The U.S. Debt Isn’t Your Biggest Risk – Your Reaction to It Is

The U.S. Debt Isn’t Your Biggest Risk – Your Reaction to It Is

By Anthony Criscuolo, CFP®

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The United States recently surpassed the $40 trillion mark in total federal debt. The highest levels of Debt-to-GDP since World War II. Annual deficits measured in the trillions. Interest payments now exceeding the government’s spending on many major programs and projected to become one of the fastest-growing components of the federal budget over the coming decades.

According to the Congressional Budget Office (CBO), under current law, federal debt held by the public is expected to continue growing faster than the economy for decades to come. Those headlines naturally make investors uneasy, and they should. Unlike many short-term market stories that disappear after a few weeks, the national debt represents a genuine long-term challenge. It deserves thoughtful discussion and public debate, not because it signals an imminent crisis, but because it influences many of the forces that shape long-term investment returns: inflation, interest rates, taxes, economic growth, and government policy.

Yet this is also where many investors make major mistakes. The debt is certainly a risk, but the real investment risk is how investors respond to it. History is full of examples of investors allowing legitimate concerns to evolve into poor financial decisions. They move to cash, dramatically reduce stock exposure, concentrate investments around a single prediction, or spend years waiting for the “right” time to invest again. Ironically, these decisions often prove more damaging than the original risk they are trying to protect against.

Understanding the debt is important, but reacting emotionally to it is not. The better approach is to understand how and why the national debt might influence the economic environment over many years and then build a financial plan and an investment strategy designed to succeed across many possible outcomes. That distinction is at the heart of good wealth management.

This article is not a technical review of the national debt with all the statistics and charts about its projected growth and the doom and gloom of the Social Security system. This article is about how to plan and invest in the face of such risks – what we do and why we believe it works. It’s a longer read, so refresh your coffee and settle in for a wealth of knowledge.

Investment Planning in an Uncertain Fiscal Future

Your investment portfolio has been here before. The fact is, the United States has carried large amounts of debt in the past. Following World War II, federal debt relative to the economy reached levels comparable to where we find ourselves today. So why has today’s debt become such an important discussion? The answer isn’t simply the amount of debt – it’s the environment surrounding it.

The decades following World War II benefited from several powerful tailwinds. America had a young and rapidly growing workforce. Productivity expanded dramatically. The economy grew quickly. Interest rates remained relatively manageable for long periods. Those forces helped the country gradually grow into its debt burdens.

Today’s environment looks different. The population is aging. Healthcare costs continue rising. Labor force growth has slowed considerably. Interest rates are no longer near zero. When rates were extraordinarily low after the Global Financial Crisis, economists could reasonably argue that financing government debt at 1% or 2% carried relatively little immediate burden. Today’s math is different.

As older Treasury securities mature, they must increasingly be refinanced at today’s higher interest rates. That means a growing share of federal tax revenue goes toward servicing existing debt rather than funding future priorities such as infrastructure, defense, education, or scientific research. In other words, the debt itself isn’t just getting larger. It is becoming more expensive to carry. This is why today’s debt conversation deserves more attention than it did a decade ago. It doesn’t necessarily make catastrophe more likely – it simply makes future policy choices more difficult.

Debt Is Not an Investment Problem – It’s a Purchasing Power Problem

This is perhaps the most important idea in this entire discussion. The national debt influences the environment in which investments operate. If debt continues growing faster than the economy for many years, policymakers will almost certainly face increasingly difficult decisions: perhaps taxes gradually rise, government spending grows more slowly, inflation may run somewhat higher than investors have become accustomed to. Perhaps economic growth slows. Perhaps all of these occur to varying degrees. Nobody knows the future.

This uncertainty is exactly why trying to predict one specific outcome is such a dangerous investment strategy. Rather than asking: “What will happen?” We believe investors should ask a different question: “How do I build a resilient portfolio that can succeed under many future scenarios?”  

That is a fundamentally different way of thinking. It shifts the focus away from prediction and toward planning. It also leads to a very different investment philosophy. If the primary long-term risk isn’t simply market volatility, but rather the gradual erosion of real purchasing power through inflation, taxes, and other policy changes, then success is not measured by the number printed on your brokerage statement. Success is measured by how much real, after-tax purchasing power your wealth can provide for you and your family over the coming decades.

This idea will shape everything else we discuss. Once the objective becomes preserving and growing real purchasing power, not simply chasing returns, the portfolio decisions and overall tax planning become much clearer.

Own Productive Assets, Not Predictions

If preserving long-term purchasing power is the goal, then the next question becomes obvious: What kinds of assets have historically protected purchasing power the best?

