A Government-Fueled Rally
On paper, America is in one of the strongest booms in decades. Stocks are flying high yet many families still feel squeezed. There is an uneasy sense that all the strength might be more fragile than it appears. Bank of America strategist Michael Hartnett has given the moment a name: the “boom loop”. In his view, it’s a powerful bull market propped up by government spending, AI investment, and inflation rather than old-fashioned productivity growth. How this boom loop plays out could shape your financial future.1
Growth in Name Only
Much of the current economic strength is nominal rather than real. In plain terms, the economy looks good because there are more dollars in circulation, but those dollars buy less. It is not because America is suddenly producing more per worker. Bank of America estimates that U.S. nominal GDP could be roughly 75% higher by 2027 than it was in 2020. What sounds like an enormous jump would actually reflect higher prices and aggressive fiscal policy rather than genuine productivity gains.2
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On the spending side, federal outlays have climbed around 60% since 2020. Large ongoing deficits are funding programs, infrastructure, and various policy priorities. Money on that scale flows into the economy and lifts corporate revenues and wages. It also pushes asset prices higher, giving stocks added support, especially in AI. Washington’s willingness to run large deficits has been a major tailwind for risk assets.4
The Hidden Cost: Debt, Inflation, and the 5% Fault Line
None of this is free. The boom rests on a rapidly growing federal debt load and on investors’ continued willingness to finance it. Policy analysts at Brookings and Third Way note that interest on the national debt is now among the fastest-growing items in the federal budget. Projections show it consuming a larger share of tax revenues if interest rates stay elevated. As interest costs rise, they crowd out other spending and force difficult budget trade-offs.
Hartnett’s key insight centers on the 30-year U.S. Treasury yield and the 5% mark as a fault line between boom and bust. That 5% refers to the interest rate the government pays to borrow money for 30 years, which helps set borrowing costs across the economy. If long-term yields hover near, but do not break above 5%, the system can muddle through. A clear and sustained move above 5%, however, would sharply raise the cost of financing Washington’s ambitions. The same forces that fueled the boom begin working in reverse.5
How Higher Rates Could Hit Stocks
Stocks could face pressure if long-term rates rise and stay high.
Valuations get squeezed first. Investors would expect more from stocks because they can earn higher returns from safer bonds. Stock prices would drop as a result. Growth stocks, especially in AI, often take the hardest hit since much of their value depends on future earnings.
Deficits become harder to ignore. Refinancing and expanding federal debt at higher rates gets more expensive. Markets begin to question long-term sustainability instead of looking past it. Risk premiums rise, volatility increases, and both stocks and the dollar come under pressure.
The real economy slows as well. Higher long-term yields make mortgages and business loans more expensive, which begins to cool housing and investment. Consumer borrowing follows. As growth weakens and valuations fall, rising risk premiums can trigger a sharp correction. Late-cycle Japan in the 1980s and U.S. technology stocks around 1999 are cautionary examples of how quickly sentiment and prices can reverse when the cost of money rises.6
Conclusion
Markets can keep rising for a time, but the foundation beneath this rally is becoming more fragile. Today’s bull run depends heavily on continued government spending and a bond market willing to finance it at manageable rates.
Recent signals from the Federal Reserve suggest support may not come easily. At the latest FOMC meeting, policymakers voted to hold rates. Several officials opposed any hint of cuts and warned the next move could even be a hike if inflation remains firm. 7
Gold enters the picture for a specific reason. It does not rely on future earnings or cash flows that lose value when rates rise. In periods of concern about debt, inflation, or currency weakness, Americans have historically turned to gold as a store of value that sits outside many of the financial system’s risks.
The boom is real. So is the bill that comes with it. For those who want to participate in the upside while preparing for potential risks may find that holding hard assets is an effective way to do both. If you want to protect your portfolio with physical gold, or through a tax-advantaged Gold IRA, call American Hartford Gold today at 800-462-0071.
