As the national debt continues to surge past $36 trillion, some analysts believe a second Trump administration may view inflation not as a problem to solve, but as a potential mechanism to manage that debt.
This presents both challenges and opportunities for Registered Investment Advisors (RIAs) as they guide clients through a shifting macroeconomic landscape. Despite campaign promises to "end inflation on Day 1," former President Donald Trump has made several policy statements suggesting he may favor economic conditions that could prolong inflation.
If inflation stays elevated, the value of the national debt—in real terms—declines. That’s because inflation reduces the purchasing power of the dollar, and by extension, the real value of outstanding debt. Jeff Muhlenkamp, manager of the Muhlenkamp Fund (MUHLX), is among those preparing for that scenario.
“There are reasons to believe we’re entering another inflationary period,” he told Business Insider.
“Governments that borrow too much tend to solve their debt problems by devaluing their currency.” That sentiment is echoed by Scott Barbee, manager of the Aegis Value Fund (AVALX), who points to the sharp increase in debt servicing costs. “With $36 trillion in debt, a single percentage point increase in interest rates means $360 billion more in spending just to cover interest,” he said. “It’s not sustainable.”
The debt-to-GDP ratio has more than doubled since 2008, rising from 64% to over 120%. That rising debt burden risks undermining the perceived safety of U.S. Treasurys and the long-held assumption that the U.S. government is the world's most reliable borrower. A loss of that credibility could trigger a selloff in Treasury markets and a downgrade of U.S. credit ratings—outcomes that would increase market instability and investor anxiety.
Trump’s ongoing emphasis on tax cuts, which could exacerbate deficits, has some experts speculating that sustained inflation may be part of the broader strategy. For RIAs, understanding the implications of this potential macroeconomic shift is crucial.
Barbee explains the underlying mechanism: “If debt is denominated in your own currency, the traditional way out is currency debasement. That’s what history shows us.” Whether through expansionary fiscal policies, rate cuts, or continued monetary easing, the result is the same—reduced real debt and a higher nominal GDP, which lowers the debt-to-GDP ratio.
Trump has already pushed for lower interest rates, which could fuel inflation while simultaneously making debt service cheaper. In the short term, this might ease government financing pressures. But RIAs should be cautious: if inflation accelerates beyond expectations, it could lead to stagflation—low growth paired with persistent inflation.
“I don’t see a long-term path out of this without debasement,” Barbee noted. “It’s likely we’ll face persistent inflation for years, and that changes how investors should think.”
For clients, the implications are clear: traditional fixed-income assets may underperform in an inflationary environment, while real assets—especially gold and energy—can serve as effective hedges.
Barbee has allocated 25% of his portfolio to precious metals and mining stocks. Muhlenkamp has a 10% allocation to gold-related holdings. “Hard assets tend to do well during periods of debasement,” Barbee said. “They preserve value when the currency doesn’t.”
Muhlenkamp concurs, emphasizing that “anything you can’t print” becomes attractive in high-inflation periods. He cites the strong performance of energy stocks during both the 1970s stagflation and the 2022 inflation spike. Among his picks: EQT Corporation (EQT), a major natural gas producer.
For RIAs, that translates into a potential rebalancing opportunity. Funds like SPDR Gold Shares ETF (GLD) and iShares Global Energy ETF (IXC) offer broad exposure to two of the asset classes expected to outperform in a sustained inflationary environment.
Barbee advises advisors and investors to adopt a mindset shift. “You have to think differently about asset allocation when inflation becomes a policy tool rather than an obstacle,” he said.
As inflation threatens to become a more permanent feature of the U.S. economy, RIAs will need to adapt investment strategies to account for increased volatility, reduced real yields, and a greater role for real assets in client portfolios. While inflation erodes purchasing power, it may also reshape the investment landscape—and potentially, the national debt.
