Six Predictions From The Last Week’s Horrific Treasury Report
Six Predictions From The Last Week’s Horrific Treasury Report
Notes From the Field By Simon Black October 23, 2023
By the time Philip II ascended to the throne of Spain in the year 1556, the empire he inherited from his father was already the most dominant superpower in the world.
Spain had a formidable military, and its famous naval armada struck fear in the hearts of its adversaries.
Spain also held vast colonies across the Americas, Africa, and Asia that produced unimaginable wealth; just one single mine in Bolivia-- Cerro Rico-- was so abundant that it has produced more silver than any other mine in history. And it still operates to this day.
Spain must have seemed invincible back then. And Philip II probably thought his Empire’s dominance would last forever.
And yet less than 100 years later, Spain had succumbed to the same historical fates that have caused ALL empires to decline.
Decades of bad decision making. Corruption. Bureaucracy. Inflation. Endless and costly warfare. Idiotic decrees that restrain economic growth. Chasing away productive citizens and businesses.
Excessive spending. Excessive debt.
Debt, in fact, was such an enormous problem for Spain that its kings had to default on their debts multiple times.
Empires are extremely expensive to maintain. Governments have to become bloated and costly. Administering colonies requires a lot of money. Military expenditures skyrocket.
And Spanish kings didn’t exactly hold back when it came to spending on lavish courts and luxuries.
So even though Spain should have been immensely wealthy, it was actually taking on a mountain of debt.
It’s almost incomprehensible how a nation with so much income and so many resources could have squandered its wealth.
Yet we’re seeing the same phenomenon play out in real time in the United States, for many of the same reasons as the Spanish Empire’s decline. And it’s even more incomprehensible.
Like Spain, the US was once the clear, dominant leader in the world, synonymous with wealth and power. But decades of war, excessive spending, debt, etc. have taken a toll.
A few days ago the final numbers for the US government’s Fiscal Year 2023 were published. (Remember that the Fiscal Year runs from October 1 through September 30, so FY23 ended a few weeks ago.)
The numbers are absolutely atrocious… and an obvious sign of America’s fiscal decline.
I’m not saying this to be sensational. I’m saying this because it’s a cold, hard fact. You cannot sugarcoat a $2 trillion annual increase in the national debt-- which is what the numbers show.
What’s really concerning about this, however, is how little the people in charge seem to care.
The President of the United States is so clueless that he doesn’t even understand the difference between the national debt, versus the annual budget deficit.
He’s also so clueless that he even claimed as recently as two weeks ago that the government is running a budget surplus. It’s obviously not.
(Notably, the Big Guy also claimed that “Americans know they are better off financially than they were before. It’s a fact.”)
He’s totally wrong, of course… as evidenced by the national debt having increased $2 TRILLION for Fiscal Year 2023.
It’s worth noting that the national debt has already increased more than $500 BILLION just so far this MONTH. So this addiction to debt and spending does not seem to be abating anytime soon.
Treasury Secretary Janet Yellen-- who was formerly the head of the Federal Reserve-- went so far as to say that America “can certainly” afford to fund two wars at the same time, i.e. both Ukraine and Israel. There’s simply no instinct for restraint.
Then there are lawmakers like AOC who believe that deficits don’t matter, and that “we should eliminate the debt ceiling in the United States because of the Constitutional reasons…”
Yet despite sounding like an inarticulate buffoon every time she opens her mouth, AOC is representative of an entire movement of prominent economists and PhD ‘experts’ who similarly believe that deficits and debts are irrelevant.
Nobel Prize winner Paul Krugman has said in the past that the US national debt is simply “money we owe to ourselves” therefore no one should really worry too much about it.
(Coincidentally, Krugman wrote those words in February 2015 when the national debt was ‘only’ $18 trillion. Today it’s almost twice that level.)
Well, Krugman is completely wrong, and the facts are clear.
Out of the $33.6 trillion national debt, it’s true that roughly $7.1 trillion of that is owned by different agencies and departments within the federal government. I suppose that’s the “we” that people always refer to when they say “we” owe the debt to “ourselves”.
But nearly ALL of that $7.1 trillion is owned by Social Security and government retirement programs for its civilian and military personnel. Other programs like the FDIC, US Post Office, and the federal unemployment office also own a lot of US government bonds.
