make it basically impossible to achieve spending cuts that will bring the deficit and debt to sustainable levels.
Implications for investors
Elon may just now be emerging from the second stage of grief—anger. As investors, we should fast forward to the final stage—acceptance.
Interest rate hikes are the primary tool that our government uses to bring inflation under control. By suppressing private borrowing, higher rates depress economic activity and reduce demand for goods and services, which helps bring down prices.
When debt-to-GDP is relatively low, rising interest rates have a muted impact on federal spending. Now that debt-to-GDP levels are about twice as high as they were fifteen to twenty years ago, it is a different story.
When Fed Chair Paul Volcker jacked up interest rates to tame inflation in the early 1980s, for example, debt-to-GDP was close to 30%, about one-fourth of current levels.
The problem now is that the federal government cannot afford high interest rates. The higher rates go, the greater the interest payments, the larger the deficits.
This condition, known as fiscal dominance, suggests the Fed will have to maintain interest rates over time at lower levels than it otherwise might to keep inflation in check.
The Fed may also have to engage in Quantitative Easing (QE) and other strategies that produce growth in the money supply and the credit system.
If private investors push long-term interest rates to unaffordable levels—and we do not appear far away from that—the Fed will have to consider QE, i.e. printing money to purchase long-term bonds.
The alternative is a government that cannot afford to finance its own activities, which is a fundamentally impossible scenario for the Fed to allow.
Feed the rich
The Fed also needs to make sure there is a constant and growing stream of liquidity within the economy because our federal government essentially relies on asset price inflation.
Despite rhetoric around the need for the rich to “pay their share fair,” the tax code is in fact extremely progressive. The top 10% of taxpayers are responsible for more than 70% of all tax receipts. The bottom 50% pay only 3%. |
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| Distribution of Federal Income Taxes Paid in 2022 |
| The notion that the system is rigged so that the rich always get richer has some basis in the methods by which our government actually raises revenue.
Ironically, by leaning so heavily into the rich as the primary source of all tax revenues, our system becomes increasingly reliant on the rich getting richer every year.
The income generated by most of the U.S. population comes from wages.
If one thinks of the U.S. government as if it were a business, what happens to the wages of the bottom half of the population is almost irrelevant. They barely pay taxes.
Meanwhile, the income generated by the top 10% of the population is extremely important. These are the government’s “best customers.”
When it comes to the top 10%, a very large portion of their taxable income comes from business and investment income, which fundamentally relies on rising asset prices.
To the extent the taxable income of the top 10% is based on the wages of the most highly paid professionals in the economy, these are also often tied to rising asset prices, like an investment banker or tech CEO’s bonus.
A system that primarily taxes the rich, and has enormous and growing fixed liabilities to service, can only function if there are rich people to tax and they continue to do well.
The Fed therefore has yet another motivation to pursue policies that inflate asset prices. Our highly levered government, along with our highly levered private sector, needs asset price growth to stay afloat.
What to own
The Bitcoin community has popularized a comment made by Michael Saylor in a televised interview. It has become a meme and even been turned into a (rather catchy) song. |
| | People who use fiat currency as a store of value… there’s a name for them. We call them poor. - Michael Saylor, Executive Chairman of Strategy (MSTR) |
| | The comment may sound arrogant and obnoxious, especially coming from a billionaire (albeit a self-made one who was the son of an Air Force pilot and grew up in very modest circumstances in rural Ohio). But it contains a lot of truth.
Saylor’s main point is that Bitcoin is preferable to U.S. dollar-denominated investments, whether cash in bank accounts or Treasuries, because it will not get diluted into oblivion over time by Fed money printing. The supply of Bitcoin is capped.
But his logic can extend further than Bitcoin.
People with limited assets keep a disproportionate amount of whatever savings they have in bank accounts (or even shoeboxes of paper bills under their beds). It is actually somewhat rational to do this.
If you have a small amount of money that you need to survive, you cannot necessarily tie it up in volatile investments that may even fail. You need the stability of principal.
The more money you have, the more risk you can actually take.
A prudent individual will likely always keep some cash in the bank, money market funds or government bonds, for the proverbial rainy day.
