The following article is based on our May 26, 2023, Big Picture podcast segment, It All Comes Down to Math – There's No Way Out, with Financial Sense Wealth Management President and Founder Jim Puplava.

In Jens O. Parsson's seminal work, Dying of Money, he provides an insightful, lucid analysis of economic inflation and characterizes it into three phases - the early, later, and terminal stages. Each stage, he explains, has contrasting effects on economic parameters such as government spending, stock markets, prosperity, and price stability. He writes:

“Everyone loves an early inflation. The effects at the beginning of an inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may readily increase the money inflation in order to stave off the later effects, but the later effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and the ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.” –Jens O. Parsson, Dying of Money

Currently, the rate of inflation has receded from its post-pandemic peak of around 9% seen in June 2022 to the latest print of 4.9%. Though this is still a high inflation reading—and well above the 2% level the Federal Reserve is aiming for—the consensus view is that prices are stabilizing and that we are on our way back to normal once again.

Source: U.S. Bureau of Labor Statistics, St. Louis Fred (annotations added by FSWM)

Unfortunately, there's some (exponential) math that just doesn't work out, painting an alternative picture of what we might anticipate for the coming decade.

Firstly, there's the ongoing explosion in US national debt and the soaring interest costs of financing this debt. In light of this situation, Fitch, the international credit rating agency, put the US on watch for a potential debt downgrade. The S&P downgraded the US from its AAA credit rating in 2011 over the last debt ceiling debacle. The US may have dodged a bullet in the recent debt deal, but this is only temporary and, just due to the math alone, a further erosion of the credit worthiness of US debt is likely.

There's really no way out of this, and inflation is going to play a key role for how this plays out.

For example, the fiscal year 2024 saw President Biden’s budget amounting to a hefty $6.9 trillion, potentially inflating government spending to reach 29% of GDP.

In 2022, despite achieving record tax revenues of $5.03 trillion, government spending still outstripped this amount, reaching $6.48 trillion. Consequently, the fiscal deficit expanded to $1.5 trillion, representing a 28.7% increase over revenues. This imbalance primarily derives from the 'Big Three' spending components of 1) Social Security, Medicare, and Medicaid; 2) Defense spending; and 3) Interest costs on US national debt. The last component, shown below, is now the fastest growing of the three.

Source: Board of Governors of the Federal Reserve System (US), St. Louis Fed (annotations added by FSWM)

According to the Congressional Budget Office (CBO), under President Biden's administration, the deficits could surge from $1.5 trillion to a staggering $9.8 trillion within ten years. This trend could add an additional $20 trillion to the national debt, amassing a total of $52 trillion by the end of the decade.

Further exacerbating these issues is the government's strategic missteps with regards to debt management. During periods of low-interest rates, it would have been prudent to lock in rates at these more manageable levels. Instead, the government opted to keep its debt short-term, a decision which is now backfiring as the debt rapidly re-prices at higher interest rates. This problem is magnified by the fact that one-third of the government's total debt will be re-priced in the next 18 months, totaling around $10 trillion.

Keep in mind that we reached an important inflection point during the pandemic-induced lockdowns in 2020 with the US government's massive fiscal spending package of $4.1 trillion causing an acceleration in the already rising debt.

Source: U.S. Department of the Treasury. St Louis Fed (annotations added by FSWM)

Given the above, including a rapidly aging workforce and retiring Baby Boom generation, which will continue to require large amounts of spending, inflation is likely not going to return to normal and may come in waves, reminiscent of the turbulent 1970s.

Considering the potential outlook and the above longer-term trends, it is paramount for individuals and businesses to plan their portfolios carefully. Key strategies we believe investors should consider include preparing for a longer-term period of inflation, investing in short-term, laddered bonds of different maturities instead of simply bond funds and ETFs, and gaining a long-term exposure to precious metals.

Investments in commodities, essential for a decade of scarcity from base metals, oil, and agriculture, and shares in essential companies in the food, drug, and medical sectors may also be considered. Unfortunately, inflation disproportionately impacts the poor and the middle class, leaving them with less money to spend on other things.

These considerations become increasingly important for those retired or nearing retirement, as their cost of living will invariably rise annually. To keep pace with inflation, in addition to the above, we particularly like companies exposed to each of these areas that pay out a stable dividend with a reliable track record of raising their dividend payout over time.

In conclusion, the US economy and the trajectory of US debt are currently on a precarious path. While there are options available, each brings its unique set of challenges and potential pitfalls. As we move forward, careful planning and strategic decision-making will be critical, both on a macroeconomic and personal level, to mitigate the adverse effects of potential economic turbulence. But as it comes down to math - there appears to be no easy way out, which makes proper preparation all the more important when it comes to the way you invest and plan for your future.

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