• The Congressional Budget Office is forecasting federal deficits to be $2.1 trillion higher over the next decade than initially predicted
• High government debt can lead to soaring inflation and dollar devaluation
• Precious metals, especially in a Gold IRA, can protect the value of your retirement savings from the consequences of America’s runaway debt

Out of Control Debt

In just six months, from January to July 2024, America’s national debt skyrocketed from $33.99 trillion to $34.86 trillion. That’s an astounding increase of $876 billion. With the budget deficit projected to hit $2 trillion, $300 billion more than last year, alarm bells are ringing across the financial and political spectrum.¹

The Congressional Budget Office (CBO) has recently updated its projections. They are forecasting federal deficits to be $2.1 trillion higher over the next decade than initially predicted. The increase is due to new government spending bills and changes in data analysis. ²

The Peter G. Peterson Foundation is a nonpartisan organization focused on America’s fiscal challenges. They warn, “The CBO’s updated projections emphasize the nation’s unsustainable fiscal outlook, as the projections show deficits continuing to rise significantly over the upcoming decade.”³

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These deficit levels are historically associated with times of war or recession-driven stimulus spending. U.S. net debt is nearing 100% of GDP. Large debts like these were once manageable due to near-zero interest rates. But recent aggressive interest rate hikes have turned these debts into a significant burden.

Dangers of Debt

Mike Pompeo is a former Secretary of State and ex-CIA director. He views this debt as a national security threat. He cautions that record-high debt could lead to dollar deterioration. This could potentially allow U.S. rivals to gain influence over the global economy. The BRICS+ economies are gaining geopolitical influence and attempting to establish a rival trading and monetary system.

Pompeo states, “Persistent high debt, interest rates, and inflation can combine to weaken the value of the U.S. dollar in the long run – a disastrous outcome that would only benefit America’s adversaries in Beijing, Moscow, and Tehran as they seek to recenter the global economy away from the United States.”⁵

The consequences of ignoring this mounting debt are dire. Higher debt servicing costs mean less funding for critical public services and reduced capacity to respond to crises. Increasing bond yields would be necessary to attract investors. This translates into higher borrowing costs, and in turn, slowing economic growth.

It also leads to a “crowding effect”. Investors choose to put their money into high interest government bonds instead of private investments. As a result, the economy stalls. In addition, high debt can also lead to dollar depreciation and inflation.

The Congressional Budget Office projects that by the mid-2030s, all federal revenues will go to mandatory spending, like Social Security, and interest on debt. This scenario would force the government to either borrow more or cut discretionary spending to finance basic functions. Defense, law enforcement, infrastructure, and education would all be endangered.

Escaping the Debt

An unlikely solution to the debt crisis is good fortune – inflation is defeated, interest rates go down, and productivity surges (maybe from AI). In essence, America can outgrow its debts.

The International Monetary Fund (IMF) has reiterated its warning that the U.S. debt “needs to be urgently addressed.” They suggest that the U.S. will need to cut spending or raise taxes by 4% of GDP to stabilize the debt by 2029.⁶

However, economists point to a more worrisome solution: sticking it to creditors by devaluing the debt with inflation. Inflation reduces the real value of government debt. Creditors are made to “pay” by receiving less valuable money. Government repayments during high inflation have less purchasing power than the original loan.

This could occur through various mechanisms. All of which are hazardous to the health of the economy: The Federal Reserve prints money to buy government debt. The Fed keeps interest rates low while increasing government spending. Or Congress allows unlimited borrowing, potentially compromising the Fed’s ability to control inflation.

Some analysts argue this process is already underway in America, though it’s too early to be certain.

Global Impact

The global implications of this debt crisis are significant. As the world’s reserve currency, a debased dollar would devalue global reserves. Capital would become more expensive worldwide, leading to global recession. Investors might seek alternatives to the dollar, potentially leading to a chaotic transition into a new world order.

