America's Debt Story: Why Higher Stock Prices Are Likely

U.S.'s Debt/GDP %


If we look at the U.S.'s debt to GDP ratio, the image is eerily similar to Japan. The U.S. seems to be around where Japan was in early 2000 relative to its debt to GDP ratio. Also, like in Japan, we can expect the debt to GDP ratio to continue to increase. The U.S. has a remarkably high Federal budget deficit of over $3 trillion ($3.6 trillion, actual). Now, we can expect the deficit to remain relatively high (over $1 trillion) in future years regardless of government fiscal policy. Therefore, the debt to GDP ratio is very likely going to continue to rise.

Fed Funds Rate


The Fed funds rate has been at 0-0.25% for most of the last 12-year period. We see a brief attempt to bring rates modestly higher in the 2016-2020 time frame. However, this attempt failed, as the economy started to show clear signs of strain in a slightly higher interest rate environment.

U.S. 10-Year Treasury


Back in the 1980s, when the U.S. debt was at around 35% of GDP, the economy could withstand substantially higher interest rates. However, we see a clear trend here. As the U.S. debt perpetually increases, the 10-year Treasury and other interest rates head lower and lower.


So, there is a clear correlation here. Due to enormous public and general debt obligations, the economy needs ultra-low rates to expand.

How to Prevent a Disaster?

Just look at Japan; the answer is ultra-easy monetary policy. First and foremost, low and eventually negative rates. Japan's central bank took its benchmark rate negative after zero was not enough to service its debt and produce growth. The U.S. is likely heading in the same direction. After all, like any other debt, the Federal debt needs to be serviced. The debt is mainly composed of 5, 10, and 30-year Treasuries. Thus, the lower the Treasury yield, the easier it is to service the public debt. In fact, it is preferable to have the 10-year and other Treasuries as close as possible to zero, or even negative. Therefore, regardless of inflation, we are likely looking at an ultra-easy environment for longer in the U.S. The Fed can attempt to elevate rates modestly from here, but tightening comes with the added risks of throwing the economy into a tailspin and making the debt burden unmanageable.

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Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss ...

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