Mark Spitznagel, co-founder and CIO of private hedge fund Universa Investments, is known for earning juicy returns for wealthy investors with his patented tail risk hedging strategy, a form of market “insurance” that pays handsomely during periods of economic and market crisis. tumult. But when it comes to his generation’s debt obsession, Spitznagel seems more like a social activist than an enterprising money manager.
For years, the 53-year-old has warned that the national debt — which recently soared to more than $34.5 trillion — is unsustainable. He argues that when rising debt combines with decades of loose monetary policy that have pushed asset prices ever higher, with growing piles of consumer debt, and with the propensity of businesses to rely on credit during periods of stress, a “powder keg economy” is created that could go up in flames in an instant. It is the “largest credit bubble in human history,” Spitznagel said Fortune last year, warning that “it will have its consequences.”
With that in mind, we decided to ask Spitznagel, who has two teenage children, what this credit bubble will mean for future generations and what he thinks of his cohort’s debt-laden legacy. As usual, he pulled no punches.
“We have simply been incredibly irresponsible to future generations. They had no role in this, yet they will bear the brunt of it,” the hedge funder said Fortune. “We should all feel really, really bad, really bad. It will hurt people who aren’t even alive today. How is that fair?”
For Spitznagel, the United States’ unsustainable federal debt is downright immoral. He argues that it’s simply a way to give the next generation a jump start whenever problems emerge, especially problems that could hurt investors’ market returns. From spending billions to bail out “too big to fail” banks during the Great Recession of 2008 to pumping trillions into the economy to prevent a terrible recession during the COVID era, the federal government has succeeded for decades now to prevent large swaths of America from experiencing economic suffering in difficult times. These spending policies, which typically went hand in hand with near-zero interest rates from the Federal Reserve, helped stimulate markets and enabled stunning post-recession recoveries in the 21st century. That’s a good thing in the short term, but avoiding worst-case scenarios through heavy deficit spending comes at a cost to future generations, according to Spitznagel.
It is essentially a “massive, massive transfer of wealth brought forward from the future,” he said. “There is something immoral, quite simply, about public debt: individuals can take out debts for their own benefit, to be paid by people who have had no say in that debt.”
Spitznagel’s concerns about growing US debt are not without merit. A mix of expensive spending, COVID-era rescue packages and weak tax revenues have helped push the U.S. national debt 28% higher than in 2020, from $26.9 trillion to more than $34.5 trillion. dollars. That left the U.S. debt-to-GDP ratio, which serves as a gauge of a country’s ability to repay its debts, at a record 123% in January, according to the International Monetary Fund.
Even worse, economists at the University of Pennsylvania’s Wharton School found in a 2023 study that the United States has about 20 years left of “corrective action” to repair the national debt before it reaches 200% of GDP. After that, “no future tax increases or spending cuts will prevent the government from defaulting on its debt,” they warned.
While the United States defaulting on its debts is a very unlikely scenario, and something that may not happen for decades, the impact of the rising national debt is already being felt to some extent. According to the Congressional Budget Office, the US federal government will spend $870 billion, or 3.1% of GDP, on interest payments on its debt this year, more than the entire budget of the Department of Defense. Over the past two decades, the United States has spent an average of just 1.6% on debt service, about half of this year’s projections. And CBO expects government interest spending to rise to 3.9% of GDP over the next 10 years. To illustrate how extreme interest payments are, it should be noted that U.S. federal, state, and local governments combined spent a total of just $810 billion on education in 2023.
In total, net interest payments on the federal debt will amount to about $12.4 trillion over the next decade, according to the Peter G. Peterson Foundation, a conservative think tank. That’s money that could be spent on a lot more useful things.
For Spitznagel, this costly reality means that policymakers must act immediately to put the U.S. national debt back on a sustainable path. But unfortunately, he predicts, it may already be too late to do it painlessly.
The hedge funder argued that after decades of loose monetary policy and rising debts, it may be impossible for the next generation to end the debt cycle without incurring serious consequences in the form of an epic recession. This means that when today’s young people come of age and a crisis strikes, they will likely “have to do more of the same,” accumulating debt to avoid worst-case scenarios.
But you can’t keep borrowing forever, Spitznagel says, and he fears we’re well past the point where we need to cut back. “You can argue that at some point it stops working,” he said.