SLOWLY......THEN SUDDENLY!
This is the Crab Nebula in the constellation Taurus. It is the remnant of a supernova event that was seen on earth in the year 1054. Amazingly, it was bright enough to be seen during the day. Because it is over 6,500 light years away, those on earth witnessed an event that had actually occurred thousands of years earlier. Supernovae result from the sudden collapse of a massive star that over time has consumed the majority of its "assets" (hydrogen) causing it to abruptly implode due to intense gravitational forces. As the core rapidly contracts it reaches a temperature of billions of degrees Celsius - causing it to explode.
This recalls the exchange between two characters in Earnest Hemingway's, "The Sun Also Rises." One asks, "How do you go bankrupt?" His friend replies, "Slowly, then suddenly." To bystanders, suns and debtors appear stable despite their profligate consumption without consequence. But then there is an abrupt phase transition that suddenly brings down the house. Those who ignored the warning signs suffer the consequences. We are told that being "fore-warned" to a developing crisis allows us to be "fore-armed" - but only if we do something with that fore-knowledge. That is: prepare or prepare to be a victim.
We regularly write about the soaring US (and other) government debt. We do so because history proves that there will suddenly be a day of reckoning if the problem is not timely addressed. US debt (not including off-balance sheet liabilities) is now $35 trillion. Not only is the US government in no position to repay that debt with honest money, it is staggering under the burden of paying just the interest on the debt. It can do that only by selling ever more Treasury obligations. The risk is that at some point there will be insufficient buyers - even with rising rates. Many trillion dollars of Treasury debt will come due before the end of 2024 and must be rolled over because there is no money to redeem them. This chart shows the front-loading of maturities over the next years. Government finance is about to get very interesting.
The Fiscal Destruction of Governments
Ray Dalio is the founder of Bridgewater Associates, the largest hedge fund in the world, with some $120 billion of assets under management. He writes extensively, including a book titled "Principles for Dealing with the Changing World Order." In it he recaps the rise and decline of world powers over the last 500 years and more than fifty civil wars and revolutions. Sudden economic shocks are the principle cause of government failures. These shocks often result from bursting financial bubbles, destructive acts of nature, and costly wars. To respond to these shocks governments always resort to expanding their borrowings. The turning point (implosion) is when there are insufficient buyers for that new debt. That crisis ignites aggressive in-fighting for money and political power.
Dalio describes six stages of a government's rise and decline. He writes that the 5th Stage (where the US is now) involves bankrupt government finances coupled with extreme wealth gaps. The US's $2 trillion annual budget deficit coupled with $35 trillion in Treasury debt amply demonstrate "bankrupt government finances." The next chart shows the extreme wealth divide that has developed in the US. The top 10% (black and red) holds the vast bulk of all wealth. The far more numerous middle and lower classes (green) hold a pittance. This confirms the presence of "extreme wealth gaps."
The working classes have been under attack for decades and are finding it ever harder to meet their monthly expenses due to rising prices, rising taxes and stagnant real wages. David Stockman tallies the numbers,
[At the urging of the uni-party] the Fed has printed upwards of $6 trillion of excess fiat credits over the past 18 years, thereby transforming the nation’s central bank into the milk-cow of speculative windfalls on Wall Street and endless Forever Wars and borrow and spend bacchanalias on the banks of the Potomac. The explosion of public debt and fiat credit since 2006 has left middle class America high and dry. [Consider] the purchasing power of a dollar saved or earned in January 2006. It’s now worth just 63 cents. Since 2006, total inflation-adjusted wage and salary payments (in 2024 dollars) have risen from $9.4 trillion per annum to $12.1 trillion. That $2.7 trillion gain amounts to $20,600 per US household in constant dollars. By contrast, the constant dollar net worth of the top 1% of US households have grown from $27.3 trillion to $44.6 trillion as of Q4 2023. That $17.2 trillion gain amounts to $13.2 million each for the 1.3 million richest US households.
It was Lenin who argued that the middle class must "be ground between the millstones of taxes and inflation" to destroy them so just two classes remain: the ruling wealthy elite and the poor workers who exist to support them. Is the present sorry state of affairs for the US middle class a historic anomaly or the goal achieved by the elite who control government?
