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US debt, what they will do and how you should invest!

We all know America has a debt problem. So what is likely to be done about it.

Higher taxes and spending cuts are politically painful. Faster growth cannot be guaranteed. Default would be hugely disruptive.

My base case is modest fiscal adjustments combined with pressure to keep borrowing costs low with financial repression a credible part of the mix.

That means channelling savings into government debt and suppressing financing costs. When interest rates stay below inflation, savers gradually transfer purchasing power to borrowers.

The government will stealthily inflate away the debt but they must keep growth going

Possible winners

Equities DM and EM: Companies with pricing power can increase revenues and protect margins. Favour reasonably valued businesses with strong balance sheets; an expensive stock can disappoint even when its business benefits. 

Selected property and infrastructure: Potential value where prices reflect financing pressures, income adjusts with inflation and borrowing costs are fixed.

Commodities: Potential beneficiaries of supply-driven inflation, though recent gains make a blanket “cheap” label difficult. 

Gold: Lower real yields support its appeal, but its strong performance means protection does not necessarily come cheaply. 

Possible losers

Long-term nominal Treasuries: Higher yields improve starting value, but fixed payments remain exposed to inflation. Suppressed yields could initially lift prices.

The US dollar: Lower real yields could weaken its appeal. Safe haven or reserve currency status gets eroded with financial repression. Earlier official assessments flagged overvaluation.

Corporate bonds with tight credit spreads: Limited extra yield leaves little compensation for deteriorating credit conditions. 

Expensively valued equities with weak pricing power: High expectations, rising costs and heavy refinancing needs can be a damaging combination. This is a vulnerable subset of equities, not a verdict on the entire asset class.

Cash, deposits and fixed nominal income also suffer when after-tax returns trail inflation, although they cannot meaningfully be ranked by valuation alongside shares and bonds.
Financial repression could buy Washington time. Persistent deficits could still overwhelm its benefits.

For investors, the challenge is preserving purchasing power without overpaying for protection.