Double Nickels on the Dime

Lost in the election year noise and the zealous pursuit of World War III is one overarching fact.  The USA is rapidly going broke.  And no one can stop it.

We know digging into the particulars of Washington’s fiscal condition is a dreary and tedious undertaking.  There are certainly more exciting and fruitful ways you can spend your time.  But if you want to better understand why everything is broken, please indulge with us here.

So far in fiscal year 2024, from October 2023 through May 2024, the federal government has spent $4.49 trillion.  According to propaganda on the Treasury Department’s fiscal data website, this money was spent “to ensure the well-being of the people of the United States.”

How exactly all this spending ensures well-being is unclear.  Does it make your morning cup of joe taste better?  Does it enhance your health and ease your aches and pains?  Does it deliver fresh fruits and vegetables to your grocery store?

What is clear is that government spending is completely out of control.  In fact, $1.2 trillion of the $4.49 trillion was made up with debt.  In May alone, the deficit was $347 billion.  And per the Congressional Budget Office’s latest update, deficit spending will hit $1.9 trillion in FY2024.

Remember, the CBO’s projected $1.9 trillion deficit is racked and stacked on top of the national debt, which currently exceeds $34.8 trillion.  Presumably, this debt must be repaid.  At a minimum, the debt interest must be serviced.  And, unfortunately, the debt interest is consuming a larger and larger portion of the federal budget.

Through May, spending for net interest on the debt has amounted to $601 billion.  That’s more than any other category apart from social security ($960 billion) and medicare ($607 billion).  For perspective, defense spending over this period was $576 billion.

What to make of it…

Ferguson’s Law

Roughly half of the $1.2 trillion deficit spending that has occurred thus far in FY2024 went to paying the $601 billion interest on the debt.  Moreover, as these massive deficits continue to rack and stack on top of the debt, more and more borrowing is needed to service the debt.

As this continues, less and less money is available to fund other budget categories.  Thus, the U.S. government has less to spend so that it can “ensure the well-being of the people of the United States.”

As noted above, net interest on the debt now exceeds defense spending.  This is especially significant because it has implications for America’s ability to maintain its empire.

In this regard, author and financial analyst Luke Gromen recently reminded us of Ferguson’s Law:

“Ferguson’s Law states that any great power that spends more on debt service (interest payments on the national debt) than on defense will not stay great for very long.  True of Hapsburg Spain, true of ancien régime France, true of the Ottoman Empire, true of the British Empire.”

Ferguson’s Law comes from doom aficionado, Niall Ferguson.  It is a simple law based on empirical evidence.  It generally recognizes what happens when an empire gets too big for its britches.  And it offers past examples one can look to for what comes next.

The USA is now the latest empire to have breached its pantaloons.  In truth, its fall from being great already commenced several decades ago.  That’s when America’s debt trajectory began its transition to a vertical moonshot.

Alas, there’s no going back.

Political Expediency

As the debt piles up, and the debt interest becomes larger and larger, the options for addressing it are reduced.  Quite frankly, the debt and deficit situation is an absolute trainwreck.

Still, there are two options for improving the fiscal predicament.  These include: (1) reducing spending, or (2) cutting interest rates.

In reality, Option 1 is a nonstarter.  The corrupted lunkheads in Congress have shown they’re politically incapable of reducing spending – especially when all the spending is making them rich.

So, the politically expedient solution is Option 2: for the Federal Reserve to cut interest rates.

This, of course, would come with painful ramifications.  The projected FY2024 deficit of $1.9 trillion is highly inflationary.  This radical fiscal policy is much more responsible for driving consumer prices higher than current Fed monetary policy.

However, cutting interest rates in the face of these monumental deficits would add more fuel to the inflationary fire.  The cost for goods and services, and residential real estate, would rise.  The dollar, in return, would continue to lose value against hard assets.

Cutting interest rates would temporarily reduce the net interest on debt.  It may prop up Treasuries on a nominal basis.  But on a real, inflation adjusted basis, bonds would get destroyed.  And international creditors would be compelled to liquidate their holdings.

This would put financing the debt back on the shoulders of the Fed.  By this, the Fed would be forced to resume its quantitative easing programs of creating credit out of thin air to buy Treasuries.  This, in turn, would further encourage government spending, and mega deficits, which would set America up for an even greater crisis down the road.

The U.S. isn’t the first country to find itself cascading down this destructive slope.  Nor will it be the last.

Nonetheless, for American’s trying to work, save, invest, and improve the lives and security of their families, we’ve entered dangerous territory.  One that generally ends in societal chaos and upheaval.

Double Nickels on the Dime

In a world of fractional reserve banking, recessions are an inevitable part of the business cycle.  As credit moves to and fro, booms and busts follow.  Always has.  Always will.

However, over the next several years, as the Fed is forced to cut interest rates and Washington continues its insane levels of spending, the U.S. economy will slip into a stagflationary deathtrap.  Where economic growth slows or contracts, the unemployment rate goes up, yet consumer prices continue to rise.

Stagflation is not a natural phenomenon.  It is the result of poorly mismanaging an economy over an extended period through massive deficit spending, artificially low interest rates, and overindulgent welfare and warfare programs.

The last time this happened was in the 1970s, when inflation and unemployment went up in tandem.  After closing the gold window in 1971, President Nixon made various attempts to control prices through wage and price freezes and import tariffs.

In 1974, following the first oil price shock of 1973, Nixon even established a national 55 miles per hour speed limit to reduce fuel consumption.  Long-haul truckers traversing on Interstate 10, which runs coast to coast from Los Angeles to Jacksonville, were forced to do double nickels on the dime (i.e., go 55 MPH on I-10).

The stagflation was finally put to bed in 1981 with a 10-Year Treasury yield of 15.32 percent.

This time around, given the mega level of government debt that exists, it will be impossible to overcome stagflation without a U.S. government default.  At a 10-Year Treasury yield in the 4 to 5 percent range, net interest on debt has already blown out to the point of massive fiscal stress.  What would happen at a yield of 15 percent?

Hence, more money printing will be called upon to prevent an outright default.  Still, the default will happen regardless.  It will happen via extreme dollar devaluation and inflation.

And everything you thought you knew about civil society will be turned inside out.

[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 you can too.]


MN Gordon
for Economic Prism

Return from Double Nickels on the Dime to Economic Prism

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