Debt is the problem

The fog of war is starting to clear - President-to-be Donald Trump's senior appointments are becoming known and, as expected, they are sharply dividing opinion. Astonishingly the topic of America's national debt hasn't surfaced, and didn't during the recent Republican-Democrat face off.

For although America's national debt is huge - $36 trillion (more than £28 trillion) - it doesn't yet pose a serious problem. Debt is less risky if it is in the nation's own currency, as all US debt is, and if there is strong demand for the country's bonds, which currently is the case for those of the US. It will become a serious problem if the debt grows faster than the US can afford the interest payments. America's mammoth debt costs some $3 billion per day in interest payments, more than it spends on defense. The US, like any debt-laden country (or person) needs to ensure its income grows at a faster rate than do its debts.

With the incoming President this is not a certainty; the risk of America defaulting on its debts is small right now, but will grow in the 47th Presidency. Perception of heightened risk will damage America's economy (bond-buyers will start to demand higher interest payments) and threaten the US Dollar's status as the world's reserve currency. The Dollar's humiliation would have many unpleasant consequences, but for us the most consequential is the lack of any automatic replacement, and the probability that gold would be promoted to fill the gap.

The European disease

Politicians everywhere call for greater economic growth yet very rarely do they take action to bring that about. In the European Union economic stagnation has barely lifted since the 4% drop in the EU's gross domestic product (GDP) in 2009. This year the bloc's overall GDP is likely to grow by less than 1%. The UK's economic growth is barely noticeable - just 0.1% in the third quarter of this year. Unlike the US, where consumer spending has helped deliver a post-Covid economic rebound, European consumers, shocked by the recent high inflation and war scares are hoarding cash at a higher rate than before the pandemic. The divergence between America's high spenders and Europe's more parsimonious tribes is not surprising - war is literally closer to Europeans than it is to Americans. American consumer spending has so far helped bat away the European disease - the US economy grew by 2.7% in the third quarter of this year, and many economists predict it will continue growing at around 2.5%/year.

That's good news for Americans. But inflation persists at a higher level than the US Federal Reserve aims for - 2%/year ; in the US the core consumer price index (CPI) in October actually rose (for the third successive month) to an annualized 3.3%. In the UK too inflation is proving hard to wrestle into place. The recent optimism that interest rates (and thus mortgage rates) might continue to be cut is petering out, as inflation is proving stickier. If the past is any guide to the future, the next US President will oversee much higher debt levels and inflationary policies. In his previous term in office Donald Trump approved $8.4 trillion (£6.64 trillion) in new borrowing, compared with $4.3 trillion (£3.4 trillion) under President Biden.

America's 12 month rolling fiscal deficit in October was $2 trillion. That deficit will widen with the next President. The US non-profit Committee for a Responsible Budget (CRFB) warned in June this year that during the next presidential term "the national debt is projected to reach a record share of the economy, interest costs are slated to surge, the debt limit will re-emerge, discretionary spending caps and major tax cuts are scheduled to expire, and major trust funds will be hurtling toward insolvency." This warning appears to have fallen on stony ground.

Tariff wars, promised tax cuts, inevitable higher spending on various welfare programs, are all bound to widen the deficit, add to the national debt, and - sooner or later - scare investors. It's not necessary for the US to default on its debt for global bond markets to ring the alarm bells - just the appearance of the climbing debt having no solution would spark panic. The US Constitution in any case seems to outlaw a default on government debt. Trump has said he will not alter Social Security, Medicare or Defense spending. Keeping abreast of the numbers is virtually impossible because the US federal government accounting is so complex. Little has improved since former Defense Secretary Donald Rumsfeld said in 2001 that the Pentagon could not track $2.3 trillion (almost £2 trillion) of spending.

Donald Trump needs to get a grip of the US debt. He has called himself the "king of debt". But so far all that most of his pledges will bring about is a weakening Dollar and a perception that trust in American debt and its currency is misplaced. That will fuel US inflation, forcing the Fed to raise interest rates, with rocketing debt interest payments. The quick recovery in the gold price after it briefly dropped after the Presidential election shows how jittery investors are. A year from now today's gold price will seem a bargain.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.