The U.S. federal deficit has surged to a record $35.362 trillion, marking the highest level in the nation’s history. Despite political promises to address the debt crisis, independent analyst Lyn Alden predicts significant obstacles to reducing the deficit, especially in light of potential global economic downturns.
Alden, a macroeconomic and investment analyst, pointed out that the Congressional Budget Office forecasts perpetually high deficits unless substantial measures are taken. “Even with projections assuming no recessions, which tend to worsen deficits, the baseline scenario anticipates over $20 trillion in new public debt over the next decade,” Alden said.
According to Alden, the U.S. is approaching a phase of “fiscal dominance,” where budget deficits have an increasingly profound impact on the economy and financial markets. This situation could diminish the effectiveness of central bank monetary policy or limit its independence. She cited recent trends such as the 2019 bond market bubble and the inflation spike beginning in 2021 as indicators of this shift.
Alden also noted a divergence within the U.S. economy, with some sectors potentially entering recession while others emerge from downturns. “The investment strategy in this cycle leans heavily on equities and scarce assets, rather than bonds,” she explained. “In the context of fiscal dominance, gold and T-bills have outperformed Treasury bonds since 2019.”
Politicians often deflect responsibility for the deficit, but Alden attributes the issue to a combination of long-term factors. She highlighted Social Security’s unsustainable structure, noting that the fund is expected to deplete by 2035. Additionally, inefficient healthcare spending contributes to the deficit, exacerbated by subsidies for low-nutrition foods and high healthcare costs.
The “Foreign Adventurism” of post-9/11 military expenditures, including the costly War on Terror, and the ongoing high military budget further strain the deficit. Alden also pointed out that rising interest on accumulated debt adds to the financial burden. “The historical pattern of rising debt with falling interest rates has changed, leading to higher debt service costs,” she said.
Alden identified two primary choices for managing high debt-to-GDP ratios: keeping interest rates low despite inflation or raising rates and risking a fiscal spiral of increasing debt expenses. She suggested that politicians hope productivity growth will counteract inflation, but noted that disparities between different asset types could exacerbate wealth inequality.
Political polarization also impedes effective deficit reduction. Alden noted that both Republicans and Democrats have shifted positions, with fewer areas of agreement on spending cuts. She pointed out that significant spending areas, such as Social Security and defense, remain largely protected from cuts.
Alden also discussed the financialization of tax receipts, which are increasingly tied to asset prices. This correlation means that attempts at fiscal austerity might not effectively reduce the deficit if they negatively impact the stock market. “The challenge of balancing fiscal policy with asset price performance complicates efforts to address the deficit,” she said.
For investors, Alden’s outlook suggests a cautious approach to U.S. stocks, given their high valuation and the potential for inflationary pressures. She recommended a diversified portfolio with exposure to undervalued stocks and international equities. Alden also views gold as a favorable investment, although it may be temporarily overbought, and remains bullish on Bitcoin, acknowledging its high correlation with global liquidity.
Overall, Alden’s analysis underscores the complexity of addressing the U.S. deficit, given the intertwined factors of entitlement spending, healthcare inefficiencies, foreign military commitments, and political dynamics.
