What Are We Going to Do About the Debt Crisis?

As of 2024, the United States has crossed $35 trillion in national debt, with no signs of slowing down. In 2023 alone, the debt stood at $33.17 trillion, and annual interest payments have become a staggering burden, projected at over $1 trillion by the end of this fiscal year. Regardless of whether Kamala Harris or Donald Trump wins the 2024 election, the looming debt crisis will be one of the most pressing issues for the next administration. Unfortunately, the solutions aren't clear-cut, and the options are limited, each with significant consequences.

The Unsustainable Spending Problem

The government brought in approximately $4.39 trillion in revenue but spent $6.3 trillion during this fiscal year, leading to a $2 trillion deficit. The largest expenses include:

• Social Security: $1.34 trillion
• Medicare: $850 billion
• Interest on the Debt: $843 billion
• Health Care: $824 billion
• National Defense: $798 billion

With expenses outpacing revenue by trillions of dollars, the U.S. is trapped in a cycle of borrowing more money to service its growing debt, which further increases interest payments. As interest rates have risen, servicing the debt has become one of the fastest-growing budgetary items, pushing the government closer to a fiscal cliff.

The Hyperinflation Scenario

One of the most likely scenarios is that the government chooses to inflate its way out of debt. In an inflationary environment, existing debt becomes easier to manage in nominal terms because the value of the currency decreases. However, printing more money would lead to accelerated inflation, significantly reducing the purchasing power of ordinary citizens while increasing the value of real and financial assets.

For those advocating for inflation as a "solution," the benefits are largely skewed toward the elite, who have the resources to invest in assets that rise with inflation, such as stocks, real estate, and commodities. However, inflation disproportionately harms the middle and lower classes, whose wages don't keep up with the rising costs of goods and services. Hyperinflation could lead to social unrest, further destabilizing the economy.

The Federal Reserve's Role and Interest Rates

The Federal Reserve has recently cut interest rates, a move some argue is designed to "buy time" as interest payments on the debt soar. While this may provide temporary relief, lowering rates will likely exacerbate inflationary pressures, causing prices to rise even faster. It's a stalling tactic, but one that only delays the inevitable reckoning with the debt.

As interest payments grow, the government will need to either borrow more (continuing the cycle) or drastically cut spending. But even a balanced budget — if miraculously achieved — would likely plunge the U.S. into a severe recession. The government is the largest employer in the country, and cutting jobs or reducing benefits would drive up unemployment, reduce tax collections, and shrink the economy, putting us right back in a position of running deficits.

The Collapse: A House of Cards?

The U.S. economy is caught in a precarious situation. As the government keeps borrowing to maintain spending levels and service the debt, interest payments will continue to grow, leaving fewer funds for critical services. If the debt and interest payments spiral out of control, the economy could face a "house of cards" scenario, where confidence in the U.S. dollar weakens, foreign investors pull back, and the value of the currency plummets.

Some economists argue that we're already on a path toward a debt collapse, where the only option is to restructure the debt, default, or resort to extreme inflation. But neither political party has shown the will to make the tough cuts necessary to avoid this.

The Best Bad Option: Inflation?

In a scenario where every option is bad, inflating the currency may be the "least bad" option. By allowing inflation to rise, the government can effectively reduce the real value of its debt, making it easier to pay off in cheaper dollars. However, this would have devastating consequences for everyday Americans, who would see their savings eroded and the cost of living skyrocket.

This strategy also benefits those with access to financial assets and hard assets, as they can adjust their portfolios to ride the inflation wave. For the average person, however, keeping up with inflation will require moving into higher-risk assets, such as stocks, real estate, or even cryptocurrencies, just to maintain their standard of living.

Conclusion: Preparing for the Great Melt-Up

No matter who wins the 2024 election, the debt crisis isn't going away. Both parties have shown a willingness to overspend, and the structural issues in the U.S. economy — including unfunded liabilities in Social Security and Medicare — make it unlikely that significant cuts will be made. The most probable scenario is that the government will inflate the currency, pushing people into high-risk assets in a desperate attempt to keep pace with rising prices.

The "great melt-up" — a scenario where financial assets soar as people pour into them to avoid inflation's ravages — may be on the horizon. In the coming years, Americans may have no choice but to chase these risky assets or face the prospect of watching their wealth evaporate as inflation reaccelerates.