So the argument that ‘we owe the debt to ourselves’ absurdly presumes that it’s OK to default on Social Security… or military retirement obligations… or the FDIC.
Well, such a default would trigger a massive financial and social crisis in the Land of the Free, and few politicians are willing to go down that road.
$7.7 trillion of the national debt is owed to foreign nations. And nearly all of those bonds are owned by countries who are flat broke (like Japan) or who are major adversaries of the United States (China).
This is pretty important, because it means that those countries will be less and less likely to buy and own US government debt in the future. More on that below.
The rest of the US national debt, roughly $18.8 trillion, is owned mostly by large businesses, financial institutions, money market funds… plus state and local governments.
Money market funds, pension funds, and retirement funds own trillions of dollars of government bonds. Apple owns about $25 billion of US government bonds. Bank of America owns $200 billion.
It’s not like the US can default on the city of Chicago or the State of California. Or pension funds that manage the retirement assets of millions of Americans. Or big banks.
As I wrote last week, Bank of America has already suffered more than $107 billion in losses from its ownership of US government bonds (and related securities). If the Treasury Department decides to not pay its debts-- because, you know, ‘we owe it to ourselves’-- then nearly every bank in the US would be wiped out.
Again, none of these is a crisis that any politician wants to trigger. So not only is ‘we owe it to ourselves’ completely incorrect, but it also doesn’t even matter. Failure to make payments on the national debt would be catastrophic.
Now, according to the most recent Treasury Report, the federal government spent a whopping $879 billion on interest payments in FY23. But that’s with an average interest rate below 3%.
Interest rates have now passed 5% and may be headed higher.
So, fast forward a few years when the national debt could exceed $40 trillion and average interest rates reach 5% or more. That would mean potentially $2 TRILLION per year, just to pay interest.
To say this is unaffordable would be an outrageous understatement.
Because on top of all this debt drama, the US government’s tax revenue is also sagging. Total FY23 tax revenue was $4.4 trillion. And that’s down from nearly $5 trillion the year before.
Just do the math: interest costs on the national debt are spiraling out of control at a time when tax revenue is falling. It’s not a pretty picture.
And based on this scenario, I’d humbly make a few predictions:
1) The Federal Reserve will reverse course and start cutting rates.
This might not happen right away; the Fed seems far more concerned right now with appearing like they’re in control and know what they’re doing. But no Fed Chairman wants to preside over the bankruptcy of the United States.
So the Fed will have to cut rates and start printing money again in order to save the federal government, as well as the banking system, Social Security, and more.
2) This will lead to more inflation.
With the Fed creating so much money-- trillions of dollars at once-- the US economy will suffer the same predictable consequences as it did in 2021 and 2022: inflation.
3) And a loss of confidence in the dollar
Higher inflation coupled with outright government dysfunction has already caused much of the world to seek alternatives to the dollar. Another bout of inflation, plus potentially several more years of incompetence will probably be enough to reset the dollar-centric Bretton Woods system once and for all.
4) Foreign nations will stop investing in US government bonds
With the dollar no longer at the center of global finance, foreigners (presently $7.7 trillion) will no longer have the same incentives to own US debt. This means that one of the US government’s major funding sources will dry up, leaving politicians scrambling to find money.
5) Politicians will demand new and higher taxes.
With foreigners no longer buying US government bonds at the same pace, politicians will try to raise tax revenue. Expect wealth taxes, higher income taxes, green taxes, and even windfall profits taxes on certain assets and income like crypto, gold, oil profits, etc.
6) Many Americans will move further left
Politicians and their media allies will insist that capitalism has failed… and rescuing the nation from this hardship will require bigger government and more intervention. Sadly, millions of people will believe them, and a new wave of socialism could rise.
I’m not suggesting that this outcome is imminent. Or even certain.
It could still take several years for these issues to unravel. And I’ve written before that America’s challenges are still fixable… however the window of opportunity is narrowing quickly.
It’s also true that other rival powers like China have their own critical challenges. But this is irrelevant; other nations’ challenges don’t eliminate the seriousness of America’s.
We can certainly hope that the West will put itself back on course. But as we used to say in the military, ‘hope is not a course of action’. And it’s for this reason that it makes so much sense to have a Plan B.
Simon Black, Founder Sovereign Man