Parsing Out Dystopia: Now $35,000,000,000,000 Isn't Enough – Part Two

 

The National Debt Clock about 9AM Eastern Time this morning.

[Read Part One]

The National Debt Clock tells a story that mirrors Mauldin’s warnings. Total public and private debt in the US now surpasses $100 trillion. This number is staggering, a testament to decades of unchecked borrowing and fiscal irresponsibility. To put it in perspective, in 1974, total debt was about $2.2 trillion. By 1984, it had risen to around $6.2 trillion. In 1994, it was approximately $14.2 trillion, and in 2004, it stood at about $29.2 trillion. By 2014, it had surged to roughly $58.2 trillion. These figures show a relentless upward trajectory, with each decade adding an ever-larger mountain of debt.

This relentless increase in debt reflects a deeper, systemic issue. Our economy has become addicted to borrowing, using debt to finance growth, consumption, and government programs. This addiction creates a fragile economic environment, vulnerable to shocks and downturns. The historical data highlights a clear trend: debt has consistently grown faster than the economy, leading us to a precarious position where debt levels are unsustainable without significant economic growth, which remains elusive.

Considering this situation through the lens of a “quiet” dystopia, we see a society struggling under the weight of its financial obligations (while simultaneously not doing much about it). The nostalgia for a past where economic growth could outpace debt feels increasingly irrelevant. Our reality now involves grappling with choices between higher interest rates or higher inflation, each with its own set of challenges. The specter of stagflation, as seen in Japan, looms large. This gradual erosion of financial stability and security creates a pervasive sense of unease and uncertainty.

No one wants to cut Medicare, Social Security, or defense (or much of anything else). These programs are sacrosanct in American political discourse, yet Mauldin’s column makes it clear that addressing the debt crisis without touching these areas is nearly impossible. Yet, without addressing these massive expenditure areas, meaningful debt reduction remains out of reach. It is a damned if you do, damned if you don't situation.

As mentioned, Mauldin concludes with the sobering thought that there will be no resolution without a crisis. His vision of interest rates consuming an unsustainable portion of government revenue by 2034 or sooner is a stark warning. As the debt grows, the risk of a bond crisis increases, leading to higher interest rates and potentially severe economic and social consequences.

In essence, Mauldin is sounding the alarm on an unsustainable path. The growing debt is not just a financial issue but a societal one, affecting every aspect of American life. The challenge is clear: we must find a way to manage this debt sustainably, through cooperation, compromise, and innovative solutions. If we fail to do so, the quiet dystopia we are living in could become far more tumultuous and destructive.

My deceased former financial guru, Richard Russell, used to write about the debt situation all the time. It was one reason he felt that gold would be such a good investment. His writings got me into gold in 1999 and I enjoyed a long bull market, even surviving (and rebounding from) the gold crash. Russell used to write “inflate or die.” By this he meant that inflation equated to a weaker dollar (and stronger gold) and a weaker dollar would make the debt seem less weighty than a strong dollar. Perhaps he was right in that regard. The devaluation of the dollar might be the a partial solution to the massive debt problem. It is going to take some innovative thinking to resolve the almost inevitable problem with bonds the lies ahead in the next 5 – 10 years.

Mauldin followed up his initial post with "This Time is (Not) Different" where he delves into the current economic landscape and the recurring patterns of financial crises throughout history. He argues against the prevalent notion that each crisis is unique and unprecedented, suggesting instead that they often share fundamental similarities despite varying triggers.

He references Carmen Reinhart and Kenneth Rogoff's book This Time is Different, which explores historical financial crises and the tendency for policymakers, investors, and the public to believe that present circumstances are exceptional and therefore incomparable to past events. He counters this belief by highlighting common threads in financial crises: excessive debt, asset bubbles, and misallocation of resources.

The author draws parallels between the 2008 financial crisis and the current economic environment, noting that despite efforts to address issues like debt levels and financial instability, similar vulnerabilities persist today. He discusses the role of central banks in managing economic downturns, criticizing their reliance on unconventional monetary policies such as quantitative easing and low interest rates as temporary solutions that may exacerbate long-term economic risks.

Furthermore, the article addresses the impact of technological advancements and demographic shifts on economic stability, emphasizing the need for adaptive economic policies in a rapidly changing global landscape. Mauldin concludes with a cautionary note, urging investors and policymakers to remain vigilant against complacency and to prepare for inevitable economic downturns by addressing underlying structural weaknesses.

"History shows that excessive debt accumulation is the single most reliable predictor of financial crisis. It’s not different this time." This quote highlights Mauldin's assertion that throughout history, excessive debt accumulation has consistently been a significant precursor to financial crises. He argues against the prevailing belief that each economic downturn is unique and argues instead that underlying patterns, such as high levels of debt, often repeat themselves.

