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Why IMF Is Worried about the US’s Expanding Debt Profile

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IMF says tax cuts are unfunded

As we’ve seen in the previous part, all is not hunky dory with the International Monetary Fund’s (IMF) forecasts. On one hand, it has increased US growth projections due to the stimulus from tax cuts. On the other hand, it believes that there could be bad news ahead because of the cuts. Since these tax cuts are unfunded, the IMF believes that there will be a need for severe spending cuts in the coming years.

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US government debt to expand

IMF also warns that the US government’s debt will keep on expanding. It predicts that the US debt-to-GDP (gross domestic product) ratio will expand to 116.9% by 2023, surpassing Italy’s ratio, which should narrow to 116.6% by 2023. IMF’s debt forecasts are similar to the Congressional Budget Office’s (or CBO) predictions. CBO has mentioned that the US debt “is far greater than the debt in any year since just after World War II.”

US debt and gold

The US budget deficit has been increasing by the day. The country recorded a budget deficit of $215 billion in February 2018, the largest in six years. While fiscal income dropped to $156 billion, 9% lower year-over-year (or YoY), spending increased 2%. Since October 2017 (the beginning of the fiscal year), the deficit has widened to $351 billion.

The main argument against the rising debt is that if it rises beyond a certain point, the country will have to raise taxes and cut spending in productive areas to service its interest costs. Such developments would be negative for economic growth. If economic prospects aren’t bright, people don’t have many options to fall back on. Gold is one of those options. According to a senior portfolio manager at Sprott, a precious-metal-focused fund, the demand for US debt from international investors is slowing, which is also leading to pressure on the US dollar, thus supporting gold.

Many market participants expect debt to rise substantially under the Trump administration. A rise in US debt would be negative for the US dollar’s long-term profile. The US dollar (UUP) affects gold prices, which affect gold companies such as Agnico Eagle Mines (AEM), Barrick Gold (ABX), Yamana Gold (AUY), and Newmont Mining (NEM) as well as funds such as the SPDR Gold Trust ETF (GLD) and the VanEck Vectors Gold Miners ETF (GDX).

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