Originally published on LinkedIn in Jan Brzeski’s Observations newsletter. Republished here with permission.
Imagine if you were a household that borrowed more money every year. Eventually, you would have a crisis. You would need to declare bankruptcy, agree that you could not pay off your debts, and start over. It would be very hard to borrow money in the future and you would need to get used to a much more frugal lifestyle.
That’s essentially where American society stands today, along with many other rich countries. Here are the numbers that matter: National debt – $40 trillion. Gross domestic product (total size of our economy)--$33 trillion. Debt relative to the economy–more than 120%, more than double the average in the late 90’s and early 2000’s. The annual budget deficit is around $2 trillion, and the interest on the national debt is around $1 trillion per year.
Maybe the most shocking numbers: total revenue for the U.S. government is $5.4 trillion per year, but we are spending $7.4 trillion per year. To put these numbers in perspective, that’s like a household with income of $100,000 per year spending $137,000 per year, while owing a total of $740,000.
Why inflation is almost certain to escalate and remain elevated
England, France and even China all face similar challenges. That’s at the root of the protests and rioting in France right now. And Donald Trump made a comment recently without much fanfare or attention that investors should consider carefully. Here is what he said:
“You know, inflation, certain levels of inflation will also pay off that debt very rapidly. Very rapidly.” –Donald Trump, Sept. 26, 2026
Trump was referring to “inflating away the national debt.” This is an option that we have as a country which a household deep in debt would not enjoy. If we allow the level of inflation to be 3% or 4% for many years, rather than the current Federal Reserve target of 2%, then it becomes easier to service the existing national debt and potentially even start reducing it, as a percentage of the economy.
Of course there is a downside, because every dollar buys less every year, and households feel like they are losing ground all the time. But compared to the other options, inflating away the debt looks like the most realistic path. Consider the other options:
If the U.S. defaults on the debt, it would be a catastrophe and the U.S. could no longer borrow money. If we raise taxes dramatically, that chokes off the economy and growth. Cutting spending is incredibly difficult both politically and due to baked-in mandatory spending for Social Security and Medicare / Medicaid. The only other hope would be that AI kicks off a period of much faster growth in the economy that magically solves our problems. But we can’t count on that.
Things investors may want to do, and to avoid, in the face of greater inflation
The chart below outlines a few good and bad investing ideas for inflationary times. I am ignoring some nuances that may be important, such as whether inflation is accelerating or not, and whether inflation is expected or not. This chart is premised on 3-4% inflation for many years to come, with an eye to the possibility of inflation rising further.
Investments to avoid
Cash and equivalents. Inflation is a tax on savings and destroys value of cash and equivalents.
Long-maturity bonds. Not very attractive unless they are both safe and also yielding quite high returns. Also, bonds leave the investor exposed to losses if inflation (and therefore interest rates) rise further.
Real estate with long-term leases whose lease rate increases are fixed or capped. The value of the real estate will generally not keep up with inflation if the property is burdened with this type of lease.
Certain bank stocks Consider First Republic Bank. It had great clients and very few defaults on its loan investments, but when rates rose a few years ago (which frequently happens when inflation is higher), it lost a huge amount of book value and collapsed because it owned long-maturity loans that fell in value. Bank of America’s stock has been down recently for similar reasons.
Investment themes to consider
Most real estate and REIT stocks. Real estate owners can raise their rents (other than when there is rent control)
Hard assets. Precious metals and commodities tend to keep up with inflation.
Certain foreign investments. Assets in countries with relatively lower inflation can be profitable because the U.S. dollar will tend to depreciate when U.S. inflation is elevated.
Many public equities. Companies with strong pricing power can raise their prices with inflation. Just realize that real returns (defined as total return minus inflation) may be lower than in recent history.
Inflation-protected U.S. bonds (“TIPS”). This is the most direct hedge against inflation. You earn a guaranteed return above the inflation rate, backed by the U.S. Treasury.
Short-term loans or bonds. If you can lock in a return well above the rate of inflation, with risk under control, this can make sense. The short maturity allows you to reset the rate or shift to other investments if inflation accelerates. (This is the investment strategy that I have been focused on for the past 17 years, focused on real estate loans).
Borrowing long-term at low rates. If you own a house with a 30-year mortgage at 3%, don’t pay it off! Instead, you can invest that money and likely earn a higher return.