Imagine borrowing and spending as much as you want.
And you never have to pay it back.
In fact, someone else pays it back for you.
Sounds crazy, no?
Well, consider this.
The last time the U.S. Treasury posted a budget surplus (meaning they took in more taxes than they spent) was in 2001—more than two decades ago!
But along came 9/11 and Bush’s war against terrorism, the Great Recession, Obama’s bailouts, Trump’s tax cuts, Covid…by that point, we just lost count.
Deficit spending became a bipartisan norm—as if it were too distant an issue to even care about. Aaprès moi le déluge and pass the debt buck to future generations.
There’s now even a progressive theory that encourages this thinking.
It’s called Modern Monetary Theory (MMT). It claims “deficits don’t matter.” In fact, the theory is that you can print as much money as you want as long as you hold a monopoly over the money.
Of course, that’s wrong in so many ways because deficit spending is essentially a future tax in disguise. It lets the government fund its reckless policies and strips it of any accountability.
In the next few weeks, I’ll walk you through the undeniable facts that expose this complex scheme.
But first, let’s look at where this loose budgeting led us.
National Debt Highest Since WWII
America closed out 2021 just shy of US$30 trillion in federal debt.
It doesn’t sound like much anymore, but consider this: it acquired more debt in the past ten years than in the previous 45 combined (adjusted for inflation and population growth ).
As a share of GDP, the U.S. national debt is now at the highest level since WWII ended over 74 years ago.
Worse, the interest on this debt eats up one-seventh of all tax revenue – even with current low-interest rates.
But what happens if we keep accumulating debt at this pace?
According to projections by the Congressional Budget Office—which are still naively optimistic— “Interest payments on the 2051 federal debt will exceed all the federal government’s tax revenues by 46%.”
That’s not all.
This hockey stick-shaped graph is just the official, on-the-books federal debt. It doesn’t include the lion’s share of other obligations—such as Medicare and Social Security.
In fact, the Treasury’s February fiscal report data revealed that, if you include benefits and entitlement programs, total federal obligations crest over $100 trillion.
Of that, Medicare obligations make up nearly half.
And it will only get worse.
By the end of this decade, the last boomer will reach full retirement age. That means we’ll soon have to feed the biggest retiree generation yet, which will cost a lot…and I mean A LOT!
Economists estimate that boomer benefits alone will cost an extra trillion in annual budget deficits. That’s more than the entire deficit of 2019, when spending was already off the charts by historical averages.
And we haven’t even begun to factor in inflation’s effect on Social Security.
“Social Security beneficiaries are projected to receive a 8.6% raise for 2023, the biggest annual boost in more than 40 years, according to estimates released Friday morning. But even that may not be enough to counter stubbornly high inflation.
Pegged to the consumer-price index, or CPI, the cost-of-living adjustment is designed to help Social Security benefits keep pace with rising prices. Yet the COLA is falling short, said Mary Johnson, analyst for the Senior Citizens League and author of Friday’s projection. Social Security benefits have lost about 40% of their buying power since 2000, according to her analysis.”
Imagine where federal debt will get to with that kind of deficit spending…
Corporate and Consumer Debt Off the Charts
It’s not just the government that’s spending way beyond its means.
A decade of the Fed’s near-free money led Americans to build up a record $15.6 trillion of debt. And the appetite for credit is just growing. Last year, consumers were taking out loans at the fastest clip since 2003.
“Consumers ended 2021 with record levels of debt, leading into a year in which interest rates are expected to rise substantially.
Total U.S. consumer debt at the end of the year came to $15.6 trillion, a year-over-year jump of $333 billion during the fourth quarter and just over $1 trillion for the full year, according to data released Tuesday from the Federal Reserve’s New York district.
The quarterly rise was the biggest since 2007, and the annual gain was the largest ever in records going back to 2003.”
Corporate America isn’t falling behind, either.
In 2021, non-financial corporate debt hit a record of $11 trillion, according to the Fed’s data. Most worrisome, the biggest pile-on was recorded in the most “uncreditworthy” companies.
The riskiest companies—rated as BB+ or below—issued $432 billion worth of junk bonds last year. That’s nearly 2x as much as pre-Covid.
This raises a question: why did so much money flow into such risky investments during the most volatile economic period in history, which would normally scare off investors?
First, Covid gave governments worldwide and their investors a “verbal” bailout guarantee if things went bad. For example, in the U.S., Fed Chair Jerome Powell said they would do “whatever it takes” to save the economy—including buying all the junk.
Second, zero rates forced investors to take on more risk to earn at least some kind of yield. So, they threw caution to the wind and poured trillions of dollars into junk.
“Companies eager to raise cheap funds have been met by investors desperate to put cash to work, especially in assets such as corporate junk bonds that yield more compared with government debt.
The deluge of issuance has increased the face value of outstanding debt in the high-yield bond market above $1.5tn for the first time, according to a widely tracked index run by Ice Data Services.
“A lot of this issuance, like a lot of things we are seeing, is just a by-product of the excess liquidity we have in the system,” said John McClain, a portfolio manager at Brandywine Global Investment Management. “We are seeing excessive amounts of capital chasing returns and trying to find a home. I don’t think it’s going to slow down any time soon.”
In other words, the Fed’s policy has legitimized indiscriminate lending.
And when you flood the economy with so much “blanket” capital, it inevitably sets off a vicious cycle of unsustainable debt growth.
Cheap Money Forces Conformity to Debt
Think about it from a business owner’s perspective.
Say you run a small coffee shop on a busy street bustling with a dozen cafes competing for your customers. Then one day, the Fed slams down the rates, and your barista competitors seize the chance to take out cheap business loans.
They use that money to spruce up storefronts, buy fancy Italian coffee machines, or refurnish their venues to create a more inviting atmosphere—all to lure in more customers. Including yours.
How do you stay competitive?
You do the same thing as them: borrow.
Even if you were doing just fine without debt, now that your competition is leveraging cheap money, so must you—or else you’ll fall behind. It’s a rat race of debt.
The same goes for people in general.
During Covid, Americans fell over themselves to buy homes in fierce bidding wars. And it wasn’t just about cheaper mortgages – many wanted to lock in the deal before cheap money jacked up housing prices even more.
Can you blame them for taking on debt out of fear of getting priced out of homeownership—like tens of millions of Americans who already have?
In other words, cheap money is forced conformity to debt.
And it should be your government’s job to balance these things out in the best interest of every stakeholder in the economy.
So what have they done?
To be continued…
Seek the truth and be prepared,
This is the first instalment in the two-part series investigating America’s reckless fiscal and monetary policy that created a vicious cycle of unsustainable debt.
Next week, we’ll pick it back up and discuss how the government will monetize this debt using taxpayer money.