Financing the U.S. government’s mega budget deficit – the gap between government spending and tax revenue – has become an act of madness. Just this week, the U.S. Treasury flooded the market with $180 billion of new debt. Did you buy some?
Washington’s spending is completely out of control. Even the International Monetary Fund (IMF) is speaking up. Its recent World Economic Outlook points to spending “that is out of line with long-term fiscal sustainability.”
Of note, are expanding U.S. budget deficits, which ballooned from $1.4 trillion in fiscal year 2022 to $1.7 trillion in fiscal year 2023. This trend is continuing. We’re now over six months into fiscal year 2024 and Washington is on track to hit a deficit of over $2 trillion.
Each year may start fresh. With a new deficit to accrue. But each year’s deficit doesn’t go away when the new year starts. These deficits, which are are racked up year after year, are stacked onto the national debt – now over $34.6 trillion. “Something will have to give,” the IMF warned.
This warning is nothing new. In 1986, economist Herbert Stein, father of Ben Stein, the economics professor in Ferris Bueller’s Day Off, observed that U.S. government debt was on an unsustainable trajectory. He, thus, established Stein’s Law:
“If something cannot go on forever, it will stop.”
From what we gather, a scientific law, as opposed to a theory, is a statement based on a repeated observation that describes some aspect of the universe. For example, water boils at 212 degrees Fahrenheit. This is a scientific law. It has been repeatedly observed since before the measuring scale was even discovered.
What’s the point?
Postponing the Crackup
The present financial and economic state of affairs is challenging Herbert Stein’s Law. We are living in an era where something that cannot go on forever, doesn’t stop. Remarkably, it continues.
Year after year. Decade after decade. The debt piles up. And all the while, it piles up at a much faster rate than GDP growth. At the turn of the new millennium, U.S. national debt was $5.6 trillion, while U.S. GDP was $10 trillion. Today the national debt is $34.6 trillion, and GDP is $27.9 trillion.
Over this time, GDP has increased 179 percent. Yet the national debt has increased 517 percent. The nation’s income is being dwarfed by the national debt. Both Herbert Stein and the IMF are right, “something will have to give.” But when?
At this point, the economy is radically dependent on government debt. Significant spending cuts or tax increases would make GDP flatline or fall. This would bring on a complete credit collapse and 1930s-style depression, which is exactly what’s needed to restore things to a fundamentally sound economy.
Central planners, like Fed Chair Jerome Powell and Treasury Secretary Janet Yellen, are resisting. Their jobs and the ruling class depend on preserving the status quo. Thus, they’re choosing inflation and financial repression. This is the end game here, or at least the first act of it – until the dollar loses all value.
Jerome Powell is 71 years old. Janet Yellen is 77 years old. Joe Biden in 81 years old. Donald Trump is 77 years old. Chuck Schumer is 73 years old. And on and on.
The aim of the geezers in power is to postpone the debt crackup – to keep stimulating – until after they die. In other words, they plan to die before Stein’s law is realized. That way they’ll miss out on the ultimate misery and suffering of their making.
Out of Thin Air
Forever, as employed by Stein’s Law, is a very long time. On the road to forever, practically anything and everything can happen. Including the unexpected.
Yet just because something hasn’t happened yet, doesn’t mean it will never happen. Without question, unsustainable debt must eventually stop. Will you be alive when this happens?
The unsustainable trend of U.S. government debt Stein witnessed outlasted his life. Herbert Stein died in 1999, several decades before the crackup. Those reading this may not be so lucky.
For many decades, Washington’s solution to the problem of too much debt has been to add more debt. When one credit card is maxed out, for example, just charge to a new one.
So long as the U.S. government can continue to borrow several trillion dollars each year, it doesn’t need to face the reality of its true financial condition. But when Japan or China or the United Kingdom or other countries stop lending to the U.S. government, things will get especially real.
Through the magic of central banking the U.S. government can borrow without limits. The Fed, using quantitative easing, creates credit out of thin air and loans it to the Treasury. The government then spends it on foreign wars, domestic boondoggles, and free drugs. This spending, a form of corporate welfare, is considered to be good for business.
As we’ve all experienced following the coronavirus money printing orgy, these actions have consequences. A debased currency brings about all sorts of instabilities, above and beyond higher consumer prices. It brings about the breakdown of society.
Destination TEOTWAWKI
“In the long run we are all dead,” said 20th Century economist and Fabian socialist, John Maynard Keynes. This was Keynes’ rationale for why governments should borrow from the future to fund economic growth today.
The proposition, like eating your seed corn, is foolish. It may make today a little more agreeable. But it guarantees that tomorrow will be miserable.
Still, politicians love an academic model that gives them justification for spending other people’s money to buy votes. Keynesian economics, and in particular, nonstop stimulus, does just that.
U.S. politicians have attempted to borrow and spend the nation to prosperity for the last 90 years. Over the past 15 years, the Fed has aggressively printed money to fund Washington’s epic borrowing binge. In doing so, the Fed is taking us to a place of utmost unpleasantness. And we’re still alive to experience it.
Sometimes the end of the world as we know it (TEOTWAWKI) comes while some of us are still here. We believe the present episode of debt, deficits, and state sponsored economic destruction, has placed all of us ‘top dead center’ for one of these times. Something explosive, world altering is happening. We’re reaching destination TEOTWAWKI.
The world as it was once known – where a dollar was as good as gold – has come and gone. Today, in life after the end of that world, we are witnessing the illusion of wealth, erected by five generations of borrowing and spending, crumble before our eyes.
Moreover, contrary to Keynes’ words, in the long run we are not all dead. In fact, in the long run we are all very much alive. And we are all living with the compounding consequences of shortsighted, politically driven economic policies.
[Editor’s note: It really is amazing how just a few simple contrary decisions can lead to life-changing wealth. And right now, at this very moment, I’m preparing to make a contrary decision once again. >> And I’d like to show you how can too.]
Sincerely,
MN Gordon
for Economic Prism