Dalio continues - as the fiscal crisis begins to unfold, the government has only two options as it will never meaningfully cut expenses: raise taxes dramatically or print vast sums of money that quickly loses value. He writes that governments always choose option two because it is the easiest thing to do without fomenting public uprisings over confiscatory taxes. When looking for warning signs of a developing crisis he suggests,
Watch populism and polarization as markers. The more that populism and polarization exist, the further along a nation is in Stage 5, and the closer it is to civil war and revolution. In Stage 5, moderates become the minority. In Stage 6, they cease to exist. Not knowing what is true because of distortions in the media and government propaganda increases as people become more polarized, emotional, and politically motivated. When winning becomes the only thing that matters, unethical fighting becomes progressively more forceful in self-reinforcing ways. When everyone has causes that they are fighting for and no one can agree on anything, the system is on the brink of civil war/revolution. Late in Stage 5 it is common for the legal and police systems to be used as political weapons by those who control them.
Populism is soaring now in the US, throughout Europe and around the world. The reason is that voters are utterly disgusted with their governments' failures to address inflation (high food, energy and housing costs), ever more burdensome taxation, uncontrolled immigration, rising crime and stagnant economies. These conditions adversely affect the poor and middle class far more than they affect the wealthy elite. Jeremy Warner at the Telegraph writes,
In Kenya, at least 23 people were killed and more than 300 injured in protests last week against the steep tax rises the government wanted to impose to head off fiscal calamity and default. In Britain, Truss’s short-lived premiership was brought to an ignominious end when markets rebelled against her unfunded tax cuts. In Brazil, the currency and stock market are in free-fall amid rising anxiety over the spending plans of President Luiz Inácio Lula da Silva’s Left-wing government. And in France, credit spreads have widened in anticipation of sweeping electoral gains for the hard Right and Left, both of them with delusional tax and spending plans in the face of an already burgeoning deficit and debt-to-GDP ratio.Virtually the world over, public debt is completely out of control. With the spending pressures of ageing populations yet to fully make themselves felt, there seems little chance of the corrective actions needed, or none that seems politically possible. Only when the entire floor caves in will governments realise their peril. Sometimes the most obvious observations are also the most insightful, and so it is with the late Herb Stein’s celebrated remark that “if something cannot go on forever, it will stop”.[The US suffers] 123% debt to GDP today - The International Monetary Fund (IMF) forecasts that the federal deficit will stay well above 6pc of GDP in each of the next five years, with federal debt swelling to 136pc of GDP by 2029. Looking still further ahead, the nonpartisan US Congressional Budget Office reckons that, given the present trajectory of tax-and-spend, public debt will further increase to 172pc of GDP by 2054. Even at 172pc of GDP, US public indebtedness may still be sustainable. Until, of course, it is not. That’s the thing about markets. Everything seems calm and normal, giving everyone a false sense of security even when the lights are flashing red. Then suddenly they turn. The point of no return happens well before governments start monetising the debt, and once they do it’s game over: rapid currency depreciation and rampant inflation quickly follow, as we have seen repeatedly in emerging markets.
During such turbulent times political leaders become obsessed with raising money from any and every source to keep the plates of government spinning and the elite-insiders in power. Those about to be fleeced consider leaving or at least moving their assets out of the country. Predictably, they will be met with currency controls that bar the transfer of money out of the country and travel restrictions to trap them in the failing system. Thus, the necessity of getting assets out of a failing country before the crisis arrives and you are barred from doing so. Dalio cautions,
Civil wars inevitably happen, so rather than assuming “it won’t happen here,” which most people in most countries assume after an extended period of not having them. Domestic conflict causes vulnerabilities that make external wars more likely. Almost all civil wars have had some foreign powers participating in an attempt to influence the outcome to their benefit.
We are not predicting a civil war. But we observe that over the last five fiscal years US government debt has soared from 79% of GDP to 123% and will continue to rise in the future. Interest rates are up, so expiring 3-month Treasuries that averaged a 2.5% coupon rate will be replaced with those bearing 4.5% interest - nearly doubling the interest cost to the Treasury. The government has had to dramatically increase borrowing - not to repay its debt - but just to pay interest on its debt. The debt thereby rises ever faster. This chart shows the rapid increase of the Federal debt.
And this chart shows the soaring interest expense on that debt.
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Source: Federal Reserve Bank of St. Louis
US government spending is expected to consume 24% of the entire national GDP this year, with the percent increasing annually thereafter. The Congressional Budget Office estimates that federal debt will reach $50.7 trillion in ten years. Note: this estimate is $2.4 trillion higher than the CBO estimated - just four months ago, so consider its estimates of future debt to be unreliable, at best. The crime of this is that Congress has lavished benefits on its supporters to buy votes over the last decades but your children and grandchildren will be the ones having to pay for it.
