July 22, 2025
Dear Investors and Friends,
Last month’s letter explored why India’s trade deficits have helped fuel growth, while America’s have often hollowed out key industries. But one reader wrote back with a pointed, and important, follow-up:
What happens if these needed changes don’t come about?
It’s a fair question. And it’s one that history has answered before.
There are only so many levers a government can pull in the face of too much debt and persistent deficits. Broadly speaking, they are:
- Raise taxes
- Cut spending
- Inflate the currency
- Restructure or default
As unappealing as those all sound, history shows us a consistent pattern: governments generally try to avoid the immediate pain of higher taxes or lower spending. The result? They often choose the more subtle path: inflating the currency by monetizing the debt and devaluing the dollar.
As Ray Dalio, one of our favorite thinkers and historians of global finance, put it:
“When countries have too much debt, lowering interest rates and devaluing the currency that the debt is denominated in is the preferred path government policy makers are most likely to take because its impacts are less obvious than the alternatives.”
We agree.
That path, while politically expedient, has real implications. It can feel good at first: lower rates stimulate asset prices, encourage borrowing, and delay fiscal reckoning. But longer term, it reduces the real value of your money. Your portfolio might go up in dollars, but your dollars go down in purchasing power.
Wait - How Can They Lower Rates and Print More Money?
It sounds counterintuitive, and frankly, it is. Normally, printing money stokes inflation, which pushes interest rates higher. But when the central bank is willing to buy government debt itself, it can push rates down.
Here’s how:
The U.S. Treasury issues bonds to fund deficits. Normally, those bonds are bought by investors - pension funds, banks, foreign governments. But when there aren’t enough buyers, the Federal Reserve can step in. It creates new dollars, electronically, and uses them to buy those bonds directly. This extra demand pushes up bond prices and pushes down yields.
That’s what economists mean when they say the government is monetizing the debt: turning government IOUs into newly created money. It avoids the pain of raising taxes or cutting spending, but at a cost, usually in the form of inflation and a weaker currency.
Why take this path? Because inflation quietly reduces the real value of existing debt. At the same time, it increases nominal GDP, making debt look smaller relative to the size of the economy. In short: inflation is one of the few politically palatable ways to reduce the debt-to-GDP ratio over time. But it does so by eroding the purchasing power of the very people funding that debt, savers and bondholders.
Most Americans don’t notice right away, because they measure their wealth in dollars. But if the value of each dollar declines, what looks like rising asset prices may simply be falling purchasing power.
Fixed Income: Role and Limits
We also want to acknowledge a simple truth: fixed income is not the ideal tool for hedging long-term inflation. Over decades, thoughtfully executed public and private equity strategies are far more likely to outpace inflation and grow real wealth.
But prudent investors still need to hold a portion of their capital in fixed income - because liquidity matters. Bills come due. Opportunities arise. Life happens. Private equity is illiquid. Public equity can fall dramatically in a short period. That’s why liquidity matters, and why fixed income, while imperfect, remains essential. Our job is to help ensure that the capital you hold in fixed income works on your behalf as hard, and as intelligently, as possible. And just as importantly, we believe you should hold enough fixed income, but no more than necessary.
What This Means for Investors
At Roosevelt Capital Management, we help clients play offense in the most defensive part of the portfolio, fixed income. In an environment like today’s, that matters more than ever.
Here’s how we do it:
- Asset Allocation: We help clients determine where to allocate within fixed income - taxable or tax-exempt, high-quality or high-yield - based on their specific needs, risk tolerances, and constraints.
- Security Selection: We don’t chase what’s popular - we seek what’s mispriced. Our process begins with “what’s for sale at a great yield relative to risk,” not “what do we like?” This helps us consistently find higher expected returns.
- Portfolio Construction: Diversification is good, but deworsification is not. We construct portfolios deliberately to ensure each position contributes meaningfully to the whole.
- Ongoing Optimization: Markets move. So do portfolios. For accounts that allow it, we regularly review the portfolio for ways to improve yield and reduce risk.
Whether the future brings inflation, volatility, or market-led discipline, we believe thoughtful bond management is essential to preserving purchasing power, protecting flexibility, and growing real wealth.
We’re grateful for readers like Dallas who ask hard questions. And we remain committed to answering them with the clarity, candor, and conviction you’ve come to expect.
Warm regards,
David and Mike
Disclaimer
Roosevelt Capital Management LLC is a registered investment adviser. The information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
Past performance is not indicative of future performance. Principal value and investment return will fluctuate. No guarantees or assurances that the target returns will be achieved, or objectives will be met are implied. Future returns may differ significantly from past returns due to many different factors. Investments involve risk and the possibility of loss of principal.
While all the values used in this report were obtained from sources believed to be reliable, all calculations that underly numbers shown in this report believed to be accurate, and all assumptions made in this report believed to be reasonable, Roosevelt Capital Management LLC neither represents nor warrants the values, calculations or assumptions and encourages each prospective investor to conduct their own review of the audits, values, calculations and assumptions.