The Debt Avalanche: 7 Alarming Projections for America’s Fiscal Future

As an experienced financial professional, I consider inflation “like a sneaky pickpocket, quietly stealing the value of your money over time.”  Milton Friedman considered it a hidden tax. The average annual inflation rate in the United States has been around 3% over the past century.

That might not sound like much, but compounded over time, it adds up. For example, if you had $100 in 1950, you’d need about $1,000 today to have the same purchasing power. However, that’s a tenfold increase in just 70 years! In perspective, if you bought a fancy new TV for $500 in 1980, you’d need to shell out around $1,700 today for the same level of fanciness. Talk about a buzzkill!

I wish I could say it ended there, but because of the root cause, inflation will likely worsen for the average person. In this blog post, I will cover the history of inflation, its causes, and our direction.

The ’70s: A Wild Ride

Let’s take a trip down memory lane to the 1970s. Bell bottoms were in, disco was king, and inflation was rampant. In 1974, the inflation rate hit a whopping 11%, and by 1980, it had skyrocketed to 13.5%. If you had $1,000 in the bank in 1970, it would have been worth only $480 by 1980. Ouch! It’s like your money went on a crash diet without even trying.

But wait, there’s more! During the 1970s, when inflation was high, housing prices were also on the rise. The median home price in 1970 was $23,000. By 1980, it had jumped to $64,600, nearly tripling in just a decade. So, not only was your money losing value, but the cost of putting a roof over your head was going through the roof, too!




The ’80s: A Tale of Two Halves

The 1980s were a different story. Inflation continued to rise in the decade’s first half, peaking at a mind-boggling 10.3% in 1981. Mortgage rates were also sky-high, with the average 30-year fixed rate reaching 16.04% in 1982. Can you imagine paying that much interest on your home loan? You might as well have taken out a loan from a loan shark!

But then, something interesting happened. Inflation started to cool off, and by 1986, it had dropped to a more manageable 1.9%. Housing prices, however, kept climbing. The median home price in 1986 was $92,000, up from $69,300 just four years earlier. The housing market didn’t get the memo that inflation was taking a breather.

Milton Friedman on Inflation: Monetary Policy and Its Consequences

Now, let’s talk about Milton Friedman, one of the most influential economists of the 20th century. He had a clear and consistent view on inflation: it’s always and everywhere a monetary phenomenon. In other words, inflation happens when the money supply grows faster than the economy. It’s like trying to fit a gallon of milk into a pint-sized carton – something’s gotta give!

The famous equation can summarize Friedman’s theory: MV = PY, where M is the money supply, V is the velocity of money (how quickly money changes hands), P is the price level, and Y is real output. If the money supply (M) grows faster than real output (Y), and velocity (V) remains constant, then prices (P) must rise. As Friedman put it:

Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

In other words, if you print more money without increasing the number of goods and services, prices will go up. It’s like trying to buy a limited edition comic book on eBay – the more people bidding, the higher the price!

Friedman emphasized that governments, not businesses or unions, control the money supply. Therefore, he argued, inflation is ultimately the result of government policy:

Inflation in the United States is made in Washington and nowhere else.

So, the next time you hear someone complaining about rising prices, you can channel your inner Milton Friedman and say, “Don’t blame the businesses, blame the government!”

The Great Inflation of the 1970s

Friedman’s monetary theory of inflation gained traction in the 1970s as the U.S. experienced a period of high and volatile inflation. In a 1977 Newsweek column, Friedman argued that the inflation of the 1970s was the result of excessive money growth, not temporary or “transitory” factors. He warned that inflation would persist until monetary policy was tightened.

Friedman’s views eventually influenced policymakers, including Federal Reserve Chairman Paul Volcker, who implemented a strict monetary policy to bring inflation under control in the early 1980s. This episode, while painful in the short run, helped establish monetary policy’s credibility as a tool for maintaining price stability. It’s like going on a crash diet – it’s not fun, but it gets the job done!

