Lost in the noise of an election year and the passionate pursuit of World War III is one important fact. America is rapidly going bankrupt. And no one can stop it.
We know that digging into the details of Washington’s finances can be tedious and tedious. There are certainly more interesting and beneficial ways to spend your time. But if you want to better understand why everything is broken, join us here.
In fiscal year 2024, from October 2023 to May 2024, the federal government spent $4.49 trillion. According to the Treasury’s propaganda on financial data: WebsiteI spent all this money “To ensure the well-being of the American people.”
Exactly how all this spending ensures well-being is unclear. Does your morning cup of joe taste better? Does it improve your health and relieve aches and pains? Do you deliver fresh fruits and vegetables to the grocery store?
What is clear is that government spending is completely out of control. in fact, 1.2 trillion dollars Of that amount, $4.49 trillion was financed by debt. In May alone, the deficit reached $347 billion. And according to the Congressional Budget Office: Recent updatesDeficit spending in fiscal 2024 will reach $1.9 trillion.
Remember, the $1.9 trillion deficit that CBO projects is on top of a national debt that currently exceeds $34.8 trillion. Perhaps this debt should be repaid. At a minimum, you have to pay the interest on your debt. And unfortunately, debt interest is taking up an increasing portion of the federal budget.
Through May, net interest expenditures on debt reached $601 billion. That’s more than any other category except Social Security ($960 billion) and health care ($607 billion). During this period, defense spending reached $576 billion.
What to make…
Ferguson’s Law
About half of the $1.2 trillion in deficit spending incurred so far in fiscal 2024 has been used to pay interest on debt. Moreover, as these huge deficits continue to pile on top of the debt, more and more borrowing is needed to service the debt.
As this continues, less and less money is available to fund other budget categories. So the U.S. government can reduce its spending. “Ensure the well-being of the American people.”
As noted above, net interest on debt now exceeds defense spending. This is especially important because it affects America’s ability to maintain its empire.
In this regard, author and financial analyst Luke Gromen recently reminded us: Ferguson’s Law:
“Ferguson’s Law states that a great power that spends more on debt service (paying interest on the national debt) than on defense will not remain great for long. The same goes for the Spanish Habsburgs, the French Old Regime, the Ottoman Empire, and the British Empire.”
Ferguson’s Law comes from destruction enthusiast Niall Ferguson. It’s a simple rule based on empirical evidence. Generally, we recognize what happens when an empire gets too big for its britches. And it gives us examples from the past to help us see what comes next.
The United States has now become the latest empire to get its own pants on. In fact, the fall of greatness began decades ago. That’s when America’s debt trajectory began to shift into a vertical moonshot.
Alas, there is no going back.
political expediency
As your debt piles up and the interest on your debt grows larger, your options for resolving it diminish. Frankly speaking, the debt and deficit situation is a complete wreck.
However, you have two options to improve your financial situation. This includes (1) reducing spending or (2) lowering interest rates.
In fact, option 1 is impossible to start with. The corrupt idiots in Congress have shown that they cannot politically cut spending. Especially when all their spending makes them rich.
So the politically expedient solution is option 2. That means the Fed is lowering interest rates.
Of course, this will have painful consequences. The fiscal year 2024 deficit is projected to be $1.9 trillion and inflation is very high. These radical fiscal policies are much more responsible for raising consumer prices than the Fed’s current monetary policy.
But cutting interest rates despite these massive deficits will only fan the flames of inflation. The cost of goods, services and residential real estate will rise. In return, the dollar will continue to lose value against real assets.
Lowering interest rates temporarily reduces the net interest on debt. This could nominally support government bonds. But on a real inflation-adjusted basis, the bonds would be broke. And international creditors will have to liquidate their holdings.
This would place financing the debt back on the shoulders of the Fed. This would force the Fed to resume its quantitative easing program, which creates credit out of thin air to buy Treasury bonds. This will ultimately lead to further government spending and massive deficits, which will put the United States facing even greater crises in the future.
The United States is not the first country to fall down this destructive slope. It won’t be the last either.
Nonetheless, as Americans struggle to work, save, invest, and improve the lives and security of their families, we have entered dangerous territory. It usually ends in social chaos and upheaval.
Double Nickel on the Dime
In the world of fractional reserve banking, recessions are an inevitable part of the business cycle. As credit moves around, booms and busts follow. That’s always the case. It will always be like that.
But over the next few years, as the Federal Reserve cuts interest rates and Washington continues its crazy levels of spending, the U.S. economy will fall into the death trap of stagflation. Where economic growth slows or contracts, unemployment rates rise but consumer prices continue to rise.
Stagflation is not a natural phenomenon. This is the result of long-term mismanagement of the economy through massive deficit spending, artificially low interest rates, and excessive welfare and war programs.
The last time this happened was in the 1970s, when inflation and unemployment rose simultaneously. After closing the gold window in 1971, President Nixon made various attempts to control prices through wage and price freezes and import tariffs.
After the first oil price shock in 1974, Nixon also imposed a nationwide speed limit of 55 miles per hour to reduce fuel consumption. Long-haul truckers traversing Interstate 10, which runs along the coast from Los Angeles to Jacksonville, had to pay double (i.e., 55 MPH on I-10).
Stagflation finally subsided in 1981, when the 10-year Treasury yield reached 15.32%.
This time, given the extraordinary levels of government debt, it would be impossible to overcome stagflation without a default by the U.S. government. With 10-year Treasury yields in the 4 to 5 percent range, the net interest on the debt has already ballooned to the point of significant financial strain. What happens at a 15% rate of return?
Therefore, more money printing will be needed to prevent a complete default. Still, the default will happen regardless. This will happen through severe dollar devaluation and inflation.
And everything you thought you knew about civil society will be turned upside down.
[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 you can too.]
thank you,
minnesota gordon
for economic prism
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