Conclusion

As we face this looming crisis, the words of Mike Pompeo serve as a stark reminder. He said, “We must wake up to the threat America’s mounting national debt poses to the future of our country before it is too late.” The path forward requires difficult decisions, fiscal responsibility, and a clear-eyed view of the challenges ahead. The alternative – a weakened dollar, diminished global influence, and economic instability – is a future we can ill afford.⁷

JP Morgan doesn’t foresee meaningful improvement in the medium term. They advised “adding non-U.S. dollar–denominated assets and ‘real assets’ such as infrastructure, gold and commodities to traditional multi-asset portfolios.” ⁸ Precious metals, especially in a Gold IRA, can protect the value of your retirement savings from the consequences of America’s runaway debt. Contact us today at 800-462-0071 to learn more.

Notes:

1. https://dailyhodl.com/2024/07/07/us-debt-explodes-876000000000-in-six-months-as-ex-cia-director-says-americas-balance-sheet-is-national-security-threat/
2. https://www.pgpf.org/blog/2024/07/the-nations-fiscal-outlook-just-got-worse-heres-why
3. https://www.pgpf.org/blog/2024/07/the-nations-fiscal-outlook-just-got-worse-heres-why
4. https://www.livemint.com/economy/americas-reckless-borrowing-is-a-danger-to-its-economy-and-the-worlds-11720510033537.html
5. https://dailyhodl.com/2024/07/07/us-debt-explodes-876000000000-in-six-months-as-ex-cia-director-says-americas-balance-sheet-is-national-security-threat/
6. https://finbold.com/imf-warns-u-s-to-immediately-address-its-chronic-fiscal-deficits/
7. https://dailyhodl.com/2024/07/07/us-debt-explodes-876000000000-in-six-months-as-ex-cia-director-says-americas-balance-sheet-is-national-security-threat/
8. https://privatebank.jpmorgan.com/eur/en/insights/markets-and-investing/tmt/how-worried-should-you-be-about-government-debt

 

• The AI stock market boom is evoking eerie memories of the dot-com bubble
• There are mixed economic metrics, some of which resemble the dot-com bubble right before it burst and wiped $5 trillion in value
• Diversifying your portfolio with physical precious metals can offer protection against potential stock market crashes

AI Hype Power Stock Market Boom

The stock market is buzzing with excitement over artificial intelligence (AI). Comparisons are being drawn to the dot-com bubble of the late 1990s. As investors pile into AI-related stocks, particularly chip manufacturer Nvidia, many are wondering if history is about to repeat itself.

Nvidia’s graphics processing units (GPUs) are the go-to solution for generative AI. They have seen their shares skyrocket by nearly 4300% over the past five years. This meteoric rise is reminiscent of Cisco’s 4500% surge before peaking in 2000. Nvidia’s success has propelled it to become the most valuable publicly traded company, mirroring the dominance of tech giants during the dot-com era.¹

The current market boom is not limited to Nvidia alone. The stock market has reached record highs this year. The S&P 500 rose over 50% from its October 2022 low. The Nasdaq is up more than 70% since the end of 2022. This surge is largely attributed to the AI boom, echoing the internet-driven enthusiasm of the late 1990s.²

Growing Concerns

One striking similarity to the dot-com bubble is the concentration of market value in a small group of tech stocks. Today, just three companies – Microsoft, Apple, and Nvidia – make up over 20% of the S&P 500 index. Information technology now accounts for 32% of the S&P’s total market value, the largest proportion since 2000.³

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This concentration of value in a few companies is eerily like the “four horsemen” of the late 90s: Cisco, Dell, Microsoft, and Intel. History shows us the potential consequences of such market dynamics. Following the burst of the dot-com bubble, the Nasdaq plunged almost 80% from its March 2000 peak. More than $5 trillion in market value was wiped out by the crash.

