As a small business manager, a father of three teenagers, and a wealth manager, there are many things that can keep me up at night. From an investment perspective, the main concern is the national debt.

The following quote from Jay Powell at the New York Times DealBook Summit sums up the problem: “The U.S. federal budget is on an unsustainable path. The debt is not at an unsustainable level, but the path is unsustainable, and we know that we have to change that.” Currently, the national debt stands at $36 trillion, which is approximately 125% of 2024 GDP. This is a very large debt amount, and the percentage of GDP is one of the highest in the world. However, at this point, it is still sustainable. This can be seen in the strength of the U.S. dollar and the ability of U.S. treasury bonds to maintain reasonable rates.

But as Powell stated, the problem is that under the current budget, there is a deficit of $1.8 trillion. As the graph below shows, we have been in a significant budget deficit for many years, and the likelihood is that this will not be changing anytime soon.

If we continue our deficits at this level for an extended period, there is a high likelihood that the dollar will weaken dramatically against other currencies, inflation will spike, and interest rates will also increase. There is a saying that bankruptcies happen very slowly and then all at once. If we find ourselves in a position where the rest of the world loses trust in our ability to pay our bills, the changes required to restore that trust will be quite dramatic and will likely involve a combination of increased taxes and reduced government spending.

The big unknown is when this could occur. While it is unlikely in the next several years, the odds increase as we move into the 2030s. From an investment perspective, this doesn’t preclude certain U.S. equity sectors with broad global exposure from thriving. It is also the case that international stocks may out perform their U.S. counterparts. However, it this case interest rates will most likely rise and inflation will probably move higher which would be negative for bonds and interest sensitive sectors. It is in this environment that gold and perhaps cryptocurrencies should do well.