Mauldin points out that despite advances in financial markets and changes in economic policies over time, the fundamental risk posed by excessive debt remains a constant. This perspective draws on historical evidence, where periods of economic expansion often lead to increased borrowing and speculative investments, eventually culminating in financial instability when borrowers are unable to service their debts.

By emphasizing the continuity of this pattern, Mauldin challenges the notion that modern financial systems are fundamentally different or immune to the cycles of boom and bust seen throughout history. He suggests that recognizing and addressing the risks associated with high debt levels is crucial for both policymakers and investors in managing and mitigating the impact of future financial crises.

Looking to the near future, Mauldin opines that by 2028 the amount of government debt will surpass $46,000,000,000,000(!). When we add the totality of state and local debt to this absurd figure, he concludes, the interest payments on this collective sum will surpass the total budgeted amounts of Medicare and defense combined. So, we are about four years away from the total interest on the debt being the second largest part of the budget behind only Social Security.

Mauldin speculates regarding the 2028 election and beyond: “We have a national election that will be focused on debt and inflation. All sorts of political promises will be made and there will be serious differences. Whomever is elected will be promising they will fix the problem. Except they will not be able to get Congress to go along with whatever their proposed solution is. It will take serious compromise, which won’t happen.

“Whoever the new president is will be sworn in in January of 2029. The markets will give him or her some grace for a period of time to fix the problem. When it is clear that it won't happen by the end of the year, and Congress gets ready to go into its Christmas recess, the bond market will go nuts at the most inconvenient time, which will be on or around December 19. I hope that doesn't happen, but I keep pointing out that it will take a crisis of biblical proportions in order to create the environment for a compromise that none of us will like.”

Compare the debt clock above with this one from yesterday's post to see how much it changes in a 24-hour period.

The exponential growth of government debt is of such fundamental importance that Mauldin devotes a third, most recent, post to it, simply entitled “Debtor and Creditors.” He starts with what we already know, the US debt is projected to surpass $46 trillion by 2028. Do I need to point out that that is a huge number? $26.9 trillion of that debt is in the form of marketable Treasury securities. He delves into the ownership structure of Treasury debt, noting that foreign holders own $8 trillion (29.7%) of the marketable securities, while American investors and institutions hold the remaining $18.9 trillion.

The article provides a detailed breakdown of how this debt is distributed among various domestic entities, including mutual funds, the Federal Reserve, individual investors, banks, and pension funds. Mauldin then shifts focus to the international aspect, examining the changing landscape of foreign Treasury holdings. He points out that while countries like China have decreased their holdings, European nations have significantly increased theirs.

Despite the growing absolute value of foreign-held U.S. debt, the percentage of debt held by foreigners has actually been shrinking. This is due to the rapid pace of U.S. debt growth outstripping foreign acquisition. Mauldin connects this trend to evolving U.S. policies aimed at reducing import dependence and increasing economic resilience, particularly in light of recent global events and national security concerns.

As in the previous two postings, Mauldin raises concerns about the sustainability of this debt trajectory. He argues that as the debt continues to grow, the Treasury will face increasing pressure to attract more buyers. This could potentially lead to higher yields, which in turn could exacerbate the deficit, creating a challenging cycle for the U.S. Economy.

Quoting Mauldin: “Federal interest, expressed as a percentage of GDP, spent almost 20 years in a range around 2.5% of GDP. That means both GDP and debt were growing at about the same rate. As a lender, you can live with that. Your borrower’s debt load is sustainable, though perhaps unwise.

“This has now changed as federal interest costs approach 4% of GDP. That means financing costs are now growing faster than the economy, which is also the tax base the federal government can tax. Would commercial lenders be so accommodating to a household or business like this? Probably not.”

He emphasizes the complex interplay between domestic and international financial systems in the context of U.S. government debt. He suggests that the growing debt, combined with potential changes in foreign demand for Treasury securities, could have significant and far-reaching implications for the U.S. economy in the coming years.

Quoting Mauldin again: “The growing national debt is a drag on GDP growth. Anybody who says it's not is not paying attention to the actual numbers. I don't think it's even up for debate now, unless you are Paul Krugman. When interest on the debt is growing faster than the economy, that is not sustainable, and means the bond market (lenders) will soon be asking for higher interest rates. With the deficits rising, and especially with a potential recession in our future at some point (I am no longer predicting when), the deficit will rise more...Maintaining the higher interest rates necessary to hold inflation at bay will raise the US government’s borrowing costs and further enlarge the debt. We are past the point of any good choices.”

