Trillions and Trillions: The National Debt and Where It Is Going

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Includes: DIA, QQQ, SPY, TBT, TLT, XLF
by: John Lounsbury

There was an interesting article Friday on MSN Money Central. The proposition of the article is that the total cost of the past eight years will be over 11 trillion dollars added to the national debt. This requires the reader to accept some estimated expenses baked in the cake for policy actions already taken. It is generally agreed that to this point, the national debt has increased by some 6 trillion dollars since 2001. The rest of the $11 trillion, according to the Money Central is committed and just not yet listed as paid invoices; the rest is “on the tab”.

This article does not discuss what is likely to happen in the next eight years, but “$1.2 trillion deficits as far as the eye can see” would get us close to another 11 trillion dollars over eight years.

So, the type of analysis presented in the Money Central article implies a national debt by 2017-2020 in the area of $28 to $30 trillion. If interest rates rise, as many feel they must, sooner or later, this will be a tremendous burden. At 5%, this is $1.5 trillion just to service the national debt. And who can say that interest rates could not be higher. The potential exists for interest on the national debt to be larger (maybe much larger) in ten years, than the entire annual deficit is for 2008 or 2009.

This creates massive negative pressure on popular investment themes. Treasuries will be terrible performers over the next ten years under this scenario. Economic growth will be meager or negative during much of this time as private credit is frozen out by massive public credit. If we have rolling recessions or a couple of depressions, gold will not be pushed to valuations that many anticipate. This could be a time of no place to hide.

Readers: Please tell me where and how to be optimistic. I need to hear some counter perspectives.