When There Is A Death Spiral Of Debt And Stagflation May Your Boots Be Full Of Gold And Gold Stocks

Initially, when I started reporting on why I could see stagflation becoming a growing problem, I was in a small crowd. It still hasn’t become a front-page topic, although more are talking about it these days.

My forecast was based on concerns that government statistics were overstating economic growth and employment numbers, while also understating real inflation.

Where the jobs market goes, so goes the economy. In the latter part of Biden’s term, the economy was shedding full-time high paying jobs, while part-time jobs were on the rise as were government jobs. An economy that is forcing workers to lose high paying full-time jobs with benefits to take on one or more part-time jobs with no benefits is not a healthy economy.

Biden tried to prop up the jobs numbers by hiring government workers at a torrid pace, but that was smoke and mirrors as government workers are a drain on the economy. Proof that the jobs market was worse than advertised came out in the massive downward revisions.

If workers are having a hard time, there is no way the real economy isn’t. Despite the government statistics presenting a healthy economy during Biden’s term, economic reality set in during the election when voters handed the Democrats a stunning defeat giving Trump and the Republicans a resounding victory to take over the White House, House and Senate.

Voters were concerned about the health of the economy and their job security while feeling the pain from long-term inflation. Rightfully so, they could tell that the economy was soft and inflation was strong.

Despite the farcical numbers coming out in the government statistics, they faced reality every time they bought something and when they struggled to stretch what they received on payday.

Trump and the Republicans benefitted from the voters angst with a landslide victory. Initially, after the election and through to inauguration day, there was some relief amongst voters and CEOs of companies. But, it hasn’t lasted very long.

The reason it has been a short-term honeymoon is because mass deportations and tariffs cause the economy to slow down and inflation to pick up. The uncertainty of the tariffs (due to Trump’s on again, off again, back on again plans for tariffs) makes it challenging for consumers and companies to make plans.

The result is that well before the actual tariffs are seen in the economic numbers, it becomes a self-fulfilling prophecy.

The same can be said for the mass deportations. Deportations pull migrants out of the economy, and others leaving voluntarily does the same. Many stay in America in a state of fear that causes them to stop showing up for work and at stores to shop because they are scared to be caught by ICE agents. Which also causes the economy to slow and inflation to kick in as companies have to find replacements and pay them more.

Stagflation started during Biden’s term, but it was somewhat masked by the phony government statistics. Voters could tell that the economy was soft and inflation was a lot higher than what was being reported.

They only showed slightly higher inflation than economic growth, maybe a percent or so, while in the real economy it was likely over two percent. Trump’s stagflation will be much worse and could rival Carter’s stagflation.

At least Trump and his devout economic advisor Bessent somewhat see the writing on the wall. Trump is mentioning that there could be pain before gain and Bessent is making the case that after the out of control government spending by Biden, there will be a “detox” period.

It shouldn’t surprise me, as I have seen Washington politics turn people like Bessent from someone who would be the economic adult in the room into a yes-man. But, in his case, it does because prior to going to Washington he was a levelheaded market guy. Now that he has arrived, he says the economy has relied on out of control government spending during Biden’s term, and totally forgets that Trump was almost as bad in his first term. Like Obama, Biden and Trump were both devastating.

Elon Musk’s DOGE is giving Trump some cover and they still have many in the MAGA crowd and other Trump fans fooled into believing they will slash spending. While the GOP led House has different plans. They want to increase the debt ceiling to $40 trillion and keep the Biden spending intact. So much for slashing spending.

A trend that is coming to light of late is that Elon Musk’s DOGE wants to slash government workers, including at the IRS. People have put two plus two together and are talking about not filing or paying their taxes. They are emboldened by the prospect that Elon will fire many IRS workers and they can defer their taxes for well into the future.

So, the government will spend around $7 trillion by keeping Biden’s spending going, and the revenue from taxes which was $5 trillion, making for a $2 trillion deficit, is likely going to see a drop from the firing of IRS people. This could on its own cause a $3 trillion deficit.

Then there is the $9 trillion debt elephant in the room, which is how much old debt built up with much lower interest rates that has to be rolled over into current interest rates. Combining less money from tax revenue, the Biden/Trump spending and rolling over of the debt have the deficit on a path to well over $3 trillion and it could reach $4 trillion.

If you then consider the slowing in the economy and inflation picking up due to mass deportations and tariffs, it makes a recipe for the Death Spiral of Debt getting much worse. As well as stagflation.

During Biden’s stagflation, it didn’t become a front-page topic, but Trump’s stagflation will and it is being talked about much more on Wall Street, and by economists and talking heads in financial media.

It is kind of in two camps at the moment. Some Wall Street folks are forecasting an increased chance of recession. In a very short period of time, the chances have increased from around 10%, some, including Jeffrey Gundlach, see the chances at over 50%.

