In 2024, interest payments on U.S. debt will eclipse $1 trillion for the first time. That’s more than the government spends funding all branches of the military combined. America’s key debt ratio recently surpassed highs set during World War II.
Today, I’m shedding light on two critical topics in a way you likely haven’t seen before. First, I’ll describe America’s debt problem using simple but effective examples. Second, I’ll explain why I think the “worst case scenario” has a very real possibility of creating a true renaissance in one sector of the economy the likes of which we haven’t seen in 80 years.
No One Understands a Trillion, and You Don’t Need To
Ever notice politicians and financial pundits love to throw around the word “trillion” to try to sound smart? That’s doubly true when the U.S. debt is the topic. To give your brain a well-deserved break, I’ll use simple metrics to avoid numbers with 12 zeros.
The total amount of U.S. debt hogs all the attention, but it shouldn’t. In 1980, each U.S. household shouldered $39,000 in national debt. That’s the total debt divided by the number of households at the time. It’s what matters most because citizens pay it over the vast majority of taxes. Corporations are responsible for less than 10%.
Moving to 2024, the burden on every household has grown 7.6 times and is now $266,000. And yes, that’s adjusted for inflation. It’s also more than triple the median U.S. household income and double the average.
Another difference today than in the past is the carrying cost of the debt. From the 1950s through the 1970s, interest on debt was about a 1.25% tax on the overall economy. Today, it’s nearing 4% and is at an all-time high. But that’s the entire economy. As a percentage of the government’s spending, the situation is much bleaker.
Social security is the most expensive line item by far at 21% of the overall budget. Medicare is in second place at 14%, but by a tiny margin. If interest paid on the debt this year is just $7 billion higher than anticipated, it will overtake Medicare to become the second-largest spending category. National defense is down in fifth place. In less than 10 years, the percentage of federal spending needed to cover the interest on debt has more than doubled. All those figures are straight from the U.S. Treasury.
The last thing you need to know is the least talked about. When Wide Moat Research analyzes any company, we carefully assess what’s called the weighted average maturity of its debt. That may sound complicated, but it’s not. If a company has half of its bonds maturing in four years and the other half in six, the average weighted maturity is five. This metric allows us to know how soon the company will need to refinance or pay back its debt. Ideally, the weighted average maturity is at least five years, and preferably 10 or more. That way, if it runs into financial trouble or a bad recession, it has time to sort things out. Only a small portion of its debt will need to be repaid or refinanced soon because the maturity dates are spread out over many years.
The U.S. government used to follow this prudent strategy. But not anymore. Less than a year ago, former Dallas Federal Reserve President Richard Fisher stated “that 50% of this [U.S. national] debt will mature in the next three years and will need to be refinanced.”
Desperate to win over bond buyers, the U.S. Treasury has increasingly relied on short-term debt. Not only does the average American household carry $266,000 in national debt on their backs, but it comes due much sooner than people realize. If the government has even the slightest amount of trouble refinancing those bonds, it’s likely game over for the bond market.
Never Underestimate American Ingenuity
While this information may sound troubling, and it is, always remember that crises create the very best investment opportunities. Let’s start by using history as our guide.
At the end of World War II, there wasn’t a full-blown debt crisis in the U.S., but it was close. The U.S. rapidly increased the money supply to help pay down the mountain of war-related debt. That’s government bureaucrat speak for money printing.
The debt-to-GDP ratio back then was similar to today’s elevated levels. Yet, the American economy didn’t crash. Instead, it entered a period of historic growth and wealth creation. This era was later named the “Golden Age of Capitalism.” A single income often supported an American household with four kids and two new cars.
How was this possible? A complete answer is more than we can fit in this article, but I’ll touch on a couple of key drivers. Factories that used to make bombs and military trucks were retooled to manufacture appliances and pickup trucks. In short, America had an industrial revolution.
The economy’s total value rose from $200 billion in 1940 to $300 billion in 1950, or 50% growth in a single decade. By 1960, gross national product soared to $500 billion. In just 20 years, the economy grew by 2.5 times. And it all started by narrowly avoiding a debt crisis similar to what we face today…
How did this happen? The money printing meant dollars were less valuable, and that helped exporters by lowering the real prices paid by international buyers. It’s the same strategy that enriched Japan, China, Hong Kong, Singapore, Germany, and many other export-driven economies. Just like today, America had a huge industrial base. American industry didn’t have much competition at the time (that would happen in the 1970s), and many old protectionist laws from the 1930s were still in place (they would be removed in the 1970s). Protectionism plus a devalued currency is the formula to make exporters rich.
A Smart Bet on American Innovation
One way or another, the U.S. will face the music on its mounting debt. The most likely solution will be to print money to pay it down. That’s what just about every other country has done in recorded history, including the U.S. after World War II.
But that doesn’t mean it’s all over for the economy and stocks. Wide Moat Research has been telling our readers about the “hidden” industrial renaissance going on all around the country. Half an hour from where I’m writing this, Samsung is using over a dozen tower cranes to build a $25 billion semiconductor plant in Taylor, Texas. Automakers from all around the world are opening new billion-dollar plants in Georgia, Tennessee, Kentucky, and the Carolinas. Follow us to learn about more examples and how to profit from them.
A beaten-down dollar is solid gold for these facilities’ bottom line. The two major U.S. political parties agree on almost nothing, but they agree on two at least two things. First, they are investing huge sums into American manufacturing. If there is a debt crisis, you can bet your last dollar that whoever is in charge will pour even more money into the sector. It’s an easy political win and supports millions of jobs.
Second, the current and previous administrations support tariffs, the foundation of protectionist policy. No matter who wins in November, this policy is staying in the White House. Other efforts to support the economy will come with a serious price tag and will probably devalue the dollar further.
That makes American industrial heavyweights like Caterpillar (CAT) potentially more valuable, as most of their revenue comes from outside the U.S. Wide Moat Research focuses on high-quality, dividend-paying stocks that provide income today and wealth long-term. Many of those are positioned to benefit from the ongoing reindustrialization of America. Without a debt crisis, we believe these companies will do great. But with one, they might even do better.
Regards,
Stephen Hester
Chief Analyst, Wide Moat Research