The United States national debt recently crossed the staggering threshold of 40 trillion dollars, sparking fresh concerns among market researchers that investors could be facing a lost decade. While high stock valuations have long been a point of contention for bears, Tom Essaye, founder of Sevens Report Research, suggests that the sheer scale of government borrowing is now the primary threat. Rather than pursuing unpopular measures like tax hikes or spending cuts, Essaye argues that policymakers are likely to attempt to inflate their way out of the crisis, effectively eroding the value of the currency to manage the debt burden.
This strategy leads to what is known as the debasement trade, which has already pushed yields on 10 year and 30 year Treasurys toward twenty year highs. Historically, when risk free returns on bonds become more attractive, they pull capital away from the stock market. However, Essaye warns that the true danger isn’t necessarily a sudden market crash, but rather a slow burn where persistent inflation consumes real gains. He points back to the era between 1966 and 1981 as a cautionary tale, noting that while nominal account balances seemed stable during that time, high inflation caused real purchasing power to plummet by roughly half.
One of the most alarming aspects of this outlook is the potential failure of traditional diversification strategies. In typical downturns, bonds often serve as a safety net for equity holders through a negative correlation. But in an inflationary regime driven by fiscal dominance, both stocks and long term bonds can fall simultaneously in real terms. Because investors demand higher yields to compensate for rising prices, existing long dated bonds lose value just as stocks struggle to keep pace with inflation, rendering the classic sixty forty portfolio ineffective as a cushion.
To navigate this precarious landscape, Essaye suggests shifting focus toward assets that maintain intrinsic value or possess genuine pricing power. This includes favoring short duration bonds and Treasury inflation protected securities over long term debt. On the equity side, companies with strong cash flows and growing dividends tend to fare better. Beyond traditional paper assets, he recommends increasing exposure to tangible holdings such as gold, commodities and natural resource linked stocks as a direct hedge against further currency debasement.