Consumer confidence is dropping like a stone when it comes to growth, while they are forecasting inflation at over double what the Fed folks see coming. Team Fed is forecasting, without saying it, mild stagflation, while consumers are predicting troublesome stagflation that won’t be transitory.

Corporate America is leaning a lot more toward agreeing with consumers than the Fed. Which is double trouble because while the Fed waits for the dots to plot, consumers and companies are making their moves immediately.

If they are left to what they see in front of their noses, consumers and companies will pull in their horns and slow down their spending. Which is what causes recessions.

When the Fed went from higher for longer to starting a rate cutting cycle in their September meeting, the speculation was that there would be five or more cuts in 2025. Then after they hit the pause button in January, it quickly dropped to two or maybe even none in 2025.

Lately, due to the concerns of a recession kicking in, I am starting to hear economists going back to the five in 2025 scenario.

The Fed is in a quandary, either they throw the economy, workers and Wall Street under the bus, or inflation. They say their dual mandate is for maximum employment and stable prices. But the unspoken third mandate is to bail out Wall Street at all costs.

Trump certainly wants lower rates because that enables him to keep spending like a drunken sailor (sorry Elon, but your guy loves higher spending and debt). Wall Street wants them as well because the market is susceptible to a big correction as valuations are extremely high. If a recession takes hold, earnings drop while stocks are at a premium, which is a great way to see stock prices drop into a painful correction.

Although there is no love lost between Trump and the left leaning Fed, I doubt they will stay out of the stimulus business for too long. In the March meeting, they stated their plans are to slow down the runoff of their balance sheet. It won’t be long before the Fed gets back into the QE game.

If they pull the trigger soon enough, they may be able to dodge a recession and stock market crash. But, that will cause inflation to run much hotter than they want. It’s coming to pick your poison time, cause a recession and a stock market crash, or let inflation blast off.

If they get back in the QE game, you can be sure the politicians will increase spending from its already insane level. Which means the Death Spiral of Debt will get much worse. It already has a straw that will break the debt camel’s back from the cost of servicing the debt.

What’s An Investor To Do?

The Death Spiral of Debt made worse by the unsustainable cost of servicing the debt, plus growing stagflation, put investors in an all roads lead to gold scenario. If you don’t believe me, listen to Ray Dalio talk about the Death Spiral of Debt.

Astute investors and central bankers have seen for several years that the debt and fiat currency system is broken beyond repair. Which is why gold is trading at record highs against every fiat currency.

We are in the midst of the start of the Gold Standard 2.0, whether generalist investors in the West see it or not. To get an idea of how early we are, consider that in America, only around 2% of the debt is backed by gold. It should be much more than 10% at a minimum, 20-30% would be healthier, while 40% or more is the healthiest.

To get up to those levels is the path to $20k plus gold within the next 10 years.

The Death Spiral of Debt and Gold Standard 2.0 have me absolutely convinced gold is heading to $20k or more within 10 years. Stagflation will cause it to happen sooner, Trump’s stagflation could be a lot worse than Carter’s stagflation because the debt-to-GDP ratio was nowhere near where it is now during Carter’s presidency.

With gold above $3000, high-cost gold miners are making around $1000 for every ounce of gold they mine. While low-cost gold miners are free cash flow machines as they are mining gold for around half the price they are selling it for. Which makes gold mining one of the best businesses to be in.

Gold mining will continue to be a wonderful business for many years into the future. Likely to be measured in decades. The reason I can confidently say that is because the supply chain is broken.

While gold is trading at record prices against every fiat currency, the gold miners as an industry are struggling to increase production and replace their old mines with new mines.

Looking down the supply chain, there are not enough high-quality gold mines in development to help the gold miners increase production and replace what they mine.

To help the gold mine developers, the industry needs explorers with important discoveries, but that cupboard is bare as well.

The supply chain is broken to the point that it could easily take 20 years or more to fix it, and this is happening while the world moves to the Gold Standard 2.0.

Gold is a tremendous way for investors to protect their wealth, and fight against the devastation of purchasing power of fiat currencies that has gone on for five decades since the Gold Standard ended.

For investors that want to grow their wealth, the gold miners, gold mine developers with high-quality projects and explorers with important discoveries are a fantastic option.

Investors like Warren Buffett love to talk about swinging for the fences when they see a fat pitch. Gold is a fat pitch and the gold stocks have never been fatter pitches than they are now. While gold is trading at record prices against every fiat currency, gold in the ground is being priced like gold is in a bear market.

It’s time for investors to step up to the gold stock plate and start swinging the bat as it is like shooting golden fish in a barrel.

All the best,

Allan Barry Laboucan