CNN picked up on this theme with a piece on the broader issue of global debt just two days ago. Entitled “The world is sitting on a $91 trillion dollar problem. 'Hard choices are coming,'” the piece discusses government debt worldwide. It highlights that the problem is being virtually ignored (probably for reasons I already gave). It states that just last week, the International Monetary Fund warned the US deficits should be “urgently addressed.”

Notice that the US accounts for over one-third of the global government debt. But, looking beyond the US, the piece reads in part: “As debt burdens mount around the world, investors are growing anxious. In France, political turmoil has exacerbated concerns about the country’s debt, sending bond yields, or returns demanded by investors, soaring.”

“Countries trying to tackle the debt issue are struggling. In Germany, ongoing infighting over debt limits has put the country’s three-way governing coalition under enormous strain. The political standoff could come to a head this month.

“In Kenya, blowback over attempts to address the country’s $80 billion debt burden has been much worse. Proposed tax hikes have sparked nationwide protests, which have claimed 39 lives, prompting President William Ruto to announce last week that he would not sign the proposals into law.” I can't help wondering if this is a preview of what is in store for the western world – America, with its violent culture, in particular.

CNN's reporting echo's Mauldin's concerns. “...the problem with putting off efforts to rein in debt is that it leaves governments vulnerable to far more painful disciplining by financial markets. The United Kingdom offers the most recent example in a major economy. Former Prime Minister Liz Truss triggered a collapse in the pound in 2022 when she tried to force through big tax cuts funded by increased borrowing.

“And the threat hasn’t gone away. Take France. The risk of a financial crisis there became a serious concern virtually overnight after President Emmanuel Macron called a snap election last month.” These are examples of how unstable things can become among all governments, even supposedly strong ones throughout Europe.

It was reported in Forbes just yesterday that Federal Reserve Chairman Jerome Powell, issued a “critical warning” about the rise in US public debt. Quoting Powell from the article: “'The level of debt we have is completely sustainable but the path we are on is unsustainable,' Powell said during the European Central Bank's Portugal conference, it was reported by the Financial Times, adding the Biden administration was taking excessive risks by 'running a very large deficit at a time when we are at full employment' and said 'you can’t run these levels in good economic times for very long.'”

But Trump ran those same risks when he was blustering around the Oval Office. So did Obama. So did Bush. So has every American President in the past five decades. They are all trapped by voters who will not tolerate an increase in taxes (consider Kenya's recent unrest as a harbinger) nor a decrease in what they consider themselves entitled to. Perhaps that's the end result of democracy. The final dystopian truth of our form of government is total bankruptcy and economic chaos.

Notice that Powell is not worried about the debt as it stands today. We can keep throwing $900 billion (ultimately more) away in interest payments. That is “sustainable” but it is also unproductive. No one benefits from a dollar of that interest payment – and it is growing, robbing substantive programs of their revenues. Which is why Powell states that, even though the debt is manageable currently, “the path we are on is unsustainable.” In other words, as the debt continues to grow unchecked, as interest payments continue to eat away at productive dollars in the public sector, something's got to give.

In classic Keynesian economics, to which most of the western world subscribes, government spending is reined in during “good times” as the growing economy will allegedly take care of the needs of most citizens. Theoretically, it is during the recessions and downturns that the government needs to step in and assist. But that's not what happened. Economic growth, both public and private, has become completely tied to ever-increasing amounts of debt. For decades now, growth has been fueled by nothing but debt (see when I quoted Dave Stockman, former OMB chief under Ronald Reagan, back in 2013 about this here).

Powell warns “you can't run these levels in good economic times for very long.” Well, nobody's doing anything to stop it because the solution is to either raise revenues through growth and taxes (only growth no longer happens without more debt and no one wants more taxes) or to cut social programs to which people expect they are entitled. Debt is a our Faustian bargain. All the solutions are too painful on the voters for elected officials to implement.  As Mauldin says, nothing will happen until there's a crisis.

I don't really need to sensationalize this with some doomsday prediction. The numbers don't lie. History doesn't either. Historically, debt has never gone up forever. It has often led to calamity and collapse. There's a crisis coming that will grip this nation and, most likely, the entire world in a way not seen in the past 100 years. It will bring a distinctive form of dystopia. When the economic structure of the past three generations no longer works an important nostalgic ingredient will emerge. Millions will long for the days of “easy credit” - which has really come to mean “easy debt.”

We have no idea what the implications of this impending crisis will be, but it won't be pretty, especially for whoever is serving in our government at that time. This is when the “quiet” dystopia becomes loud. When your money is worthless, no matter how much you have, it is only those without any debt whatsoever that will get to keep what they own. And those of us in debt for everything will discover we own nothing at all.

(Written with assistance from ChatGPT and Claude)