Lau Vegys, Doug Casey’s Crisis Investing
I’ve often said that the only way out of the U.S. government’s $35.8 trillion (and counting) debt crisis is by devaluing the dollar. I also touched on this earlier in the week in my essay about the latest numbers on the government’s interest rate spending.
But I have to admit, I’ve never really explained my reasoning in detail, aside from saying it’d be political suicide for those at the top to do anything else. So today, I want to break that down and show you why dollar devaluation is the only path left for America’s power brokers.
This won’t be a quick read, but by the end, you’ll understand exactly why devaluation isn’t just likely – it’s inevitable.
Mission Impossible
Let’s start with the basics…
The root of the government’s nearly $36 trillion debt is simple: politicians have a spending problem. The federal government consistently spends more than it brings in. In fact, over the past 74 years, it has run deficits in 65 of them.
Even more telling: for the last 22 years straight, they’ve overspent every single year, piling on more and more debt. It doesn’t matter who sits in the White House – Bush, Obama, Trump, or Biden – each administration breaks the previous debt record.
Truth be told, the last “balanced budget” under Bill Clinton (see blue bars above) was largely the result of accounting smoke and mirrors, and the debt still increased during that time.
The point is, it doesn’t matter which party is in power—the budget isn’t getting balanced, and debt keeps rising.
Just how bad is it? Consider this…
To balance the budget today, spending cuts of roughly $2 trillion per year would be required. For context, the entire Social Security program costs about $1.5 trillion annually, and the defense budget is roughly $900 billion. Even eliminating either completely wouldn’t be enough.
Put yourself in a politician’s shoes. Imagine stepping up to the microphone: “My fellow Americans, we need to slash government spending by $2 trillion a year. We’ll start by cutting Social Security payments…” You wouldn’t finish that sentence before being booed off stage – assuming you made it past your campaign donors.
More realistically, balancing the budget would require across-the-board cuts of 40% to all non-debt-service spending. That means 40% less for Social Security’s 72 million beneficiaries, Medicare, veterans’ benefits, military spending, education, and infrastructure. No politician who wants to remain in office would propose this. Even if they did, Congress would never pass it.
Following the Money
But, for the sake of argument, let’s imagine the government does the unthinkable: cuts spending massively while the Federal Reserve stops printing money.
This would trigger deflation and economic depression, causing the price of everything to plummet – stocks, real estate, private equity investments, all assets.
And who owns the majority of these assets? The ultra-wealthy.
I’m not talking about your average millionaires or even multi-millionaires here.
I’m talking about the Jeff Bezoses and Jamie Dimons of the world, the Wall Street financial elites, the politically connected class that has benefited from decades of easy money policies.
Their fortunes are tied up in assets that have skyrocketed in value due to the Fed’s money printing and the resulting inflation. That’s why the top 1% are now holding more than four times the wealth of the entire bottom half.
The last thing these people want is to see the value of their assets deflate like a birthday balloon the morning after. And that’s exactly what would happen during an economic depression.
Sure, some wealthy individuals might relish the chance to scoop up assets on the cheap, but the politically-connected elites would never back policies that would shrink their net worth to a fraction of what it is now. That’s their worst nightmare.
The “Easy” Way Out
History shows that when governments face tough choices, they almost always take the path of least resistance. Cutting spending is politically toxic. Default is off the table. But gradual devaluation? That’s always the preferred stealth option.
It allows politicians to:
- Avoid explicit spending cuts.
- Continue funding popular programs.
- Maintain the appearance of “doing something” while avoiding blame for direct cuts.
- Preserve their power and wealth.
Devaluation is also essentially a get-out-of-debt card for the government because it reduces the real value of what it owes.
Let me give you a simple illustration that hits close to home…
Say your family has a fixed $500,000 mortgage – about the average house value in the U.S. right now. If high inflation hits and prices across the economy rise dramatically – say your and your partner’s salary doubles or triples along with most prices – that $500,000 debt suddenly feels much lighter. While your mortgage payments stay the same, they become a smaller portion of your growing income.
The government’s massive debt works the same way: inflation shrinks the real value of their near $36 trillion debt burden while tax revenues rise with inflation.
The elites benefit too. During inflation, asset prices soar – stocks, real estate, private equity investments all rise in nominal terms.
The pandemic years proved this dramatically: The number of U.S. billionaires grew from 614 to 737 between March 2020 and March 2024, while their combined wealth surged by 88% to about $5.53 trillion. Not coincidentally, this happened when the Fed ramped up money printing to unprecedented levels.
The bottom line: the path of least resistance is a win-win for those in power and the elites. For the majority of Americans? Not so much.
Writing on the Wall
We’ve seen this before. When countries become financially unstable, they choose currency devaluation over explicit default or austerity. From Weimar Germany to modern Venezuela, the playbook remains the same.
What makes anyone think the U.S. will be different? Because we’re a developed nation? Tell that to 1970s Britain.
Note: In 1976, the U.K. – then one of the world’s leading economies – was forced to go hat in hand to the International Monetary Fund (IMF) for the largest loan the IMF had ever granted. The British pound had collapsed, inflation was running at 27%, and the government couldn’t sell its debt. Being a developed nation didn’t protect them from the consequences of fiscal mismanagement.
Now, I’m not here to scaremonger—I want to be realistic. I don’t think dollar devaluation will happen overnight or even by the end of this decade. The most respected models suggest it could take until the mid-2030s or even the 2040s.
That doesn’t mean you can ignore it, though. We won’t suddenly slip into hyperinflation, no. But you can count on inflation progressively worsening, eroding living standards and crushing what’s left of the middle class.
Remember, the dollar didn’t lose its value overnight when Nixon took it off the gold standard. But in just ten years, it lost over half its purchasing power. Today, that same dollar buys about 90% less than it did in the early 1970s. I think history will repeat itself – just faster. We won’t have the luxury of decades this time around. Plan accordingly.
~~ Lau Vegys, Doug Casey’s Crisis Investing
