Jul 10, 2024
Wall Street titans seem increasingly concerned about a brewing debt crisis in America. Last year, Bridgewater’s Ray Dalio said the U.S. was on the precipice of a debt crisis while JP Morgan’s Jamie Dimon has called the issue one of the most “predictable” problems the economy faces.
Hedge fund investor Bill Ackman seems to be joining this cohort with a recent post on X, formerly Twitter. Here’s why the billionaire investor is “concerned” about the growing public debt burden.
Ferguson’s Law
Historian Niall Ferguson has analyzed the downfall of great empires and formulated a simple law for predicting them.
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“Any great power that spends more on debt service than on defense will not stay great for very long. True of Habsburg Spain, true of ancien régime France, true of the Ottoman Empire, true of the British Empire, this law is about to be put to the test by the U.S. beginning this very year,” Ferguson said on X.
Bill Ackman retweeted the post describing it as “concerning.”
According to projections from the Congressional Budget Office, the U.S. government is on track to spend $892 billion in interest payments to manage its immense $28 trillion debt burden. That’s higher than the $822 billion defense budget for the fiscal year.
Interest rates have risen in recent years which has made this payment bigger. Meanwhile, increasing the national debt is one of the few bipartisan trends in America. Both Donald Trump and Joe Biden have added around $7 trillion each to the total debt burden during their terms.
Based on Ferguson’s Law, the American economy is in a precarious position. Investors seeking to protect themselves could turn to assets that have performed well during economic turmoil.
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Gold
Gold has a relatively good track record of retaining its value during turmoil and economic crises, according to analysis by Sprott Asset Management. Bars of the precious metal have appreciated by double digits during the Global Financial Crisis in 2007-09, the pandemic panic of 2019-2020 and the Russia/Ukraine war of 2022-24. Sprott’s analysis shows the metal has delivered a 13.98% average return during crises while the S&P 500 dropped on average 9.61% during these periods.
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Many central banks across the world hold a portion of their assets in gold bullion as a safety net, which makes it a great potential hedge for regular investors too.
Foreign diversification
Some countries have displayed better financial discipline than the United States. The United Arab Emirates has a debt-to-GDP ratio of just 29.96%, according to the International Monetary Fund. Switzerland’s debt-to-GDP was 17.8% at the end of 2023, according to the Swiss Federal Department of Finance.
Germany has a debt brake rule that limits the federal government’s structural budget deficit to 0.35% of GDP, according to Fitch Ratings.
Some exposure to these countries could bolster your portfolio. According to an analysis by AllianceBernstein, American investors have only 15% of their assets in non-U.S. stocks. This “home bias” may not be justified considering the MSCI EAFE Index of developed-market stocks outside the U.S. and Canada have had periods of outperformance in different market cycles.
The iShares Core MSCI EAFE ETF (IEFA) tracks this index and could be a quick solution for those seeking international diversification.
Investors could also consider American depositary receipts (ADRs) for German companies like Siemens or Swiss companies like Novartis. Overseas equities and treasuries come with their own set of risks, but they could be less exposed to the fallout from a potential American debt crisis.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