Many investors instinctively think about what they should sell when risks increase. We think it is often more productive to ask what they should continue to own. That may sound like a subtle distinction, but it changes the mindset. When investors become concerned about rising government debt, they often look for a “safe” place to hide. Cash balances grow. Gold becomes popular. Bitcoin is promoted as a modern alternative to traditional currencies. Others simply reduce their stock exposure and wait for when they believe will be a more favorable time to invest. We have previously discussed why gold and bitcoin are not great long-term risk hedges – you can revisit that prior Bluerock article here: Risk Hedges to Avoid.

While these reactions may feel prudent in the moment, they all share one common assumption: that avoiding risk today somehow eliminates risk tomorrow. Unfortunately, that isn’t how investing works. Every investment decision involves tradeoffs. Cash avoids short-term market volatility, but it introduces inflation risk, tax inefficiency, and significant opportunity cost. Gold has thousands of years of history as a store of value, but it produces no income, no earnings, and no innovation. Its future value depends largely on what another investor is willing to pay for it, often based on fear or greed. Even government bonds – normally an excellent stabilizing asset within a diversified portfolio – can struggle during prolonged periods of unexpected inflation because their future interest payments become worth less in real purchasing power (we experienced this in a material way in 2022).

Rather than attempting to predict which single asset will perform best under one particular economic scenario, we prefer to own a broadly diversified collection of productive assets that can adapt as the world changes. We are not trying to predict the future – we are trying to own assets that are capable of succeeding through many different futures.

A Long-Term Hedge Against Inflation Isn’t Fear – It’s Ownership

One of the most common concerns surrounding rising government debt is inflation. While higher inflation is certainly not guaranteed, history suggests that governments carrying large debt burdens often find inflation to be one of the more politically tolerable ways of reducing the real value of outstanding debt over time. Higher long-term inflation is one of several possible outcomes investors should thoughtfully prepare for.

If inflation becomes more persistent over the next decade, or serval decades, what should investors own? Our answer has remained remarkably consistent for years: own quality, productive businesses.

Think about what inflation actually means. The prices of goods and services increase. Labor becomes more expensive. Raw materials become more expensive. Transportation becomes more expensive. Everything costs more. Well-managed businesses do not simply sit back and absorb those higher costs forever – they adapt. Think about Microsoft, if labor costs rise, Microsoft doesn’t simply stop selling software – it invests in automation, improves productivity, and gradually adjusts pricing. Coca-Cola has raised prices through wars, recessions, inflationary periods, and changing commodity costs for more than a century. Waste Management still collects trash regardless of inflation. The point here isn’t a recommendation of these specific companies. The point is to remind you that investing is not buying ticker symbols – it is buying real businesses, with real cash flows and management teams with the ability to evolve, adapt, and innovate thought all sorts of business and economic environments.

The strongest companies possess what economists call pricing power – the ability to increase prices without permanently losing customers. Businesses with durable brands, essential products, unique technologies, or dominant market positions often possess this characteristic. Over time, these companies continue generating real profits despite inflation. Those profits become dividends, reinvested earnings, growing cash flows, and ultimately, higher long-term business values.

This is why we continue to believe that owning a diversified portfolio of quality businesses remains one of the most effective long-term hedges against inflation. Ironically, if an investor truly believes excessive government borrowing could eventually produce higher inflation, selling productive businesses (i.e., “getting out of the stock market”) may be exactly the wrong response. Inflation slowly destroys the purchasing power of cash. Profitable businesses have the ability to rebuild it.

We often tell clients that the best hedge against inflation isn’t fear – it’s ownership. Ownership of productive businesses which can innovate and control costs and profits. Ownership of intellectual property. Ownership of global commerce. Ownership of companies solving problems for customers every single day. Those are the assets that have historically created wealth across generations.

Simply put, the rising national debt and the fear of higher inflation is a reason to own productive businesses – not a reason to sell them!

Diversification Is More Important When Uncertainty Increases

Another lesson from the debt discussion is one we have emphasized for years. As uncertainty rises, the value of diversification rises with it. Many investors think diversification is something you do because you don’t know which investments will perform best, but diversification also protects against something much larger. It protects us from being wrong. If we knew with certainty exactly how rising government debt would impact the economy, investing would actually become quite simple – but we don’t know, and nobody does. That uncertainty argues for broader diversification, not narrower concentration. Diversification is not an admission of ignorance; it is an acknowledgement of reality and a prudent long-term strategy.

One consequence of the remarkable performance of U.S. markets over the past decade is that many investors have become far more concentrated in the United States than they realize. Consider the average affluent American family. Their employment income comes from a U.S.-based job. Their home is located in the U.S. Most of their real estate holdings are in the U.S. Their Social Security benefits depend on the U.S. Their Medicare benefits depend on the U.S. Their future taxes depend on the U.S. Their investment portfolio is often overwhelmingly invested in U.S. companies. That is an enormous amount of exposure to one economy, one political system, one currency, and one fiscal policy.

