US debt could balloon past the point of no return in 20 years. Here’s what it could mean and 3 assets investors can use to hedge, according to a Wharton professor.

• Market veterans warn of a credit bubble burst that could impact interest rates and cause inflation.
• Kent Smetters forecasts a point of no return for the US economy in 20 years due to rising debt.
• To hedge against an economic downturn, Smetters recommends buying bonds that adjust for inflation.

The US economy is rapidly heading into a credit bubble that will burst. At least, that’s what some market veterans believe.

The hedge fund manager Mark Spitznagel, whose firm helps to protect investors from unforeseen Black Swan events, predicts that the bust will send the stock market into its worst crash since 1929. Billionaire hedge fund manager Ray Dalio has also said that we are heading into a debt crisis.

But how bad can things be, and when could this happen? It’s hard to say for certain. But Wharton Professor Kent Smetters, a faculty director for the Penn Wharton Budget Model, which provides budgetary projections and economic analysis of US legislation, says we could hit the point of no return in 20 years.

Federal spending ballooned after the global financial crisis and then accelerated during the pandemic, outpacing tax revenue and creating a deficit. The government has been borrowing the difference.

To put things into historical perspective, the general measurement of gross federal debt as a percent of gross domestic product is at 123%. In WWII, at the height of military spending, it was 119%. But, the number economists care about is the US federal debt held by the public as a percent of GDP because it removes debt held internally by the US government, Smetters noted. This ratio is now above 96%. At the height of military spending in World War II, it peaked at 106% in 1946.

A report Smetters co-authored estimates that if federal debt held by the public to GDP surpasses the 190% to 200% threshold, the US economy would be past the point of no return; interest payments owed on the debt would be so large that even steep tax hikes couldn’t fix it. The government would be out of options outside a massive decrease in spending, which isn’t plausible, Smetters said.