Economists Reinhart and Rogoff wrote a book called, "This Time Is Different" in which they debunk the eternal hope of governments that they will somehow be able to avoid the consequences of their fiscal excesses. They recount many occasions when nations thought their fiscal well would never run dry, always believing that "this time is different" from prior fiscal calamities. The authors confirm that highly indebted economies may appear to be stable, but they remain so only as long as creditors and debtors remain confident of the future. When that confidence evaporates the crisis suddenly arrives. The vast majority of people and businesses are caught unaware and suffer devastating losses. The few who anticipate the event and take protective action survive - and some even make fortunes, as during the 2008 financial crisis. John Mauldin reviewed the book and wrote,
What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite. The point is that complacency almost always ends suddenly. You just don't slide gradually into a crisis over years. It happens! All of a sudden there is a trigger event, as it did in August of 2008. There is no way to know when it will happen. There is no magic debt level, no magic drop in currencies, no percentage level of fiscal deficits, no single point where we can say ‘This is it.’ It is different in different crises.
Your sense of urgency should rise when even the main stream media, like the Wall Street Journal, headline recent articles titled, "Will Debt Sink the American Empire?" "The National Debt Crisis Is Coming" and "Soaring U.S. Debt Is a Spending Problem." The Fed's Jerome Powell has added that Congress must get control of the nation's deteriorating fiscal situation, "the sooner the better." The International Monetary Fund (IMF) recently warned that high US deficits and debt,
create a growing risk to the US and the global economy, potentially feeding into higher fiscal financing costs and a growing risk to the smooth rollover of maturing obligations. These chronic fiscal deficits represent a significant, persistent policy misalignment that needs to be urgently addressed.
Claudio Borio, the head of the Bank for International Settlements economic department headquartered in Basel, Switzerland, stated the obvious, "We know from experience that things look sustainable until, suddenly, they no longer do."
The question is whether the US Congress (or your legislature) will heed these warnings, cut spending, eliminate deficits and start repaying the debt to avert disaster? Will US Congressmen and women have either the interest or fortitude to meaningfully slash Medicare, Medicaid, Social Security benefits, defense spending, welfare spending, corporate welfare and subsidies, bank bailouts, and military aid to Ukraine and Israel thereby infuriating their political supporters and ensuring the loss of their cushy jobs in Washington? In a word, "No." Therefore, one must expect a fiscal crisis to suddenly arrive at some point in the future with governments reacting in a predictable way - massive new money printing resulting in renewed high inflation (e.g., further devaluation of the dollar). The political classes may also be tempted to fall back on the proven losing strategies of wage and price controls, bailouts of failing banks and companies and high tariffs to protect local producers - all of which will ensure that the situation will be worse.
The US is not alone in facing a fiscal crisis. Virtually every major nation is similarly situated. For example, look at debt-to-GDP ratios in Europe: Germany 63.7%, Portugal 94.7%, UK 104.3%, Belgium 105.4%, Spain 106.3%, France 111.6%, Italy 139.2%. Total EU debt is 80.1 billion Euros - which is a 45% increase from Q4 2023. What about their economicgrowth? EU GDP growth was 0.3% in Q1 2024, with France and Germany tallying a meager 0.2% - all coupled with the curse of sticky inflation.
It is easy to see how nations get so deeply in debt. A politician comes up with a proposal to buy votes by addressing a perceived problem - such as lack of medical care for some elderly and the needy. A law is passed to address the issue and estimates of the cost of the program always sound reasonable. Medicare and Medicaid were created in 1965. Congress estimated that by 1990 the programs would cost taxpayers $3 billion annually. The actual cost by 1990 was $98 billion. In FY 2022 Medicare alone cost $944.3 billion and Medicare added another $805.7 billion for a total of $1.75 trillion. That is just in direct costs. The additional amount of indirect costs imposed by the programs on the health care system of doctors and hospitals has been shifted onto private pay patients and insurers thereby adding many hundreds of billions more in cost. Everything the government does, even with the best of intentions, ends up costing vastly more than expected and causes unintended negative side effects that must then be addressed with new programs at further cost.
Consider several other well-intentioned programs. In 1964, president Lyndon Johnson declared a "War on Poverty" - a worthy sounding goal. How has that "war" gone? About as well as his war in VietNam. US taxpayers have spent $22 trillion in the effort to reduce poverty. Sixty years later, the percentage of people in the US below the poverty line is about the same as it was in 1964 - with a growing percentage of the population becoming life-long dependent on government support. Between 2012 and 2024 the US spent well over $1 trillion on the "War on Drugs." During that time illegal drug use has grown exponentially. How about George Bush's "War on Terror?" It is estimated in a paper from Brown University that the US has spent $8 trillion combatting "terror" (never defined). Has the threat of terrorism been eliminated - or even significantly reduced?