The appeal of AI is undeniable. PricewaterhouseCoopers estimates that AI could add $15.7 trillion to the global economy by 2030. However, as with any emerging technology, there’s a gap between potential and reality. Companies are still figuring out how to effectively implement and monetize AI. This could lead to bumps in the road for even the most promising players like Nvidia.⁵

Financial metrics are sending mixed signals. Forward-year earnings and price/earnings-to-growth ratios aren’t raising immediate red flags. But some analysts are concerned about Nvidia’s trailing-12-month price-to-sales ratio. This metric compares a company’s current stock price to its sales revenue over the past year. That ratio is peaking at levels like those seen in Cisco and Amazon just before the dot-com bubble burst.

The broader market also shows signs of potential overvaluation. The Shiller CAPE ratio is designed to assess whether the stock market is overvalued or undervalued. It is near historic highs. This, combined with the concentration of gains in a small number of stocks, has led some experts to warn that the market is vulnerable to a major correction.

Lance Roberts is CIO of RIO Advisors. He points out that companies are fueling investor hopes by increasingly mentioning AI in their earnings reports. AI references have surged 70% since late 2022. Roberts warns, “We are again experiencing another of these speculative ‘booms,’ as anything related to artificial intelligence grips investors’ imaginations.”⁶

Several factors could potentially burst the AI bubble. These include a reduction in demand if AI’s utility doesn’t match the hype, increasing competition within the AI space leading to lower prices, or rising costs from suppliers cutting into profits.

The market’s future also hinges on broader economic factors. If inflation flares up and the Federal Reserve raises interest rates or doesn’t cut them as expected, investor expectations could rapidly shift. Capital Economics, a research firm, predicts that the AI-fueled stock bubble will burst in 2026. This will be due to rising interest rates and higher inflation bringing down equity valuations.

While Capital Economics expects the S&P 500 to potentially reach as high as 6,500 by 2025 off AI enthusiasm, they also forecast a subsequent correction.

“We suspect that the bubble will ultimately burst beyond the end of next year, causing a correction in valuations. After all, this dynamic played out around both the dot-com bubble of the late 1990s and early 2000s and the Great Crash of 1929,” stated economists at Capital Economics.⁷

The aftermath of such a correction could be significant. Capital Economics projects that between now and the end of 2033, US stocks will deliver average annual returns of just 4.3%. That is well below the long-term average of about 7% after inflation. This stands in stark contrast to the 13.1% average annual returns delivered by US stocks over the past decade.

Conclusion

While no one can predict exactly when a market crash may occur, it’s always better to be prepared. Even as stocks hit historic highs, the adage “what goes up must come down” often holds true in financial markets. Diversifying your portfolio with physical precious metals can offer protection against potential stock market downturns. A Gold IRA, in particular, provides a way to safeguard your retirement savings with the historically stable value of gold, helping to balance your investments against market volatility.

Notes:
1. https://www.firstpost.com/tech/repeat-of-the-dot-com-bubble-us-stock-market-may-be-looking-at-massive-crash-because-of-ai-stocks-13788430.html
2. https://www.firstpost.com/tech/repeat-of-the-dot-com-bubble-us-stock-market-may-be-looking-at-massive-crash-because-of-ai-stocks-13788430.html
3. https://www.firstpost.com/tech/repeat-of-the-dot-com-bubble-us-stock-market-may-be-looking-at-massive-crash-because-of-ai-stocks-13788430.html
4. https://www.businessinsider.com/stock-market-crash-dot-com-bubble-similarities-ai-nvidia-roberts-2024-6
5. https://www.fool.com/investing/2024/06/29/nvidia-going-to-crash-history-weighs-in-big-clue/
6. https://www.businessinsider.com/stock-market-crash-dot-com-bubble-similarities-ai-nvidia-roberts-2024-6
7. https://www.msn.com/en-in/money/markets/the-ai-fueled-stock-market-bubble-will-crash-in-2026-research-firm-says/ar-AA1nLJvx

 

 

• Disappointing progress on inflation is stifling hopes for interest rate cuts this year
• Multiple Fed Board members warn rates will stay higher for longer
• A Gold IRA offers long-term portfolio protection from losses incurred due to high interest rates

No Relief from High Interest Rates in Sight

The Federal Reserve is signaling that relief from high interest rates may not come as soon as many had hoped. Despite earlier expectations of multiple rate cuts in 2024, Fed officials are now hinting at the possibility of only one cut, or even none, as they continue to grapple with persistent inflation. This stance has significant implications for the economy and retirement funds.

