These two charts paint a disturbing picture for the future of America’s finances. Over the last eight years, the Federal Government has gone on a spending spree, more than doubling the ratio of government debt to GDP. One would think such a large increase in government debt would have been an expensive proposition, but it wasn’t. A zero interest rate policy from the Fed and a multi-trillion dollar bond buying program subsidized massive budget deficits. Our chart on the ratio of interest expense (gross) to GDP shows that Federal interest expense as a share of the economy is now lower than it was eight years ago.
No harm, no foul, right? Not exactly. Interest rates won’t stay at zero forever. As interest rates normalize (a process that is already underway) interest expense is likely to soar.
What does that mean for investors like you? The most politically expedient way for a government to ease its debt burden is to inflate it away.
If you haven’t yet prepared your portfolio for the prospect of higher inflation, now is the time to act.
Jeremy Jones, CFA
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