America’s Debt Crisis Just Got MUCH Worse... Buy THESE Assets

There is a moment in the life of every borrower when the lender stops asking how much you would like and starts asking whether you can pay it back. Last week, the United States hit that moment in its us debt crisis. The government started buying its own debt.

Healthy borrowers do not do that.

What Pushed the US Debt Crisis to a Breaking Point?

Why $40 trillion changed everything

On August 18th, the national debt crossed $40 trillion. The very next morning, the Treasury announced it was doubling the size of the operation it uses to buy its own bonds back.

Most of us cannot picture a trillion dollars. So shrink the entire federal government down to a single household. Imagine that household owes $400,000, not on a mortgage, on credit cards. The interest payments alone have gotten so big they are now the third largest expense in the house. More than the car. More than the groceries. Only the mortgage and the $2,000 a month health insurance cost more.

Now imagine that to keep the credit card company from raising the rate, that household takes out another credit card to pay down some of the first. New borrowed money to pay off old borrowed money. You would tell that person they are in serious trouble, and you would be right.

The United States just did the exact same thing. It used the money from a new credit card to pay down the old one. Just add eight zeros on the end.

New Debt to Pay Off Old Debt

The US Treasury is the federal government's checking account, and it recently started doing buybacks. When a company like Apple or Microsoft does a buyback, it uses profits to buy back shares on the open market and retire them. Fewer shares remain, each worth slightly more. That is a good thing. It pushes the stock price up.

That is not what Uncle Sam is doing. Not even close.

The government is issuing new shorter-term bonds and using that money to buy back older longer-term bonds. The total debt does not change. Why do it? It is a direct attempt to manipulate interest rates.

When a big buyer like the US federal government starts aggressively buying something, that pushes the price up. And when the price of a bond goes up, the interest rate on that bond goes down. They always move in opposite directions. The coupon payment is the same, but it is a lower yield on the higher amount you invested.

So the government is buying its own bonds to push the price up, so the interest rate comes down, so it doesn't have to pay as much interest and can kick the bankruptcy can down the road for another year. Think about what is actually happening here. The debtor is bidding on his own debt.

What Does a Full US Debt Crisis Actually Look Like?

Failed auctions and skyrocketing borrowing costs

Six days before the buyback announcement, the government held an auction to sell 30-year bonds. It went badly. They had to pay 5.2% to offload the debt, the most expensive 30-year auction since 2001.

Bonds went out the door at a worse price than the market expected right up until the bidding closed. The big banks got stuck holding more of it than usual. Five days later, the debt crossed $40 trillion.

That same day, the 30-year rate in the open market pushed through 5.3%. The highest level since 2007. The very next morning, the Treasury doubled the buybacks from $2 billion per operation to at least $4 billion. And Secretary Bessent says they will go higher.

The Treasury claims this is routine. They call it liquidity support, which is a fancy way of saying they are just smoothing out a market that gets a little choppy sometimes. And there are people dumb enough to believe it.

Rebecca Patterson at the Council on Foreign Relations called it more signal than substance, and pointed out that $4 billion is a rounding error next to what this government borrows. She is right about the size. Four billion is nothing against $40 trillion in debt. But it is not just the amount. It is what the action tells you.

This is not routine. This is a us debt crisis where no one wants to lend the US government money, and the ones that will are demanding higher rates to do so.

The Interest Bill Nobody Can Pay

Why is Washington so desperate to hold that rate down? One reason. Through July of this fiscal year, the federal government paid almost a trillion dollars in interest. Just interest. Not one penny of it paid down the balance.

That is now the third largest line item in the budget. We spend more on interest than we spend on the military. The only things bigger are Social Security and Medicare.

Go back to that household. Four hundred grand in credit card debt, and the interest payment alone is the third biggest bill in the house. That family is not getting out with a good budget. They are getting out with a miracle or a bankruptcy.

Is the Fed Printing Money to Cover the Debt?

This is where the internet loses its mind. Some people claim the federal government is already printing money to buy up government bonds and prop the thing up. That is not true. It is not happening. Not yet.

Here is what the Federal Reserve is actually doing. It is buying about $10 billion a month in bills, the short-term stuff, the paper that comes due in three months, six months, or a year. The reason is technical and boring. It just keeps the right amount of cash sloshing around in the banking system.

Real money printing was the 2009 to 2020 version. That was the Fed buying long-dated bonds on purpose to force long-term rates down. Short-term bills and long-term bonds are two completely different tools. Anyone telling you they do the same thing either does not know what they are talking about, or hopes you don't.

