“Our national debt is our biggest national security threat.”
– Admiral Mike Mullen, Former Chairman of the Joint Chiefs of Staff under President Obama
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June 26, 2024— We’re turning today’s issue over to our managing editor, Andrew Packer. It’s no secret that America’s debt is soaring. And that it won’t end well.
But since it’s already a well-known problem, it may be a good time to look at ways to avoid the worst possible outcome. Andrew does just that and indicates both the best possible outcome … and the most likely outcome we’re on today.
Enjoy ~~ Addison
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America’s Debt Crisis Is On the Worst Possible Path
Andrew Packer, Grey Swan Investment Fraternity
In the 1990s, computer experts warned that systems programmed as far back as the 1960s only used two digits to calculate the year.
With the year 2000 approaching, they could run into the very real problem of resetting to the year 1900, leading to the Y2K scare.
Known for years in advance, an estimated $300 to $600 billion was spent updating computer systems.
Thankfully, there were only a few minor scares. U.S. spy satellites stopped working for a few days. One Japanese nuclear power plant had an issue with an alarm system – for a full 10 minutes.
Today, the Y2K scare is a distant memory. And it’s a sign of human ingenuity. When we see a problem, we take steps to mitigate it. Our worst fears rarely materialize.
When is a crisis not a crisis? When it’s well-known and talked about.
Today, the biggest potential crisis is a debt crisis. And it’s as well-known as the Y2K bug was in 1998.
JPMorgan CEO Jamie Dimon even said it’s the “most predictable crisis.”
Yet, we’re still veering towards it.
This issue has seemingly been around as long as we’ve had the debt.
As Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff for President Obama, noted:
The most significant threat to our national security is our debt. And the reason I say that is because the ability for our country to resource our military — and I have a pretty good feeling and understanding about what our national security requirements are — is going to be directly proportional — over time, not next year or the year after, but over time — to help our economy.
That’s why it’s so important that the economy move in the right direction, because the strength and the support and the resources that our military uses are directly related to the health of our economy over time.
When he said those words in 2010, the federal debt totaled $13 trillion. However, with interest rates at 0%, financing that debt cost just under $200 billion.
Today, our debt nears $35 trillion, almost tripling in just 15 years. The interest payment on the debt alone will exceed $1 trillion this year, a fivefold increase in costs.
Even if interest rates cool off later this year, the number will still go up by design.
In the meantime, the debt-to-GDP ratio is the real trend to watch. It’s where we go from the debt being a predictable crisis to a likelihood.
Currently, the U.S. debt is 122% of G.D.P. Historically, once a country’s debt gets over 130% and stays there, some sort of crisis is inevitable.
Of the 52 countries that have reached that level, 51 have had to contend with unpleasant choices, from devaluation to outright revolution.
Let’s take a look at the choices we face today, from best to worst.
Best Case Scenario: Grow Faster
The best way to avoid a soaring debt-to-GDP ratio is simply to grow G.D.P. relative to the growth rate of the debt.
America’s debt-to-GDP ratio briefly hit 130% during the pandemic, thanks to a sudden shrinking of a locked-down economy. Within a few quarters, however, economic growth surged, and the ratio fell back down.
With the rise of AI tools, we could be on the cusp of productivity gains that lead to a sustained increase in economic growth.
However, a big part of G.D.P. calculations is government spending. And that’s part of the problem, not the solution.
While a growing economy is a great goal, it can’t be engineered by government spending and regulations. Every dollar of government spending is either borrowed, taxed, or printed into existence.
Today’s soaring deficits make it clear that shrinking government has become impossible. Rising transfer spending and entitlement programs are set to grow automatically.
Plus, in Washington’s land of make-believe, going from a projected 10% growth in a government program to just 5% is somehow a cut. Until the geriatrics are carted out of Congress and replaced by functioning adults, it won’t get better.
So, don’t plan on a growing economy to get us out of trouble.
Raise Taxes
While most taxpayers may balk at the idea, raising income taxes would go a long way towards reducing the current deficit and extending the time it takes before we reach debt crisis levels.
The C.B.O. estimated that a 1% increase in tax rates in all brackets would raise revenues by $884 billion over ten years.
However, at today’s spending, an extra $84 billion per year is like throwing some ice cubes on a raging inferno. Our deficits are rising by nearly $1 trillion every 100 days.
If it comes time for higher taxes to deal with a debt crisis, it won’t be a 1% increase across the board. It’ll be much higher, particularly on higher tax brackets.
Taxpayers will either look for ways to reduce or avoid their tax obligations as rates rise as well, meaning that projections for capital raises may not reflect reality.
Monetize the Debt (AKA Hyperinflation)
The worst possible strategy is one of the easiest politically. So it’s also the most likely, barring some kind of citizen’s revolt.
It’s a policy of simply monetizing the debt. That could mean paying back our debts with freshly printed dollars (or their digital equivalent).
Since printing money isn’t the same as borrowing at interest, this option looks attractive. But our recent experience with surging 1970s-style inflation shows why it’s a bad idea. Done too much, however, and things spiral out of control. Just consider how Weimar Germany monetized its onerous World War I debts.
It would make it harder for businesses to plan, leading to an economic decline. It would force more and more earners into higher and unaffordable tax brackets. And it would accelerate the de-dollarization trend around the world.
However, with so much of America’s debt now owned either domestically or by the Federal Reserve, it’s an attractive policy.
Paving the Road to America’s Destruction
Historically, fiat currencies have a 75-year shelf-life.
We’re potentially already on borrowed time.
And as with the end of the British pound acting as the world’s reserve currency, the dollar may not go away. But it also won’t carry the clout – or purchasing power – that it used to.
For now, this future crisis is well-known. But when it does break out, it will likely happen in an unexpected way.
America is unlikely to be destroyed from without. It’s more likely to be destroyed from within. And our soaring national debt – and costs to finance that debt – are an even greater national security threat today than when they were initially identified as the top threat.
The good news? There’s time to prepare. And there will also likely be time to gradually shift away from the dollar and into other assets that can hold their purchasing power over time.
Much like how most of the damage from Y2K was mitigated, preparing for a debt crisis now can avoid potential pain later.
~~ Andrew Packer, Grey Swan Investment Fraternity
So it goes,
Addison Wiggin
Founder, The Wiggin Sessions
P.S.: How did we get here? An alternative view of the financial, economic, and political history of the United States from Demise of the Dollar through Financial Reckoning Day and on to Empire of Debt— all three books are available in their third post-pandemic editions.
(Or… simply pre-order Empire of Debt: We Came, We Saw, We Borrowed, now available at AmazonandBarnes & Noble or if you prefer one of these sites:Bookshop.org; Books-A-Million; or Target.)
Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com
