The Debt Death Spiral

In the 14 months since the World Health Organization first declared covid-19 a health emergency, Congress has approved over $4 trillion in relief packages and the Federal Reserve has pumped almost $6 trillion into the economy.  Such deficit spending and money printing would normally kick off a Venezuela-style hyperinflation crisis.

In the case of the U.S., however, this crisis has been postponed because people, institutions and nations keep buying U.S. debt in the form of treasury bonds. But this situation cannot go on forever. In fact famed hedge-fund manager Michael Burry is warning that too much government debt and out-of-control quantitative easing are leading to a hyperinflation crisis.  “The market is dancing on a knife’s edge.”

According to the U.S. Government Accountability Office, as of September 30, 2020, the federal debt has passed $28 trillion. The national debt-to-gross domestic product ratio is already at 100% percent, and a new Congressional Budget Office report projects the debt-to-GDP ratio will equal 202% of GDP by 2051. At that point, 41 cents of every $1 spent will be borrowed and just the interest on the national debt will consume half of federal revenue.

These estimates assume 10-year Treasury yields will remain low however, if the government starts offering high-interest treasury bonds to entice nations to lend it money, all bets are off.

Once the nation begins to print money to pay the interest on money it has borrowed, we will enter the debt death spiral which can trigger hyperinflation.  When governments dilutes the money supply by printing dollars, the value of the dollar will plummet and the stock market will crash.  

Financial historian Niall Ferguson has warned that empires usually fall apart when the costs of servicing their debts exceed the cost of defending their borders. The United States is dangerously close to this tipping point. The CBO recently disclosed that the interest on the debt in 2020 was $345 billion or one-third the amount the nation spends on defense.  

As Hunter DeRensis wrote in an article for the American Conservative; “what would transpire if Social Security checks stopped showing up in mailboxes and Medicare benefits got cut off? When presented with that choice, will the average American choose his social safety net or continued funding for far-flung bases in Stuttgart, Okinawa and Djibouti? Even the most militaristic congressperson will know which way to vote, lest they find a mob waiting outside their D.C. castles.”

America’s predominance is about to disappear as the nation struggles to borrow enough money just to keep up with the interest on its debt. Whether or not Michael Burry is right about the stock market being on the brink of collapse, America’s sobering financial situation is a sign that the nation is on its last leg.

You cannot borrow or print your way out of a financial crisis. One of the wisest kings who ever lived, King Solomon, was inspired to write, “The rich ruleth over the poor, and the borrower is servant to the lender” (Proverbs 22:7).

Source:  America’s Debt Load Will Crash the Market by Andrew Miiller, the Trumpet; Debts, Deficits, and the Entitlement Crisis by Ethan Yang, American Institute for Economic Research

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