Economist Milton Friedman famously remarked, "One of the great mistakes is to judge policies and programs by their intentions rather than their results." Evaluating the results of expensive programs is never done because it would require those in government to admit to their failures and monumental waste of taxpayer money. There is zero accountability for spending undertaken by Congress and no political price is ever paid for their mistakes. Because no lessons are ever learned, bad policies endure and multiply. Former independent presidential candidate, Harry Browne, wrote a book thirty years ago recounting this phenomenon titled, "Why Government Doesn't Work." It remains timely to this day.
The Rise of the Right and Left - Growing Extremism
We address the changing political climate here only because it impacts the economies of the world - almost always in a negative way. Most of Europe finds itself in political upheaval following abject failures of government to address the concerns of the working people. In France, Marine Le Pen's rightest National Rally party trounced elitist Emmanuel Macron's party forcing him to call a snap election, with ominous short and long-term overtones and Le Pen rising in power. France's four parties on the left including the Greens, Communists and Socialists united to run a campaign under the banner of the New Popular Front. Macron remains in power until 2027 unless he resigns. France's first round of elections brought the highest voter turnout in forty years evidencing the surge of voter disgust in their government. The Telegraph's Evans-Pritchard writes,
The situation in France is particularly alarming to vested interests as it and Germany are the glue that hold the EU together. It is becoming impossible for markets to price the political risk of Emmanuel Macron’s capricious character. If we have learned anything from a decade of galactic grand-standing, it is that he will not accept defeat lightly. He must always be the master of events. Article 16 lets the president invoke emergency powers on his own authority, and exercise those powers at his own discretion, a combination that distinguishes France from every major country in the democratic world.
Belgium's Prime Minister, Alexander De Croo resigned after the right wing party made substantial advances, Italy's Giorgia Meloni's right wing party is set to win the most seats, Germany's ruling coalition was defeated by conservatives with the AFD finishing second, numerous anti-immigration candidates were elected in Ireland, Geert Wilder's party in the Netherlands is now the second largest, in Austria the right-wing FPO party doubled their seats to take the majority, and in Spain, the right-wing Vox party is now the third largest party. In England, Rishi Sunak was forced to call a snap election following a dramatic fall in Tory support following soaring taxes, high home prices, uncontrolled immigration, low growth, persistent inflation, decaying infrastructure, a failing national health service and woke policies that voters find destructive of the national character. Labor's Keir Starmer will now have the chance to remedy these problems - or make them worse.
The US used to take great pride in its people's penchant for hard work, self-sufficiency, distaste for government intervention in their lives and moderate political views. Those days are long gone. Now vast numbers of people look to the government to solve all their problems (housing, education, food security, medical care, jobs, higher minimum wages, retirement). Nearly 50% of Americans live in households that receive one or more forms of government support making them dependent on the government for their survival. Dependency on a government that is the process of going bankrupt will lead to disaster.
Those wanting to be supported by others (and politicians promising endless benefits in exchange for votes) forget Margaret Thatcher's tart observation that "The problem with socialism is that you eventually run out of other people's money" - which is rapidly coming to pass. Populists argue that increased benefits can be paid for by raising taxes on "greedy corporations." They are ignorant of the fact that businesses must pass on to consumers their costs of producing goods and services (labor costs, rent, materials, and all overhead expenses including taxes) or they will go out of business. Thus, it is the people demanding higher taxes on businesses that will end up paying those taxes through higher prices.
During troubled times, there is a cry for tariffs on imported goods to protect local producers from losing sales to cheaper foreign producers. President Biden spent the last three and one half years urging Americans to buy EVs to reach "net zero." The problem is that American-made EVs are extremely expensive and not popular with any but the rich who can afford to virtue-signal. China produces much cheaper EVs and would like to sell them in the US. That would seem to be an obvious "Win" for the Green Agenda. But President Biden will impose a 100% tariff on Chinese EVs, which cost of course gets passed on to the buyers. To protect a few thousand union auto workers' jobs (and their votes), Biden is willing to impose the hardship of high EV prices on the public at large - who will not buy them in any event because they are too expensive due to the tariffs.
Those in government are always short-term focused on the next election. They give no consideration to where the massive ship of state is steaming. The warnings of those we quote above about the necessity of immediately addressing fiscal deficits and debt are studiously ignored. We will all pay the price for that ignorance.
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