But as one’s assets grow, a smaller percentage of one’s savings needs to be allocated to highly secure investments that are earmarked for immediate survival purposes.
As an individual’s savings grows relative to spending needs, one has more flexibility to invest in more volatile, higher risk and higher returning asset classes.
So using fiat currency as a store of value, as Saylor put it, makes some sense if you are in fact poor.
But if one does not want to stay poor or become poor, one needs to consider allocating whatever savings one has into higher potential investments that offer protection from future monetary debasement.
America will be fine (but the U.S. dollar may worth much less)
The United States today is the wealthiest and most technologically advanced nation in human history. But the government of the United States does have a lot of debt.
The good news is, this debt is largely owned by Americans themselves. Only about one-fourth of the federal debt is owned by foreigners.
On top of this, the debt is fully payable in money that the government itself creates. It is not redeemable for gold, as it was prior to 1971, or any other asset.
Elon Musk is a complex individual with many extraordinary talents that have made him the wealthiest human being on the planet by a wide margin. One of these talents is the ability to peer into the future.
Elon has seen the handwriting on the wall. His outrage at the BBB reflects his recognition that the U.S. is not realistically going to get its debt situation under control through fiscal efforts.
So it will have to be addressed through monetary policy.
The growth solution
As spending cuts have started to appear more and more unattainable, the rhetoric has shifted towards economic growth.
Just as an individual with a lot of credit card debt can solve the problem by getting a higher paying job, the federal government can generate more revenue if the economy grows faster.
Tax cuts and deregulation have the potential to lift growth rates, which would create more wealth and generate more taxable income. |
| | We can both grow the economy and control the debt. What is important is that the economy grows faster than the debt. If we change the growth trajectory of the country, of the economy, then we will stabilize our finances and grow our way out of this. - Treasury Secretary Scott Bessent (5/23/2025) |
| | There are two types of growth.
Real growth comes from productivity improvements, often driven by technological innovation and process enhancements.
In our view, the AI revolution has tremendous potential to deliver productivity gains, as we discussed back in October in Positioning for a Productivity Bonanza.
Nominal growth is driven by both real growth and inflation-related growth that results from more money in circulation.
Stocks as an inflation hedge
Whether the U.S. grows in real terms or nominal terms, high-quality stocks should benefit. Real is preferable, but nominal works, too.
In the five year period ending December 2024 and beginning in December 2019, just prior to the pandemic, S&P 500 earnings per share grew approximately 53%.
The cumulative inflation rate over that same period, based on CPI, was approximately 23%.
Inflation represented nearly half the earnings growth of the S&P 500 over this period, but investors in stocks at least got the benefit of it.
In the prior five year period ending December 2019 and beginning in December 2014, S&P 500 earnings per share grew approximately 34%. The CPI Index grew approximately 9%.
In both of these five year periods, real earnings grew at mid-single digit rates annually, while inflation got passed through.
If easy monetary policy is how the U.S. government will ultimately pay its bills, corporate earnings and shareholders will benefit.
Gold and Bitcoin for extra protection
Owners of gold and Bitcoin should also benefit. In a world of sustained monetary creation, investors will naturally gravitate to supply-constrained monetary alternatives.
Gold is the original non-fiat currency.
Against the backdrop of a U.S. government that cannot restrain spending and that may even rely on the Federal Reserve’s printing press to meet its obligations, gold should continue to see sustained demand.
U.S. fiscal challenges are just one of many factors driving central banks around the world to de-dollarize by allocating to gold rather than Treasuries, as we described in Understanding the Gold Price.
Likewise, there are multiple planks to the Bitcoin investment case. Never-ending fiat money printing is perhaps the most important.
Bitcoin does not just benefit from more dollars in circulation chasing an essentially fixed supply of Bitcoin. It also benefits from rapidly growing global adoption as trust is lost in fiat money, which we recently addressed in Can Bitcoin Be Stopped?.
Along with stocks and gold, investors concerned about the U.S. debt trajectory should give serious consideration to establishing a material Bitcoin allocation, if they have not already.
Meanwhile, think twice about what it means to “play it safe” with money in bank accounts and bonds. These are investments that are linked only to the promise of being paid more U.S. dollars in the future—with no claim to any physical or digital asset or vital business enterprise. |
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