The Bigger Story behind $40 Trillion

I remember the day I learned that gross federal debt had crossed the 10 trillion-dollar mark. It was the fall of 2008 and just a few weeks after the fall of Lehman Brothers, a date plenty of people consider a defining moment of the financial crisis.

At the time, I was part of a local investment group and we were all wondering what effect this would have on the markets.

The number was arbitrary, of course. The government wasn’t in any worse shape at $9.99T than it was at $10.00T.

But there was a psychology to it. And since the markets are ultimately driven by emotion – ever-changing impulses of greed and fear – we expected something to flow through to the markets.

In hindsight, there were much bigger problems on the horizon. The collapse of Lehman would help trigger a collapse in the markets as the tide went out and you learned who was swimming naked.

But fast forward to the recent announcement just a few weeks ago that the total debt had crossed another psychological milestone – a whopping $40,000,000,000,000!

Again, I’ve been wondering what difference it would make in the market. Because, again, the US government is not in any materially worse shape at $40.04T (August 18, 2026) than it was at $39.99T.

But there’s a psychology to it. If there wasn’t, the worldwide media – including the Austrian national news service where I first read it – wouldn’t have made such a fuss.

So does it matter?

Honestly, I don’t think so. For a couple reasons:

First, it’s going to continue. The non-partisan Congressional Budget Office (CBO) expects debt to climb to about $64T in just ten years – more than a 50% increase.

I’m not sure if that’s accurate given how fast the world is changing. And how hard it is to predict with any accuracy what will happen next year, let alone in a decade.

But keep in mind the debt was $10T in fall 2008. It doubled in nine years, hitting $20T in September 2017. It hit $30T in early 2022. And another $10T a few weeks ago as noted.

It will be very hard to stop spending at this point.

Second, it understates the government’s broader financial obligations. Even that amazingly high $64T projection is essentially counting Treasury debt outstanding. It doesn’t capture the trillions more in expected funding shortfalls for Social Security and Medicare.

Those aren’t the same thing as Treasury debt, but they’re still bills the government will eventually have to address through some combination of taxes, spending cuts, borrowing, or inflation.

The real financial burden, if you include those commitments, is much higher.

Third, interest is eating up an ever-greater amount of an already huge deficit. The Treasury is now paying more than $3 billion a day just to service the debt.

The most obvious way to ease that interest burden would be lower interest rates. But that comes with its own problem: if the Fed cuts too aggressively while inflation is still running hot, it risks pouring fuel back on the fire. And even then, lower short-term rates don’t magically make a $40 trillion debt problem disappear.

In other words, there simply is no practical way to stop without causing a huge economic crisis.

Fourth, we live in an age of populism. People vote for politicians who promise them goodies but who don’t want to pay for it in higher taxes. The math simply doesn’t add up over time.

Could there be a different outcome?

Sure. Congress could slash spending, raise taxes substantially, or attempt some kind of structural reform. But every time Washington has faced this choice, the “fix” has always turned out to be temporary.

Betting that a divided Congress will get their act together is, in my view, a dangerous assumption for investors.

The truth is, there’s nothing we can really do to change the outcome. Voters will continue to vote for those who promise them a free lunch without disclosing that someone – you – are going to have to pay for it.

I think leaders in Washington are going to go the route that so many governments have done when stuck between a financial rock and a hard place – debase the currency and pass the cost (through inflation) on to the people.

The only real solution is to get out of the way of the dollar’s decline. That’s really our core message and the heart of what we do here – helping US clients invest internationally.

Yes, investing for new and interesting opportunities.

But also as a protective mechanism. To preserve what you’ve worked hard to build.

It could be as simple as holding alternative currencies in your US-based brokerage account, depending on what’s available. Or, for proper diversification, it could be time to consider foreign bank and investment management accounts, precious metals, or foreign real estate.

Whatever the vehicle, the principle doesn’t change: be careful about betting everything on one currency, especially when the powers that be have every incentive to make it worth less.

If you realize the urgency of the situation and are looking for a way to protect what you’ve worked hard to build, feel free to get in touch to see how we might help you in your dollar diversification strategy.