The US Debt Bubble And Rising Inflation: Is it Time to Diversify Your Portfolio?

Published on 26th May 2022

The US national debt has ballooned to historic levels, currently exceeding $30 trillion. In just the last 14 months, the debt has jumped by about $5 trillion causing an inflationary event. According to the estimates published by USDebtClock.org, by 2029 the national debt would be nearing $90 trillion if the US continues to borrow and “print” money.

While the propensity to spend borrowed money has been rising for years, it reached unprecedented levels in 2021 via the Covid-19 or Wuhan virus pandemic spending, controversial infrastructure bill, and so on when national expenditures in the US exceeded national receipts by a whopping 90% or more. 

The government distributed approximately $6 trillion to counter the economic effects of Covid-triggered lockdowns and supply chain disruptions. Much of this so-called “helicopter money” eventually landed in the stock market, crypto assets, and real estate, fueling a financial market bubble that seemed like it would last forever (just like all bubbles do until they don’t.) 

The Rising Risks of Untamed Inflation 

While the US and much of the rest of the world leveraged heavily into the future to maintain today’s economic buoyancy, inflation has finally crept in to play the spoilsport as already mentioned. For an entire year, the central banks in the US, Europe and elsewhere were in denial and brushed off the rising inflation as “transitory” (which would somehow disappear on its own – we all remember Jerome Powell saying this.) Though many knew that this inflation event was not going to be transitory.

However, that is no longer the case, as the beleaguered US Fed officially retired the word “transitory” and accepted that the danger of inflation was real and urgent. In March 2022, the US Bureau of Labor Statistics (BLS) reported that the inflation rate was 8.5% – the highest since 1981 before lower taxes and Reaganomics made the 80s rock. 

Many economists even question these figures because, at the ground level, the average American consumer is experiencing significantly higher price hikes in food, gas, and housing, among other things. 

Russia’s war on Ukraine has only compounded the inflationary sentiment, considering that both these countries are the world’s leading producers of food grains, and Russia is a globally strategic energy exporter, but these are not the reasons as high gas prices and inflation reared their ugly head long before Russia invaded Ukraine. 


All these factors have left the struggling US Federal Reserve with very few options to steer the economy safely through 2022 whilst the governing powers continue to borrow and increase debt. The Fed’s favorite tool of the last two years – money printing – is off the table now because the dangers of runaway inflation can no longer be brushed under the carpet.  

The Impact of Increasing Interest Rates and Quantitative Tightening

To firefight the rising inflationary pressures, the Fed has begun raising interest rates as well as ending its practice of quantitative easing. In fact, it is already reversing its approach now with some early measures of quantitative tightening (QT), which will remove excess liquidity from the system. The QT may eventually go up to $95 billion a month. 

However, many market experts and economists now predict that the Fed’s actions are now a case of too little too late, and there is no guarantee that its firefighting will work to tame inflation. If the economic growth begins to stall, while the inflation continues to increase unabated, it will lead to the unsavoury situation of stagflation which can push the economy into a long-lasting depression. 

Naturally, the global stock markets, led by the US markets, have reacted violently in recent days to this bleak inflation-tainted economic picture. From stocks to cryptocurrencies, there is already the proverbial “blood on the streets” across various asset classes, but many people fear that the worst may be yet to come. 

If things indeed take a turn for the worse, and the 40-year record high inflation shows no sign of subsiding in the months to come, the US and other global economies may have to be prepared for an economic recession just like America faced from 2009 to 2016. And it may not be a mild recession, considering the all-time US debt and most asset prices currently in the bubble category (despite significant corrections already in technology stocks, cryptocurrencies and some other segments.)  

The Relationship between the Debt Bubble and Future Economic Growth

The current US national debt of about $30 trillion represents a little over 130% of the GDP. Moreover, some economic analysts have highlighted the dangers of “off balance sheet debt” in the US for Medicare and Social Security, which is projected to rise by a shocking $82 trillion

If both these types of debts are taken together, the real US debt may be as high as $100 trillion, representing almost 500% of the GDP. Though with new leadership poised to take over in DC, many experts believe this is not going to happen. Nonetheless, lots of damage has been done. 

Research has shown that when the government debt-to-GDP ratio goes beyond 85%, it lowers the prospects of future economic growth. Considering that the current debt-to-GDP ratio at 130% is already well in excess of this threshold, and is only expected to increase further to 280% by 2029, clearly the future economic growth scenario does not look very bright. Eventually, the extreme debt burden is bound to prove a drag on the economy – and that scenario may begin to play out going forward.  

The quantitative easing (QE), which began in 2009 and reached a crescendo with furious money printing during the pandemic years, seems to have finally poked the inflation bear. The ultimate role of the US Federal Reserve is to control the inflation fire, and not fuel it further – even at the cost of bursting the financial market bubble. 

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Will Gold and Silver Prove to be the Inflation Hedge for Astute Investors?

 Investors with foresight know that the inflation genie is out of the bottle, and are consequently pulling money out of the interest-rate sensitive asset classes, such as stocks, bonds, real estate, and cryptocurrencies. Gold, silver, and other precious metals have proven to be a time-tested hedge against inflation. 

According to market analysts and precious metals experts, gold and silver, in particular, are going to be an indispensable component of any long-term inflation-hedging basket. Precious metals have historically demonstrated their ability to protect purchasing power over extended periods of time in the face of rising prices of goods and services. Investing in gold and silver in these times may help investors protect their portfolios against the risks of extreme inflation and consequent currency debasement. 

While gold and silver have historically shown excellent attributes against inflation, it may not be necessary to convert an entire portfolio into these hedges. When investors simply buy these precious metals as part of a portfolio diversification strategy, the portfolio performance begins to shine in inflationary environments. 

In times of market uncertainty and rising inflation , investors’ liquidity gets diverted to precious metals and the value of gold and silver prospers. Their resilience and reliability as a safe haven asset invariably gets demonstrated in environments of extreme and prolonged economic uncertainty and volatility. 

Long-Term Gains in Precious Metals Go Beyond Just the Inflation Hedge

Over an extended time period, gold and silver not only serve as portfolio diversification and inflation hedge instrument but also deliver robust capital returns. Over the last 50 years, investing in precious metals has proved to be highly profitable under most conditions. This is not an exception, even though the last few years of unparalleled bubble growth in the financial markets have led some investors to think like that. 

Precious metals have the ability to deliver much more in terms of real returns in the long run. The currently developing economic scenario shows that this might be the case once again in the foreseeable future. To learn more about investing in gold, silver, and other precious metals, contact us today.

Let J. Rotbart & Co. Assist in Increasing Your Precious Metals Holdings today!

J. Rotbart & Co. provides efficient and reliable solutions for clients wishing to buy, sell, store, transport and finance physical precious metals. We source precious metals bars and coins globally in a secure and confidential manner. The bars and coins are all newly minted and are sourced from refineries and mints of the London Bullion Market Association (LBMA), thus guaranteeing their authenticity. The bullion can be deposited in secure storage facilities in a dozen locations worldwide or delivered globally to a location of your choice.

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