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June 20, 2025

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.

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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.  

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.

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%.

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.

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.

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