The Fed has kept interest rates high, between 5.25%-5.5%, since last July. Those are the highest interest rates since 2001. The stock market had surged earlier in the year on signals for three rate cuts in 2024. Now policymakers are hinting they may only cut rates once this year – or not at all. If a cut does happen, it wouldn’t occur until December.

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Inflation was back on the rise in April and March, up from both February and January. The prior dip in inflation that inspired rate cut hopes has largely been attributed to a temporary drop in fuel prices.

Fed Board Members Weigh In

Mary Daly – San Francisco Federal Reserve President: Daly said that there is still “more work to do” on bringing inflation down. And that “inflation is not the only risk we face.”² Daly warned that the Federal Reserve must “exhibit care” because rising unemployment is a growing risk.

Daly said demand must be further restrained to bring down inflation. But slowing the market can result in higher unemployment.

Daly did not know how much rates needed to drop to navigate between bringing inflation under control and stalling the economy. The Fed is prepared to hold rates higher for longer if that’s what their data points them to.

Daly is against preemptive cuts to avoid a recession. “We’re going to be resolute until we finish the job. That’s why not taking preemptive action when it’s not necessary is so important.”³

Neel Kashkari – Minneapolis Federal Reserve President: Kashkari said it could take up to two years to get inflation down to the Fed’s 2% target. He indicated that wage growth was too high to reach that target right now.

Michelle Bowman – Federal Reserve Governor: Bowman stated she is open to raising rates if inflation doesn’t drop.

Bowman said, “I remain willing to raise the target range for the federal funds rate at a future meeting should progress on inflation stall or even reverse.” Bowman said she does not project any rate cuts happening this year. She has instead shifted those into future years.⁴

Reducing rates too soon could risk reigniting high inflation, she warned. That would require additional rate increases to tame price pressures within the economy.

Lisa Cook – Fed Reserve Governor: Cook is optimistic inflation will show more progress in 2025, allowing the Fed to lower rates eventually. She sees supply and demand in the labor market coming into better balance. But, to her, economic risks remain. Risks include higher credit card delinquency rates and tighter credit conditions. Along with the difficulty in assessing economic data that has come under continuous and significant revision.

Austan Goolsbee – President of the Federal Reserve Bank of Chicago – Goolsbee said if he sees “more months” of improving inflation data, then he would be open to cutting rates. Overall, the FOMC, the board that decides cuts, is waiting on hard evidence that inflation is hitting their target before they make any cuts.

Impact of High Rates

High interest rates, slowing growth and lingering inflation are a formula for stagflation. JPMorgan CEO Jamie Dimon said, “I look at the range of outcomes and again, the worst outcome for all of us is what you call stagflation, higher rates, recession. That means corporate profits will go down.”⁵

When interest rates stay high for a long time, it can negatively impact retirement funds. Higher rates cause bond values and stock prices to drop. A slower overall economy can drag down investments across the board. Money may not grow as fast as expenses, causing savings to shrink more quickly. Real estate can lose value too. It’s crucial for people to understand these effects and plan accordingly for their future.

Owning physical gold can act as a hedge against the negative effects of higher interest rates. Gold often maintains or increases its value during economic uncertainty. It can potentially offsetting losses in bonds and stocks when interest rates remain high for extended periods. A Gold IRA offers long term portfolio protection from losses incurred due to high interest rates. To learn how you can start protecting your fund today, call American Hartford Gold at 800-462-0071.

