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"All the Colors of the Revolution"
by Dan Denning
Laramie, Wyoming - "Gross. We’re talking about gross things today. Gross interest, specifically. And we’re going to deal with an objection we get from readers about government spending and a gross misunderstanding of its supposed benefits. This week’s first research item is inspired by the year-end Monthly Statement of the Treasury that came out this week. We already knew the total deficit for the government’s fiscal year was just under $2 trillion. But there were two devilish details in the report worth mentioning.
First, since the TV is full of awful election ads, the chart above should remind you that America is already a welfare state. Fully 60% of total federal spending of $7.4 trillion, or $4.46 trillion to be exact, comes from Social Security, Medicare, Medicaid, and unemployment and disability payments.
Democrats want to extend some of those benefits to everyone–including anyone in the country illegally. Republicans probably disagree, but don’t do a really good job of saying so (and the worst argue for some kind of ‘amnesty’ or ‘path to citizenship’ which might then at least put some workers on payrolls paying FICA).
‘Morons,’ to quote from The Princess Bride. If you include ‘Net Interest’ in the spending calculation, the totals leap to $5.51 trillion and 75% respectively. So once the interest on the national credit card is included, three quarters of every Federal dollar goes to just a handful of programs. And that’s not even the worst of it.
Buried in the pages of the monthly report is the ‘gross interest’ figure. This includes interest paid on bonds held by Federal agencies or authorities. It is not part of the ‘net’ calculation for that reason. But the ‘gross interest’ figure is $1.35 trillion, or 47% of all the money generated from income taxes in 2026 ($2.84 trillion).
Half your tax dollar is being spent on money already borrowed and already spent. Even though the 10-year US Treasury yield fell on the week, it still closed above 5% today. And this buried little nugget of debt finance, like a tumor in the liver, is the reason the Primary Trend for bond prices is down (and up for yields). Is there NO silver lining to this?
Well, some readers write in to us from time to time, complaining that when we gripe about the size of government spending and its fake contribution to GDP, we fail to note that the spending is going somewhere…ending up in someone’s pocket…and in some sense…contributes to the ‘general welfare,’ or at least the specific prosperity of the firepower industry, the banks, or the politicians, bureaucrats, and fraudsters who are paid to dole out or receive taxpayer money.
It’s an interest expense for the government. But it’s income for someone, somewhere, right? A pithy response would be ‘whatever.’ The government produces nothing of value and can only spend what it takes from someone else.
A more considered response is that you have to look beyond what is seen to see what’s missing. We owe this insight to Frederic Bastiat and, later, Henry Hazlitt. All the money the government spends comes from taxpayers. That’s money that isn’t saved, invested, or spent based on the preferences and wants of individuals and households. It gets collectivized. And the things that people would have invested in, created, or purchased never happen. That’s what’s unseen.
Borrowing money to spend, rather than paying for it out of taxes, only hides its negative effects. If the money is borrowed, it still has to be paid back later by taxpayers or their children. Or paid for in the way of high inflation. That’s the government’s plan now. And that’s a problem for us.
The core of the problem is the modern mindset of thinking you know how to spend other people’s money better than they do…and not having enough self-knowledge (or historical knowledge) to realize that government spending tends to subsidize failure and raise prices for services (education, health insurance, accounting). You’d have to be a moron or a communist not to understand this, yet still support it.
As Milton Friedman pointed out, when you’re spending somebody else’s money on someone else, you don’t care about the cost or the quality of the goods or services. Think of when you spend your own money on yourself. You care about both.
Friedman understood that even well-meaning people in government end up being wasteful and unproductive losers when it comes to spending other people’s money on other people. Friedman once said the only executive Departments worth keeping, and required by the Constitution for the Federal government to do its job – were the Department of State, Department of the Treasury, Department of War, and the Justice Department.
You could throw everything else in the garbage bin. If there was work that needed to be done, let the private sector do it. If there are discretionary services certain States wish to provide, let them pay for it. No collective burden sharing for regional or local priorities. Decentralization of government, more of which shortly. But a bit more on accounting for the real cost of debt, this time in the private sector and via a chart.
This is Robert Shiller’s cyclically adjusted price earnings ratio (CAPE) already making a new all-time high…IF you include the real interest cost of debt held off the balance sheet of S&P 500 companies in special purpose vehicles (SPVs). New research from New Constructs reckons there is around $230 billion in interest expense that is un-accounted for in the reported earnings of S&P 500 companies. So what?
Well, that amounts to about a 9% reduction in the earnings of S&P 500 companies, assuming the calculation for the ‘real’ interest expense is correct. Price is the numerator in a P/E ratio. Earnings are the denominator. Ratios being ratios, reducing earnings by $230 billion increases the ratio. Et voila…you get CAPE now going past the previous 1999 high at the peak of the dot.com bubble.
If you’re a long-time reader, you already know this. The only real question, then, is if it means we’re any closer to a sell-off in the entire market, or in just the AI hyperscalers. That’s where the market’s best performance has come from since 2022. And that’s where most of the off-balance sheet debt (and interest expense) currently lives."
P.S. What color would you like your American coup? Picking up on last week’s note about the history of propaganda and psychological warfare used by American agencies against the American people @DataRepublican on X published leaked recordings from a webcall that reveal a strategy to provoke a constitutional crisis prior to the 2028 election.
Headed by ex-USAID officials and former and current intelligence officers and Pentagon officials, the plan is to use ‘useful idiots’ like the Democratic Socialists of America (DSA) to cause violence, rioting, property damage and chaos in certain major American cities. The aim is to provoke President Trump to invoke the Insurrection Act and quell the dissent with the military or National Guard. Then, local officials (including prominent and sympathetic mayors and governors) would declare the Federal action illegitimate and call for major constitutional reforms while annulling Federal authority.
Don’t get me wrong. I tend to support things that result in a smaller and less powerful central government. But the move here isn’t to make the government less powerful. It’s to replace democratically elected representatives with a permanent unelected elitist cabal. These are the same people who’ve been destabilizing and invading foreign countries for decades, leaving them in shambles and their people in misery. Now, in the name of ‘democracy,’ they have a plan to set the American people straight. Just great.
Those in charge reckon you only need 3.5% of the population engaged in non-violent resistance/civil disobedience or active insurrection to engineer a change in the control of major institutions, at which point you can re-write the rules (admit several new states to the Union, pack the Supreme Court, and send all who disagree to jail or to re-education camps). What do you think? Worst case scenario? Or highly likely? How are you preparing? More on this next week."
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