The ’90s and Beyond: A New Normal

As we moved into the 1990s and beyond, inflation settled into a more predictable pattern, hovering around 2-3% per year. Housing prices, on the other hand, continued their upward march. By 2000, the median home price had reached $169,000; by 2020, it was up to $336,900. It’s like the housing market was on a never-ending Stairmaster while inflation was taking a stroll.

But here’s the kicker: while housing prices have risen faster than inflation, wages haven’t kept up. In 1980, the median household income was $21,020. By 2020, it had risen to $67,521. That’s a 221% increase, which sounds impressive until you realize that housing prices increased by 422% over the same period. It’s like running a marathon, only to find out that the finish line keeps moving further away!

The COVID-19 Curveball

Friedman’s insights remain relevant today as policymakers grapple with the inflationary consequences of the COVID-19 pandemic and the aggressive fiscal and monetary response to it. The rapid growth of the M2 money supply in 2020 and 2021, far outpacing anything seen in recent decades, has raised concerns about a potential resurgence of inflation.

While today’s economic context differs from the 1970s, Friedman’s core message remains valid: inflation is ultimately a monetary phenomenon, and controlling it requires a commitment to sound monetary policy. As policymakers navigate the challenges ahead, they would do well to heed Friedman’s timeless wisdom on the causes and cures of inflation. After all, as the saying goes, “Those who do not learn from history are doomed to repeat it.”

Us inflation rate v fed m1

The pandemic threw a wrench into the global economy, disrupting supply chains and changing how we live and work. In 2021, home prices grew by an average of 20%, while inflation jumped to 7.5% from January 2021 to January 2022. Looking at the Fed money supply, this makes sense.

It’s like the economy decided to play a “hold my beer” game with us!

Conclusion – 7 Key Points To Debt Avalanche

As an investor, staying informed about the nation’s economic health and fiscal policies is crucial. Recent projections from the Congressional Budget Office (CBO) paint a concerning picture of the United States’ long-term fiscal trajectory. The growing mismatch between government spending and revenues is expected to substantially increase the national debt and debt-to-GDP ratio over the coming decades. This unsustainable path could significantly affect the economy, financial markets, and investments.

Government spending and national debt projections in the United States are on an unsustainable path:

  1. The Congressional Budget Office (CBO) projects that the gross federal debt will reach about $54.39 trillion by 2034, a significant increase from current levels.
  2. Under current law, the debt-to-GDP ratio is projected to continue climbing, reaching 166% of GDP by 2054, up from 97% in 2023.4 This increase is primarily driven by the structural mismatch between federal receipts and outlays.
  3. Government spending, or outlays, are projected to grow from $6.5 trillion in 2024 to $10 trillion in 2034, a 54% increase. As a percentage of GDP, outlays are expected to climb from 23.1% in 2024 to 27.3% by 2054.
  4. The growth in spending is primarily attributed to Social Security and Medicare. Federal spending on Medicare is projected to increase from 3.2% of GDP in 2024 to 5.4% by 2054, while Social Security outlays will climb from 5.2% to 5.9% over the same period.
  5. On the other hand, Federal revenues are not expected to keep pace with the rising spending. CBO projects that total federal receipts will rise only slightly over the next 30 years relative to the size of the economy, reaching 18.8% of GDP in 2054.
  6. Rising interest rates and the accumulation of federal debt will increase borrowing costs. Interest costs are projected to reach 3.3% of GDP in 2025, the highest since 1940, and continue climbing to 6.3% of GDP by 2054.
  7. At that point, interest costs on the federal debt would account for 34% of federal revenues. This highlights the unsustainable fiscal path driven by the mismatch between the government’s commitments and its revenues.

In conclusion, the provided sources paint a concerning picture of the United States’ long-term fiscal health. Government spending is projected to outpace revenues, substantially increasing the national debt and debt-to-GDP ratio over the coming decades. Rising interest rates will further exacerbate the situation by increasing borrowing costs. Sadly, I don’t see Congress working together anytime soon to address this structural imbalance and establish a more sustainable fiscal future for the country.

I will explore assets that will likely keep up with inflation in future articles. Sign up for our free newsletter below.

Free AlphaBetaStock's Cheat Sheet (No CC)!+ Bonus Dividend Stock Picks
Scroll to Top