Notes:
1. https://fred.stlouisfed.org/series/DFEDTARU
2. https://www.reuters.com/markets/us/feds-daly-inflation-not-only-risk-policy-must-exhibit-care-2024-06-24/
3. https://www.cnbc.com/2024/06/25/fed-governor-bowman-says-shes-still-open-to-raising-rates-if-inflation-doesnt-improve.html
4. https://www.cnbc.com/2024/06/25/fed-governor-bowman-says-shes-still-open-to-raising-rates-if-inflation-doesnt-improve.html
5. https://www.cnbc.com/2024/05/23/jpm-jamie-dimon-us-could-see-hard-landing-stagflation-is-worst-outcome.html

 

 

 

• The CBO released a new report stating the deficit is increasing faster than just a few months ago
• Servicing the growing interest on the debt may sink the government into a doom loop that ends with a bankrupt nation
• Moving assets into physical gold and silver can preserve purchasing power as the value of the dollar collapses from debt

New CBO Warning

A new Congressional Budget Office report warns that Congress and the White House must get serious about getting the national debt under control. The federal budget deficit will reach nearly $2 trillion this year – the third largest in US history (behind pandemic era relief spending). That is 27% higher than February’s forecast due to the latest glut of government spending. The CBO warned that the rapidly rising debt is putting the nation at risk of a financial crisis. ¹

The projected deficit increase was tied to student debt cancellation, bank failure bailouts, and funding for foreign aid. The annual deficit is expected to keep growing. It is predicted to top $2.8 trillion in ten years. This increase is on top of growing mandated spending for programs like Social Security and the higher cost of paying interest on the debt. ²

The national debt as related to the size of the GDP is also growing. As of now, it stands at 99% – the debt is essentially the same size as the US economy. Interest on the debt will exceed spending on defense this fiscal year.

Debt held by the public is projected to rise from around $28.2 trillion this year to more than $50 trillion in 2034. That translates to 122% of the GDP – a historical record high for the US, beating 106% after World War 2. ³

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Effect on Individual Americans

The CBO found the debt will slow the growth of American household income and economic growth. The estimated GDP per person is considered a measure of average income. Right now, it is about $84,000. The CBO projects that if the debt remains stable, that income will increase to $128,000 by 2054. But if the debt grows as the CBO projects, that income is $123,000. Meanwhile, the nonpartisan Committee for a Responsible Federal Budget estimates income would slow by about one third to $114,100. ⁵

Household income would shrink due to the “crowding out effect.” Excessive government spending to service the debt drags down the economy by crowding out more productive investments that improve American living standards.

Essentially, the government sells bonds to borrow money. Investors choose the bonds over private sector investment because the government has been forced to offer high rates of return. For example, instead of buying a corporate bond, stock, or putting money in the bank, someone buys federal bonds.

This results in less investment in the private economy. Over time, this means fewer buildings, machines, equipment, and software innovations. Consequently, wage and income growth slow down. This process happens gradually, little by little.

In addition, higher levels of government debt cause interest rates to rise. So as your income slows, your expenses accelerate, like your house and car loans. And the federal government is spending more on interest, so it cannot provide stimulus or relief.

Conclusion

Th CBO strongly advises that Congress and the White House need to act now. The problem is only going to grow exponentially worse, requiring stricter solutions the later it is addressed. However, a highly divided government seems unlikely to make the compromises necessary to curb the debt. Raising taxes and cutting services, especially in an election year, are non-starters.

Left unchecked, the debt will erase the value of the dollar. With their intrinsic value, physical precious metals can preserve purchasing power as the currencies collapse. A Gold IRA can secure your retirement funds for the long term. Contact American Hartford Gold today at 800-462-0071 to learn how.

Notes:
1. https://www.foxbusiness.com/politics/federal-budget-deficit-reach-nearly-2-trillion-year-cbo-projects
2. https://www.foxbusiness.com/politics/federal-budget-deficit-reach-nearly-2-trillion-year-cbo-projects
3. https://www.foxbusiness.com/politics/federal-budget-deficit-reach-nearly-2-trillion-year-cbo-projects
4. https://www.pgpf.org/sites/default/files/ltbo-2022-chart-1.jpg
5. https://www.foxbusiness.com/economy/rising-national-debt-reduce-americans-income-growth-report