"Up To Our Necks"
Debts, deficits and defaults... the US heads off the deep end.
by Bill Bonner
Baltimore, Maryland - "Some things, once set in motion, cannot be stopped. A study from Hirschmann Capital tells why the worry about government debt is not just academic, or theoretical, handwringing. Since 1800, 51 out of 52 countries with gross government debt greater than 130% have defaulted, either through restructuring, devaluation, high inflation or outright default. We need to add an asterisk, noting that, so far, this has not happened to Japan, whose government debt has been off-the-charts for years. But, it’s worth looking more closely. Because, 98% of the time is pretty close to ‘always.’ A bet with 98% odds in your favor is a very good bet. Only a fool takes the other side of the trade.
Meanwhile, US government debt is rising by $340 billion per week. If we’re not at the ‘point of no return’ already, we will be soon. Dan adds: "The debt has grown by just under $2 trillion since the debt ceiling agreement on June 1st of last year. The ratio is going up. $50 trillion here we come
The feds owed only $5 trillion when the 21st century dawned. By the beginning of the current year, the total had grown to $34 trillion. Readers will note that this should have been the most prosperous period in human history, for the simple reason that there was more capital than ever available…and more Ph.Ds, entrepreneurs, engineers, and software geniuses to exploit it. And yet, the feds couldn’t even fund their current programs, let alone pay off the $5 trillion outstanding.
Under Preasure: The GDP of the US, meanwhile, began the century at just over $9 trillion. Today it is $27 trillion. So as a percentage of GDP, US debt went from about 60% to, now, 123% now. Which means, grosso modo, that for nearly a quarter of a century, debt has increased about twice as fast as the economy that supports it. How long can that go on? We’re going to find out.
There was no ‘emergency,’ such as WWII, which, now ended, allows the feds to dramatically reduce spending. Military spending has gone up, not down. The population of over-65 retirees is now increasing at the rate of about 12,000 per day. Nor has Congress made any attempt to produce a balanced budget. Nor is there any sign that taxes will be raised to cover the deficits. Nor are any of the leading politicians, newspapers, or universities screaming an alarm.
Deficits are running at $2 trillion per year. According to the Tax Foundation there are about 150 million tax returns filed, of which only 100 million paid any taxes. Those taxpayers produced about $1.7 trillion in income taxes. Raising enough money to fill the deficit would mean, roughly, doubling their taxes.
Obviously, that is not going to happen. Nor is spending going to be significantly reduced, for the simple reason laid out many times in these pages: The People and The Deciders are not the same. The former suffer from government spending (taxes and inflation); the latter benefit from it (transferring trillions to their pet projects and crony parasites). What will happen? You’ve seen us predict that the feds will have no choice. It’s either inflate…or die. The Deciders will choose to inflate.
Dangerous Spikes: But wait. Hirschmann says there’s more to the story: "Contrary to popular belief, the Fed cannot pay off the USG’s debt by printing money. Printing money would cause hyperinflation (e.g. 1920s Germany and Venezuela today). Hence the Fed has funded its bond purchases by borrowing rather than printing. The catch is that the Fed will be trapped if Treasury yields spike due to a USG debt crisis. If the Fed does not raise the interest rate on its deposits to match spiking Treasury yields, hyperinflation would result as banks redeem their Fed deposits and lend them to the economy. If the Fed does raise the interest rate on its deposits, its carry trade would hemorrhage cash and exacerbate the debt crisis."
What Hirschmann is describing is the mechanism that kicks in…like a cyanide capsule in the mouth of a spy…to bring the show to an end. Central banks have no magical powers. They cannot command interest rates to stay low…nor can they insist that the dollar stay high. As the debt level increases, investors anticipate higher levels of inflation. They want a higher yield to protect themselves. Real rates inevitably rise.
Can the central bank keep rates low, simply by printing and lending more money? No…because real savers – the people lend real money – would ditch their US Treasury bonds, leaving the government to finance the entirety of its over-spending with printing press money and leading to the hyperinflation it sought to avoid.
At 130% debt/GDP, an economy is up to its neck. At that level, the spy bites down. Real interest rates rise, whether you like it or not; that is the implication of Hirschmann’s numbers. Asset prices fall. The system blows up – either in hyperinflation, defaults, depression or a major restructuring. Bullets fly and governments often change.
Fish, Birds & Bubbles: Hirschmann points out that no country would ever default, if it could keep its interest rates low. Low rates would make debt sustainable. At the Fed’s ultra-low rates of 2020, for example, the interest on the entire US government debt would be less than $300 billion – only a third of what it is now. Even in 2020, with the lowest interest rates in 500 years, Argentina, Ecuador and Lebanon defaulted – despite the best efforts of their central banks to keep rates low. And it’s not only marginal countries that default.
In the 1970s, for example, the richest country in the world – the US – lost control of inflation and interest rates and suffered the worst recession since the Great Depression. In 1976, the IMF had to bail out Britain. In 2008, Iceland was on the brink…and in 2015 Switzerland’s currency peg collapsed.
Hirschmann continues: "Worse yet, government debt is also currently at dangerous levels in other major economies, including Brazil, China, Japan, the UK and the eurozone…Thus, a government debt crisis in one country might easily ignite a global government debt crisis that pops the bubbles in China, US equities and US real estate."
We have no solution to this problem. Neither does the Fed. Fish gotta swim. Birds gotta fly. And a bubble has to pop."
