(Kitco News) – The list of prominent figures warning about the U.S. government’s current fiscal deficit and the increased spending promised by both presidential candidates continues to grow as a respected billionaire hedge fund manager recently suggested that rising bond prices could force unexpected actions from the government following the election.
“We are going to be broke really quickly unless we get serious about dealing with our spending issues,” Paul Tudor Jones told CNBC’s Andrew Ross Sorkin on Tuesday.
The Tudor Investment founder and CIO expressed concerns that if the U.S. continues to spend beyond its means, a major sell-off in the bond market could ensue, leading to a spike in interest rates.
“The question is: after this election, will we have a Minsky moment here in the United States and U.S. debt markets?” Jones questioned. “Will we have a Minsky moment where all of a sudden there’s a point of recognition that what they’re talking about is fiscally impossible, financially impossible?”
Jones’ concerns are not without merit, as the federal deficit for the 2024 fiscal year was above $1.8 trillion, according to the Treasury Department, an 8% increase from 2023.
To help offset the deficit, the government has to sell Treasury bonds, and with investors around the world becoming increasingly cognizant of the rapidly rising U.S. debt, demand for Treasuries is waning, which means that the rate of return will need to rise to stoke more demand.
However, with the U.S. federal debt now above $35.7 trillion, any rise in interest rates only compounds the matter as the government is forced to sell even more Treasuries to cover the cost of servicing the debt, further adding to the deficit.
Jones noted that the budget deficits increased under both the Trump and Biden administrations, which led him to say that Trump and Vice President Kamala Harris are “least suited for the job ahead of them” regarding the budget. He also expressed concerns about another rise in inflation, especially if Trump wins and implements his planned tariffs.
“All roads lead to inflation,” he said. “I’m long gold, I’m long Bitcoin (BTC). I think commodities are so ridiculously under-owned, so I’m long commodities. I think most young people find their inflation hedges via the Nasdaq, which has also been great. I probably want to have some basket of gold, Bitcoin, commodities, and Nasdaq, something like that, and I want to own zero fixed income.”
As for how the government can remedy the problem, Jones said the only way to do that is to “inflate away the debt.”
“The playbook to get out of this is that you inflate your way out … you run interest rates below inflation and nominal growth rates above inflation, and that’s how you reduce your debt to GDP,” he said, adding that the Federal Reserve should continue to cut interest rates. “Historically, the way every civilization has gotten out is they’ve inflated away their debts.”
Recently, the Federal Reserve Bank of New York indicated that the average inflation expectation of US consumers in the next 12 months is about 3%, which is notably above the Fed’s preferred inflation target of 2% per year.
According to Jones, rising US government spending and upcoming tax cuts put this target out of reach. This led him to warn that the U.S. is on a path to further deficits unless it decreases its spending, noting that the national debt has increased to 100% of Gross Domestic Product (GDP), a 60% increase in 25 years.
Some of the ways it could achieve a reduction in spending include allowing the tax cuts from Trump’s first term to expire or a major reduction of the federal workforce, Jones said.
The Tudor Investment founder is not alone in his penchant for gold and Bitcoin amid the mounting economic concerns as billionaire investor Ray Dalio also likes the two stores of value, though he sees gold as the better option during these times of economic instability.
“If you put a gun to my head, and you said, ‘I can only have one,’ I would choose gold,” Dalio said in an interview with CNBC.
“I own a very small amount of Bitcoin. I’m not a big owner,” he added. “There are certain assets that you want to own to diversify the portfolio, and Bitcoin is something like a digital gold.”
While he has previously said that Bitcoin can serve as a hedge against inflation, if forced to choose between gold and BTC, gold wins, hands down, due to its long history as a “storehold of wealth,” which means that it can be held and converted into money at a relatively similar rate as its purchase price,” Tudor said.
And according to VanEck CEO Jan van Eck, the start of the Fed’s interest rate easing cycle is “great for both gold and Bitcoin” and could eventually lead to the price of Bitcoin hitting $350,000.
“Bitcoin is growing up and will be eventually half the total market cap of gold, so that’s about $350,000, so quite a ways to go from here,” he said, indicating its long-term growth potential.
