Funding the US government’s massive budget deficit (the gap between government spending and tax revenue) has become an act of madness. This week, the US Treasury announced that it would $180 billion Did you buy some new debt?
Washington’s spending is completely out of control. Even the International Monetary Fund (IMF) is raising its voice. Recently World Economic Outlook refers to expenditure “It does not fit with long-term fiscal sustainability.”
What’s notable is that the U.S. budget deficit is growing. It has surged from $1.4 trillion in fiscal 2022 to $1.7 trillion in fiscal 2023. And that trend is continuing. Now, more than six months into fiscal 2024, Washington is on track to run a deficit of more than $2 trillion.
Each year we can start anew with a new deficit. But the deficits don’t disappear when the new year begins. These deficits that accumulate each year add to the national debt. $34.6 trillion. “Something has to give in” The IMF warned.
This warning is not new. In 1986, economist Herbert Stein wrote: Ben SteinFerris Bueller, a professor of economics at the University of Michigan, observed that the U.S. government debt was on an unsustainable trajectory. He thus developed Stein’s Law.
“If something can’t last forever, it will stop.”
From what we have gathered, in contrast to theories, scientific laws are statements based on repeated observations that explain some aspect of the universe. For example, water boils at 212 degrees Fahrenheit. This is a scientific law. It has been observed repeatedly since before the scale of measurement was discovered.
What is the point?
Play crack up
The current financial and economic situation is challenging Herbert Stein’s Law. We live in an age where something that cannot last forever does not stop. Amazingly, it continues.
Year after year. Decade after decade. Debt accumulates. And it accumulates at a rate much faster than GDP growth. At the turn of the millennium, the U.S. national debt was $5.6 trillion and U.S. GDP was $10 trillion. Today, the national debt is $34.6 trillion and GDP is $27.9 trillion.
During this period, GDP grew by 179%. But the national debt grew by 517%. The nation’s income is overwhelmed by the national debt. Herbert Stein and the IMF are both right. “Something has to give.” But when?
At this point, the economy is fundamentally dependent on government debt. Any significant spending cuts or tax increases would cause GDP to stagnate or fall. This would result in a complete credit collapse and a 1930s-style depression, which is exactly what is needed to restore the economy to a fundamentally sound state.
Central planners like Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen are resisting. Their jobs and the ruling class depend on the status quo. So they are choosing inflation and financial repression. That is the end goal here, or at least the first step. Until the dollar loses all value.
Jerome Powell is 71. Janet Yellen is 77. Joe Biden is 81. Donald Trump is 77. Chuck Schumer is 73. And on and on.
The goal of the old men in power is to postpone the debt collapse. That is, to keep stimulating it. Until they die. In other words, they plan to die before Stein’s Law is realized. If they do, they will miss the ultimate misery and suffering they have created.
In the air
According to Stein’s law, eternity is a very long time. On the way to eternity, virtually anything can happen, including the unexpected.
But just because it hasn’t happened yet doesn’t mean it won’t happen. Unsustainable debt will eventually have to stop. Will you be alive when it happens?
The unsustainable trend of US government debt that Stein witnessed lasted longer than his lifetime. Herbert Stein died in 1999, decades before the collapse. Those of you reading this may not be so lucky.
For decades, Washington’s solution to the problem of too much debt has been to add more debt: when you max out one credit card, for example, you just charge it off with a new one.
As long as the U.S. government can continue to borrow trillions of dollars a year, it will never have to face the realities of its fiscal situation. But if Japan, China, Britain, or any other country stops lending to the U.S. government, things will get especially real.
Through the magic of central banking, the U.S. government can borrow without limit. The Fed uses quantitative easing to create credit out of thin air and lend it to the Treasury. The government then spends it on foreign wars, domestic crap projects, and free drugs. This spending, a form of corporate welfare, is supposedly good for business.
As we all experienced after the coronavirus money printing fiasco, such behavior has consequences. A devalued currency creates all sorts of instability beyond just rising consumer prices. It causes the breakdown of society.
Destination TEOTWAWKI
“In the long run, we all die.” John Maynard Keynes, the 20th century economist and Fabian socialist, said this. This was Keynes’s argument for why governments should borrow from the future to grow the economy today.
That suggestion is as foolish as eating corn on the cob. It might make today a little better, but it guarantees that tomorrow will be miserable.
Yet politicians love academic models that justify spending other people’s money to buy votes. Keynesian economics, and especially constant stimulus, does just that.
For the past 90 years, American politicians have tried to borrow the country and spend it for prosperity. For the past 15 years, the Federal Reserve has aggressively printed money to fund Washington’s massive borrowing binge. In doing so, the Federal Reserve is taking us to some very unpleasant places. And we are alive enough to experience it.
Sometimes the end of the world as we know it (TEOTWAWKI) comes while some of us are still here. We believe that the current episode of debt, deficits, and state-sponsored economic destruction has put us all ‘on the edge’ at one of these times. Something explosive and world-changing is happening. We are reaching our destination, TEOTWAWKI.
There was a time when the dollar was as valuable as gold. Today, in the aftermath of that world, we are witnessing the illusion of wealth built on five generations of borrowing and spending crumble before our eyes.
Moreover, contrary to Keynes, in the long run we are not all dead. In fact, in the long run we are all alive. And we are all living with the complex consequences of short-sighted and politically driven economic policies.
[Editor’s note: It really is amazing how just a few simple contrary decisions can lead to life-changing wealth. And right now, at this very moment, I’m preparing to make a contrary decision once again. >> And I’d like to show you how can too.]
thank you,
MN Gordon
For Economic Prism
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