The Treasury Department released data showing the national debt is currently $30.9T. Analysts expect the number to move past $31T later this month. The recent and costly Inflation Reduction Act of 2022 and Student Debt Forgiveness bills will add more than $1T to the total. Despite the rapidly increasing debt, the President has been touting the $350 billion deficit reduction.
Debt vs. Deficit? What is the Difference?
Most people don’t realize there is a difference between the terms “debt” and “deficit.” Politicians like the word “deficit,” but the reality is about the debt. The deficit is the difference between annual revenues and annual expenditures. Debt is the total of all deficits. For example, if you make $400 in a year but spend $500, your deficit would be -$100. In year one, your total debt would equal your deficit. In year two, you make $600 but spend $800. Your deficit in year two is -$200, but your total debt is now -$300 (-$100 + -$200=-$300).
In both years, you spent more than you made. The assumption is that you don’t create more deficits and use your income to pay back the debt. At the end of year one, the debt-to-income ratio would be 25%. If things continued in year two as year one, it would take 25% of the income to pay off the debt. At least, in theory, the debt is still manageable. However, in our example, the second year did not go as year one. Both income and spending increased. If the income continued at the year two level, the total debt would represent 50% of the total income, or the debt-to-income ratio would jump to 50%. As deficit spending increases year over year, it becomes less likely that the debt will ever be repaid, and there is more risk of loaning to the borrower.
What would happen if the total debt was more than annual revenue? It would be impossible to pay off the debt, and the only way to sustain it was by opening more lines of credit. This is the current state of U.S. debt. The current ratio of Debt-to-GDP is 122.84%. To pay off the U.S. debt, collecting every penny of every person and business earned would be necessary. After every penny was collected, paying off the debt would still require an additional 22.84% of earnings. Imagine you have maxed every credit card and can’t afford the payments. For whatever reason, other credit card companies are willing to allow you to open another line of credit to transfer your balances. The game only goes so long until credit card companies cut off new lines of credit.
Who is Issuing the U.S. More Debt?
The traditional way the U.S. government pays for the deficit is by selling both marketable and non-marketable securities, such as different types of Treasury bonds and savings bonds. Marketable securities can be sold to other investors, whereas non-marketable securities cannot (like a savings bond). Ideally, foreign investors would buy Treasuries, and this was the way it was for decades. The way to grow an economy is by bringing outside money into it. The Federal Reserve was considered the buyer of last resort. However, the world changed, and politics shifted. Bailouts, stimulus, and quantitative easing became the norm. Now the buyer of last resort has become the primary buyer. The funny thing about emergency power is that governments and banks don’t seem to give it back when the emergency is over.
The government distinguishes between foreign investment and Federal Reserve printing. Foreign investment is called “intergovernmental holdings,” and Federal Reserve printing is called “debt held by the public.” The graphics are from the U.S. Treasury website. Before 2008, around half of government funding was intragovernmental. Since the 2008 financial crisis, debt has primarily been funded by the Federal Reserve buying the Treasuries instead of foreign governments. No matter what they call it, debt represents a tax burden. One way or another, the bankers will get paid.
The bottom line represents intergovernmental debt. The middle line is public debt. The top line is total debt, intergovernmental and public together. The two largest holders of U.S. intergovernmental debt are Japan and China, and both have been selling their treasuries rapidly. China now has less than $1 trillion in U.S. Treasuries, the lowest amount since 2010. China has consistently sold Treasuries monthly for years and seems to be accelerating the pace of the sales. China has reduced its holdings by 10.5% since November 2021. Japan has reduced its Treasury holdings by 6.9% since November 2021.
What does it Mean?
The U.S. debt is more than 100% of the entire economy and is unsustainable. Suppose politicians continue to create deficits and refuse to cut spending. In that case, the debt can't be paid off. If history can be trusted, there is no precedent for the American print and spend circus to end well.
Alexander the Great conquered the world and set up an empire. Feeding and supplying militaries across continents isn’t cheap. The Greeks started adding clay to their gold coins. Eventually, the coins were mostly clay. The clever recognized what was happening and would store the coins containing gold and trade the coins with clay. Eventually, the Romans conquered the Greeks. The people holding the gold became very powerful and wealthy in the Roman world, and those thinking the clay would last were peasants. The Romans also built an empire, and as the empire expanded, Rome started debasing their currency. Why didn’t they learn from the mistakes of others?
The rapid expansion of the money supply and debt preceded the end of empires. The U.S. money supply has increased by 480%. The people who transitioned well into the new economy held physical gold. The inevitable monetary collapse and the coming transition are probably why the bankers are taking delivery of physical gold at a record pace.
When the President brags about a reduced deficit, he means the government isn't spending money as fast. Isn't it to be expected that emergency spending should decrease? Bragging about the deficit reduction is like expecting adulations for only opening and maxing out five credit cards this year instead of nine cards like last year. It is like a murder defendant saying to the judge, "Your honor, think of all the people I didn't kill. You should probably thank me."
Politicians are destroying the dollar on purpose. Inflation is the only possible way ever to pay the debt. We have reached the point where creating more debt is the only way to sustain our current debt. If the government continues unchecked spending, there is no escape from the day of reckoning. It is coming. Everyone can choose how to handle history lessons, but the wise will learn from others’ mistakes and wisdom. The world has been down this path, and it doesn’t end well. Today, it is not gold and clay. It is gold and paper. Will you be among the wise that hold gold and transition well into the new economy? Or are you expecting the paper U.S. dollar to be stronger than Greek clay?
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