postcards from the florida republic: An independent and profitable state of mind.
It’s almost time to call it a week. Grab yourself a drink. Have a steak. Enjoy the meal that you want to have – and ignore all the nonsensical do-gooder hypocrites nattering on about bugs and blackouts.
But before you head out, I need to show you a chart. This floated through my inbox today, and you need to see it.
It’ll give you another reason to order a double before Happy Hour starts.
We’re Mere Years Away from a Fiscal Disaster
The United States government’s twin fiscal and trade deficits are now at the highs of 2008. Janet Yellen will continue to spend at a breakneck pace to do everything possible to avoid a politically unpalatable recession.
The U.S. budget deficit tripled from a year ago to $2.3 trillion.
Proving the old adage “even a busted clock is right twice a day,” former Treasury Secretary Larry Summers – now a pariah among the more progressive economists out there – has called the ongoing deficit spiral “unsustainable.”
I think that’s a polite and pleasant euphemism for a real “four-letter” description.
The U.S. isn’t even bothering to rein in its spending levels, a reason why the market is laughing off the 25-point hike expected next week. Global liquidity (a measurement far greater than Fed balance sheets that includes shadow banking, repo, and wholesale capital) continues to rise. Fiscal insanity plays its role.
Politicians are claiming deficit reduction is happening as if we’re too stupid to think to look at simple pie charts and line graphs.
The U.S. continues to reel like a drunk toward “Destination Dumpster Fire”: $50 trillion in debt by 2032.
And that’s just the baseline. Add in another pandemic, global war, or major credit crisis, and that number could balloon further.
The problem is this: The rest of the world doesn’t have to use the U.S. dollar or buy American debt. Indeed, emerging markets are whittling away their dollar-denominated debt, which imploded a few countries last year. And China doesn’t have much of an appetite anymore.
So, who does that leave to hold all of that debt?
The people who are forced to own it.
Yes… we… the stupid Americans.
Just Look at This Chart
Here’s the chart I’m talking about. It’s from U.S. Treasury and Congressional Budget Office (CBO) projections. Debt held by the public – that is, me and you - is expected to hit 200% of U.S. GDP by 2040, says the CBO. And from there, the number blows out through the rest of the century.
But if we look at the historical high trend, that number could move much faster. In fact, a nation that is already facing $33 trillion in liabilities and hundreds of trillions in unfunded liabilities doesn’t have much choice but to keep refinancing existing debt at higher levels.
This parabolic threat will only persist.
U.S. social payments continue to rise. The number of Americans who are part of the workforce is expected to decline, not rise, over the next few decades. And – what’s worse? Americans are already stretched when it comes to holding debt.
What’s the end game? They’ll likely be forced to own it. During the Obama Administration, politicians pushed for Americans to get a “government-run” retirement account – funded entirely on the back of U.S. Treasury bonds. That’s likely coming back at some point – because they’ll need some kind of parlor trick to get Americans holding these “assets.” Higher interest rates might tempt pension funds as well.
But if that doesn’t do the trick, it leaves one last buyer. And that’s the Federal Reserve. The Fed had planned to cut its balance sheet to around $7 trillion this year before its magic liquidity trick with regional and community banks in March.
Based on the current trends, I expect the Federal Reserve to start building up its assets and push past $10 trillion in the coming years. And that’s just on my expectation of how the Fed and Treasury address debt in the future.
I haven’t even proposed the Fed’s required “inflation targeting” to address the likely deflationary impact of artificial intelligence, the forward five-year shift of e-commerce after COVID, and other technology in the future. Central bank assets are going higher.
As a result, we’ll witness the ongoing “Japan-ification” of the economy: low growth, low inflation, and increasing debt.
It’s already buried in our leaders’ projections. See for yourself.
I’ll talk about where I think all of that money will be going (hint: it’s the latest crisis) and what to make of global liquidity soon.
Garrett Baldwin
Florida Republic Capital
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.