The US Debt Impasse: A Temporary Solution or Kicking the Can Down the Road?

We have concerns about the US debt, the suspension of the debt ceiling, and the potential consequences of these actions. In this feature we cover the impact on inflation, recession, and the possible ramifications for gold and silver.

Last week Wall St had a party after Nvidia gave guidance for 50% revenue growth for 2023. Everyone on Wall St has jumped on the AI trade, including buying the mega-tech stocks that everyone loves to hold. About ten stocks now make up all the growth this year in the S&P. The rest are flat, with dismal earnings and dismal guidance. Wall St is cherrypicking the data and expecting AI to be the savior. Well, guess what? AI isn’t even a product yet. And once it is, the economy will be on its back.

What Wall St has wrong is that this is not a normal business cycle. The thinking is that Q3 and Q4 will see a resumption of earnings growth, and we will get a soft landing. This is fantasyland. Why? The Fed has removed the punch bowl of low interest rates and QE, and has no intention of refilling it until something breaks. In fact, the lag effect of higher rates is just now starting to take effect.

The Achilles heel of Modern Monetary Theory is inflation. The Fed thought that since Japan (who invented MMT) didn’t have inflation, we wouldn’t either. Remember when Janet Yellen said we would never have a financial crisis again in her lifetime? That comment was from MMT craziness. She thought MMT was the secret sauce for economic growth forever.

The Fed refuses to admit it, but they have adopted MMT. And once you go down the Modern Monetary Theory rabbit hole, there is no way back. All you can do from that point forward is expand the debt bubble. It becomes impossible to attain fiscal responsibility. This has become obvious as debt grows and grows. Next week, Congress intends to raise the debt ceiling by $4T, and only a few Republicans are voicing outrage. In fact, most of the Democrats are angry that spending will not be higher. They have become oblivious to debt, as MMT has numbed everyone to its dangers.

The Ukraine war spelled the end of US global hegemony. It also spelled the end of an era. No longer can the US print money at will. The current debt ceiling issue points that out. Why is Congress fighting over the debt ceiling? Our interest expense is too high! Do you think Congress would care about the debt ceiling if interest rates were at zero? I doubt it. Our interest expense has risen from around $300B to $800B since 2020. That’s a big move! And not something you can ignore. Suddenly, we can no longer print at will.

To make matters worse, the Ukraine war has disrupted international trade relationships, something the USA has dominated since the end of WW2. This is huge! Yet, Wall St acts like it’s no big deal. China, Russia, India, and Iran have all partnered up with the intent of expanding the BRICS economic alliance. This will lead to de-dollarization as these countries switch from using dollars for international trade to other currencies. In fact, I expect a new BRICS+ currency to be announced in August at their next big meeting. It’s likely that this currency will be both a digital blockchain cryptocurrency and backed by both commodities and currencies.

So, the international trade system is changing. Any change will be bad for the US, which has dominated the international trade system, with the dollar currently dominating all international transactions. This is about to change in a big way going forward. What impact will that have on the dollar and US bonds? My guess is that it clearly won’t be beneficial. What impact will that have on gold? Likely positive.

So, we have a looming recession during a period of high debt, high interest rates, and high inflation. Plus, in the background, the international trade system is undergoing changes that are undermining the dollar. What could possibly go wrong? Yet, the stock market continues to behave as if nothing bad is on the horizon.

Is the USA Debt Problem Really Resolved?

“Of course, on the surface the US debt impasse is now over, but as usual it’s a case of “kicking the can down the road” – yet again. The mammoth debt built up in the US now stands at $31.2 trillion – and press reports from the White House indicate a “deal has been reached”. So, okay you’d think they could now borrow say another trillion or two until 2025 (debt deals and recalibration occur on a rolling two year basis), but no. This is a deal reached to actually suspend the debt ceiling, in other words for all the fluffery surrounding the press release wording, the USA government via the Federal Reserve are now free to borrow exactly what they want for the next two years, precisely until the next US elections.

This frightening scenario brings into focus just how much money $31.2 trillion really is – as we loom in on the magical $40 trilion mark. Why is $40 trillion so important? Because once the cumulative debt reaches that stage, the interest repayments actually exceed the amount borrowed, in other words for every $1 borrowed the eventual interest will be around $1.01. In the big scheme of things one cent does not sound and is not a lot – but multiply that forty thousand million million times and you get the picture.

This impending disaster now means two things. Firstly the Fed will undertake massive money printing again as their constant desire to raise the Fed funds rate to try to kill off inflation leads to a looming recession, which could be categorised as “severe”. You will witness the spectre, maybe within less than two years of a fed being forced to then cut rates to ease the recession, but without inflation returning to their supposed target of 2%. This will then set off a new and unstoppable wave of inflation going forward which will further debase the $ and lead to the debt ceiling being raised yet again. The only answer to all this is to attempt to back what is left of the paper dollar with something of intrinsic value.

And there is only thing.

Gold.

Despite repeated attempts to rein in the gold price by the Fed and the rigged trading by the bullion banks worldwide, this time the economic forces of nature will overwhelm all of them and the true price of gold (and by implication silver) will eventually show through. Don’t be surprised to see $3500 gold and $75 silver within the next few years.

Don’t worry too much about the US debt though, so long as the US$ remains the currency of world trade (which it will for quite some while). The USA creates dollars for nothing and sells them to the rest of the world for face value. It is the best business on earth. And if the $ does cease to be the currency of world trade, the rest of the world finds itself holding stacks of dollars worth a lot less than it paid for them, while the US debt denominated in dollars shrinks with the decreasing value of the dollar. US economics is designed to stuff the rest of the world, not Uncle Sam’s boys! Americans may not be great at foreign policy, but they are pretty good at international trade and finance.