International diversification is not about betting against America. We remain incredibly optimistic about the long-term strength of the U.S. economy. America continues to lead the world in entrepreneurship, innovation, capital formation, and technological development. However, optimism should not lead to concentration. There are outstanding businesses all over the world. Companies headquartered in Europe, Japan, Canada, Australia, India, Taiwan, and many other countries generate enormous profits, develop world-class technologies, manufacture critical products, and serve billions of customers. Many earn revenues in dozens of currencies and operate across multiple continents.

To that point, currency diversification is another important, and often overlooked, benefit of international investing. Many global companies earn revenues and profits in euros, Swiss francs, Japanese yen, Canadian dollars, Australian dollars, Taiwanese dollars, and dozens of other currencies. If future U.S. fiscal pressures contribute to a weaker dollar or higher domestic inflation, these international earnings can provide an additional source of resilience.

We do not invest internationally because we are pessimistic about America – we invest internationally because we recognize that no single country should represent your entire financial future. Diversifying across economies, currencies, and political systems is simply another way of managing long-term risk while participating in global growth.

Real Assets Matter Too

Another area we believe deserves dedicated attention is publicly traded global real estate.

We have written before that we prefer owning productive real estate businesses over simply owning commodities as an inflation hedge. Global REITs represent ownership in companies that own office buildings, apartments, industrial warehouses, healthcare facilities, data centers, self-storage facilities, shopping centers, and other income-producing real estate around the world.

Unlike gold, these businesses generate cash flow, collect rent, improve properties, develop new projects, allocate capital, and create value. Over long periods, many lease agreements reset upward, property values generally adjust alongside replacement costs, and rental income tends to increase with inflationary environments. Real estate certainly experiences cycles and periods of weakness, but as part of a diversified portfolio it provides another source of return that behaves differently than traditional stocks and bonds. It is another example of owning productive assets rather than simply hoping another investor will pay a higher price tomorrow (like gold investors have to hope). Broadly diversified global REITs is also much more efficient than buying individual rental priorities and being a landlord. There are no leaky toilets or tenant issues you have to deal with – you just own hundreds of global real estate investments.

The National Debt Doesn’t Change What We Own – It Reinforces Why We Own It

Perhaps the most important conclusion from the debt discussion is surprisingly simple. The growing national debt has not fundamentally changed our investment philosophy. If anything, it has strengthened it. The visual below is a great overview of the main principles discussed above.

When uncertainty increases, we become more convinced, not less, that investors should own productive businesses, diversify globally, maintain exposure to real assets, and resist the temptation to make large portfolio changes based on macroeconomic forecasts. We cannot predict exactly how the debt story ends, but we can build portfolios designed to remain resilient regardless of how it unfolds.

Wealth Is More Than a Pile of Money

Perhaps the biggest lesson from the national debt discussion is that wealth should never be measured by a single number on an investment statement. Real wealth is flexibility. It is confidence. It is knowing your family can continue living comfortably regardless of whether inflation runs at 2% or 4%.

It is having multiple sources of retirement income. It is knowing that future tax law changes won’t force unwanted decisions because you’ve already built flexibility into your plan. It is owning businesses that continue solving problems and creating value throughout changing economic environments. It is having a diversified portfolio designed to participate in global growth rather than depending on one country, one industry, one currency, or one prediction. Ultimately, wealth is purchasing power – not a pile of money, not percentages, and not a benchmark comparison.

Putting it all together, the visual below summarizes the main concepts discussed throughout this article. Let it be a reminder to focus on what you can actually control.

The national debt deserves serious attention. It deserves responsible public policy. It deserves thoughtful discussion and debate. However, it does not deserve the power to derail a disciplined financial plan.

We don’t know exactly how the national debt story ends – we don’t need to. Good investing has never required predicting the next headline. It has required owning productive assets, diversifying broadly, planning taxes thoughtfully, and preparing for an uncertain future. Because the future belongs not to the best forecasters – but to the best planners.

Anthony Criscuolo, Senior Wealth Manager

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Bluerock Wealth Management is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Registration as an investment advisor does not imply a certain level of skill or training. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. All information referenced herein is from sources believed to be reliable. Bluerock Wealth Management and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. Bluerock Wealth Management and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Bluerock Wealth Management and Hightower Advisors, LLC or any of its affiliates assume no liability for any action made or taken in reliance on or relating in any way to the information. This document and the materials contained herein were created for informational purposes only; the opinions expressed are solely those of the author(s), and do not represent those of Hightower Advisors, LLC or any of its affiliates. Bluerock Wealth Management and Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax or legal advice. Clients are urged to consult their tax and/or legal advisor for related questions.

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Bluerock Wealth Management is registered with HighTower Advisors, LLC, an SEC registered investment adviser and/or Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through HighTower Advisors, LLC. Securities are offered through HighTower Securities, LLC.

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