Readers often call me “the eternal optimist,” always pointing out the positive aspects of the world we live in.

And it’s true that we in the West today are living longer, healthier, richer, safer, freer lives than any people in the history of the planet.

But I’m a realist – not a Pollyanna.

[ad#Google Adsense 336×280-IA]Our wonderful free-market system – in addition to being the greatest anti-poverty program ever devised – is responsible for continual improvements in innovation, efficiency and living standards.

The stock market is the epitome of this. With even a small amount of money, you can own a fractional interest in a thriving business – and your returns will be exactly the same as the wealthiest shareholders.

When a bear market comes along, as it does every few years, it generally lasts for 15 months with stocks declining an average of 32%.

Historically, these bear markets have been superb buying opportunities.

We loaded up on bargains during the Great Recession and are reaping the rewards today.

Looking ahead, it is reasonable to believe that rock-bottom interest rates, low inflation and cheap energy will drive corporate profits and share prices higher.

However, there is a looming threat that potentially overshadows everything positive about the economic outlook – and could ultimately trigger what I call “The Mother of All Bear Markets.”

I’m talking about a financial collapse caused by runaway government spending… and the unwillingness of our political class to do anything about it.

People have been warning about the federal deficit for decades, of course. Walter Mondale made it the centerpiece of his unsuccessful campaign against Ronald Reagan.

Yet the situation has only grown worse, and not just a little. The federal debt nearly doubled during George W. Bush’s eight years in office. And it doubled again during Barack Obama’s tenure.

It is now set to accelerate again.

Meanwhile, the sun is still shining. The birds are still singing. And the stock market – you may have noticed – just keeps pushing higher.

It’s begun to feel to some people like all this yammering about the national debt is really much ado about nothing.

Don’t believe it.

We all know what happens when individuals or businesses file for bankruptcy. But a major Western nation going broke – especially the world’s largest economy and most powerful country – is almost unthinkable.

Yet it could happen.

Not literally, of course. In a crisis, the federal government can always print money to pay its bills. But this comes with the virtual certainty of a severe currency devaluation… and the risk of an economic collapse.

These two combined would make the typical bear market feel like an afternoon on the Amalfi Coast.

People who say that all we need to do to solve the problem is raise a few taxes here and trim back a program or two there are simply not paying attention.

The problem is much bigger than that now. The numbers don’t add up and can’t be made to.

Let’s take a dispassionate look at the facts.

The Congressional Budget Office (CBO) just reported that the federal budget deficit rose $63 billion in the first half of fiscal 2017 (October to March) to $522 billion from a year earlier.

Net interest payments rose $7 billion – or 30% – in March from a year earlier. That’s because the Fed’s near-zero interest rate policy reduced interest payments even while the overall debt grew.

(The Fed’s bond-buying program also earned money that the Fed turned over to the Treasury each year, artificially reducing the deficit by tens of billions of dollars.)

But now the Fed is set on normalizing interest rates, with two hikes in the past year and two more likely before year-end.

(The CBO estimates that the debt will cost $160 billion more over the next decade if interest rates are even one percentage point higher than its current projections.)

Federal debt held by the public currently stands at 77% of gross domestic product. But as the Fed unwinds its multitrillion-dollar Treasury portfolio, the percentage will rise dramatically. And that’s before additional deficit spending.

The soaring debt will crowd out private investments – since more of people’s savings will be used to buy Treasury securities – reducing both productivity and incomes.

It also limits lawmakers’ ability to respond to emergencies like natural disasters, recession or war.

But the current $19.9 trillion national debt isn’t even the main problem. The current unfunded liabilities for Social Security, Medicare and Medicaid total $105.9 trillion.

And – to top it off – the states have a $3 trillion hole in their pension liabilities as well.

Think I’m exaggerating things? Heed the words of Douglas Holtz-Eakin, former director of the nonpartisan Congressional Budget Office:

“The federal government’s budget is on the road to hell. There is no polite way to describe why the world’s largest economy has placed itself on a trajectory that looks like a third-world debt crisis.”

He didn’t make this statement last week. He made it six years ago. Since then, the problem has become substantially worse, threatening not just your investment portfolio but our national security.

When will it happen? What can be done? How should you protect the nest egg you’ve spent a lifetime accumulating?

I’ll answer all those questions – and more – in my next column.

It’s not too early to despair. But it is too early to panic. Stay tuned…

Good investing,

Alex

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Source: Investment U