Video: US Deficit, Debt, Interest Expense Spiral Accelerates into High Gear in the December Quarter
| January 19, 2024 |
- Deficit accelerated to $500 billion in the December quarter, on pace for $2 trillion in the 2024 fiscal year ending September.
- Anticipated government debt of $36 trillion by December 2024, excluding significant unfunded Social Security and Medicare liabilities.
- An aging population will transition millions from taxpayers to net Social Security and Medicare beneficiaries, contributing to the looming financial strain (Current Liabilities of $26 trillion for Social Security and $40 trillion for Medicare).
- International central banks are reducing dollar asset holdings due to the weaponization of the dollar with SWIFT sanctions and dollar asset freezes and possible confiscation.
- Responses to the fiscal crisis are challenging. Resuming Quantitative Easing (QE) and debt monetization might lead to hyperinflation and discourage private investment.
- Options to mitigate the fiscal crisis, like cutting services or increasing taxes, are widely unpopular and politically unfeasible.
- Compounding Interest Expense requires the issuance of more bonds to cover higher interest expenses, driving rates even higher.
- This will directly lead to crowding out of the private sector, as higher returns in treasuries pull money out of productive investment. This is already seen with quickly increasing consumer interest rates.
- If the crisis leads to a default, commodities and stocks may become unfavorable.
- If QE resumes, gold and stocks might benefit, although rapid QE and rising interest rates could initially depress stock price-to-earnings ratios before nominal prices recover.
- We are avoiding the long end of the yield curve, as the real purchasing power of long-term bonds will erode from persistent inflation even if nominal values are maintained.
- Short-term treasuries and cash look attractive as well as diversifying assets like reinsurance.