So no, the Fed is not currently bailing out the 30-year bond. But eventually it will. The government has to borrow roughly $2 trillion of new money every year and roll over trillions more that keep coming due. A $4 billion buyback does not touch that. The Treasury can double it again and again, and it still will not matter.

Because the Treasury does not have a printing press. Every single dollar it uses to buy a bond is a dollar it had to borrow first. You cannot borrow your way out of a borrowing problem, which is the core of this us debt crisis.

The Path of Least Resistance

They will try to inflate this away

There is exactly one institution in this country that can create dollars out of thin air. If long-term rates keep grinding higher and the interest bill keeps eating the budget alive, the Fed is going to get pulled back in by the long end. Not because it wants to. Because the alternative is a federal budget that no longer works. An insolvent treasury.

When the Fed starts printing money to buy bonds and hold rates down, it will be inflationary. It always is. They will do it anyway because they have no choice. Washington never solves a problem it can hand to the next administration.

That is the government's problem. Here is yours. The 30-year rate does not just stay in Washington. It is a number the entire lending world prices off of.

The average 30-year mortgage was 6.65% for the week of August 20th. Six months ago, it was only 6%. Nobody in Congress voted for that. The Fed did not raise rates. That is just what happens to a young couple trying to buy a house when the bond market decides Uncle Sam is a riskier customer than he used to be.

Inflating the debt away is the oldest play in the book. It is not a conspiracy theory. It is just arithmetic. When you owe $40 trillion in a currency you control, making each dollar worth a little less is the least painful exit available to a politician.

The problem is it has never once worked.

• It failed in Germany and Austria.
• It failed in Greece and Argentina.
• It failed in Zimbabwe and Venezuela.

It will not work here either.

How to Protect Your Portfolio from the US Debt Crisis

1. Sell Long-Term Treasuries

Go through your retirement account and sell anything tied to long-term treasuries. Treasuries are supposed to be the safest investment you can make. The 20-year Treasury Bond ETF, ticker TLT, tells a different story. If you bought it six years ago, you have lost 52% of your money, and even more in purchasing power.

If you own a bond fund, a target date fund, a balanced fund, an income fund, anything with "aggregate bond" in the name, part of your money is sitting in these long treasuries whether you chose them or not. These funds have now been underwater for over 2,000 days. They may never come back. Zoom out to 2004, and you are still down 22 years later.

If this is you, you did not do anything stupid. You did the responsible thing. You were told your entire life that treasuries are the safe money, the ballast, the part of the portfolio that let you sleep at night. For 40 or 50 years, that advice was correct. It built a lot of retirements in this country. The rules changed, not your judgment.

I would not want to be holding target date funds. I definitely do not want the old 60/40 portfolio. Any government debt outside of short-term treasuries needs to be gone.

2. Move to Short-Term Guaranteed Yields

If you want fixed income, you want guaranteed yields. Buy SGOV, the zero to three-month treasury bond ETF, currently yielding about 4%.

It is not that the market thinks Washington might miss a payment. We know they will just print the money. But printing money devalues the very dollars you are getting paid. Investors need enough interest to offset the loss to the value of those dollars. The worse this gets, the more money they have to print to meet their obligations. The more they print, the more the dollar declines. That is when it snowballs.

3. Focus on Hard Assets and Productive Land

Some of the best opportunities over the coming years are going to come from the most boring corners of the market. Gold, copper, energy, infrastructure. Real things in limited supply that cannot be created with a keystroke at the Federal Reserve.

When a government reaches the point of bidding at its own auction, the things that hold their value tend to be the things nobody can print more of. Productive land is a perfect example. Farmland and timberland will keep producing food and lumber regardless of what happens to interest rates. Those outputs rise in value alongside inflation and protect your purchasing power.

You do not need millions of dollars to go out and buy a forest. Weyerhaeuser, ticker WY, is the biggest timberland REIT in America. It trades at $24 a share and is sitting near its lowest price to book value in decades.

Surviving the Dollar's Decline

The worst thing you can own is US dollars. The dollar has lost 96% of its purchasing power since the Federal Reserve was created in 1913. It is the only asset guaranteed to lose value. Every year, those dollars buy you fewer goods and services than they did the year before.

Long rates will stay uncomfortable a lot longer than most people are ready for. The Treasury will keep raising these buybacks, and it will keep not being enough. Four billion or twenty billion does not move a $2 trillion a year problem. The Federal Reserve will eventually have to step in on the long end, and the bill for that gets paid in the value of the dollar in your pocket.