Palisade Research - Thu, Feb 15, 2018

The Soaring U.S. National Debt is Making the Economy Fragile

image of a man sitting on a city park bench  looking at the distant apocalyptic skyline

Hey guys,

I was up all night reading the most boring papers - the congressional spending bill.

I love finance - but that stuff is just a bore.

Yet it's necessary. . .

Two months ago, President Trump pushed through his aggressive Tax Cuts. And conservative estimates state that $1.45 trillion will be added to the US National Debt over the next 10 years.

That's about $150 billion per year added debt.

These tax cuts mean that the US Government will collect less revenue to pay for their increased spending.

This isn't something new, the US has done this every year for decades - borrowed or print the difference.

But the problem is the massive Spending Bill congress just passed.

Annual Budget Deficits are about to soar to levels not seen since the aftermath of the Great Recession in 2008. . .

bar chart shows annual $US deficits in trillions since 2002

Why is this a problem?

Because in mainstream economic theory, when the economy slows down or slides into a recession, things can be done to 'fix' it.

Policy makers can slash interest rates so that consumers refinance their debts and keep buying things - stimulating the economy.

The other thing they will do is cut taxes and increase federal spending. They do this because. . .

  • Lower taxes give every citizen financial relief and more money to spend.

  • Increased Federal Spending gives more money to welfare and public works - example would be massive road paving projects to employ people and pay them.

The problem with this is deficits sky rocket since slashing taxes and raising spending are opposite of each other - you need higher taxes to pay for more spending, right?

That's where the Federal Reserve comes in and the Bond Market - they can borrow or just print money.

This causes interest rates to rise and the currency to weaken because of inflation and solvency worries.

Sound familiar?

That's what's going on today.

Except there is no recession right now.

What's going to happen when a recession does hit - sooner than later - and the Federal Government must borrow more money to fix it?

They're already borrowing at levels not seen since the last recession.

My readers know I have a reoccurring obsession to find the positive optionality in everything.

This means I always look for situations that have theoretically unlimited upside with a fixed/limited downside - this is known as Asymmetric opportunities (high reward with low risk).

It's not common - but there are opportunities that offer this.

Today the Federal Government is busy ramping up their debt load and there isn't any way to pay it back.

This is Okay for the time being, but what happens when a slowdown happens?

They will ultimately have to borrow more.

But will they be able to?

Dan Coats - Director of National Intelligence - just told congress that the U.S.'s national debt "isn't just unsustainable, it puts national security at risk. . ."

"The failure to address our long-term fiscal situation has increased the national debt to over $20 trillion and growing. This situation is unsustainable, as I think we all know, and represents a dire threat to our economic and national security."

He's aware of what will happen if a sudden recession or financial market chaos happens.

Like anyone who has borrowed money - it's an uneasy feeling going to sleep at night knowing you owe mountains of cash to someone else and fear what will happen if you can't pay it back.

Cutting taxes and increasing spending today is making the U.S. vulnerable - fragile.

And as we all know what my approach to investing is. . .

Be Anti-fragile. Not only withstand the sudden volatility or chaos but profit from it.

Over the next week I'll finish my research and have an idea that will be just that. . .

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