Think That Governments Won’t Default? Think Again
The Congressional Budget Office (CBO) just reported that the U.S. budget deficit is widening in a ‘big way’.
And what’s even worse – last month the net interest on public debt jumped 25% compared to last August. . .
I wrote last January about the soaring cost of interest that the U.S. Treasury’s paying on its outstanding debts (you can skim that here). And it looks like things keep getting out of control – especially as the Federal Reserve continues raising rates (which further increases borrowing costs).
Besides this very expensive ‘interest’ problem – the CBO reported that the U.S. budget deficit widened to its fifth highest ever.
And as Trump’s tax cuts continue taking away from Federal revenue, while government spending – including interest payments – keeps growing, we need to ask ourselves some important questions. . .
The next time the U.S. slides into a recession – will they be able to continue borrowing such enormous amounts while maintaining their interest payments? Will they follow the same route that the Emerging Markets are headed today?
We see many talking heads on CNBC and other mainstream financial media tell us that there’s virtually no risk of the U.S. defaulting. Same thing with any other major country.
Even worse, there’s a growing point of view preaching to the masses that aslong as country has a central bank, they can issue all the debt they need without risk of default.
Why would anybody think that?
Because – for instance – if the U.S. didn’t have enough cash flow (tax revenue) to pay creditors (buyers of U.S. bonds). And if they weren’t able to borrow anymore to roll over debt – the Fed would simply print U.S. dollars instead.
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