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Chart of the Week #8

I don’t usually do these more than once a week unless I come across something really pressing that I want to share with you. But after a reader named Laramie made an interesting comment under the chart I published earlier this week, showing U.S. government historical debt, I figured this topic needed a follow-up for more context. Here’s a snippet of what he wrote:

We know a debt level at 120% or more of GDP eventually leads to chaos in countries that do not have the world’s reserve currency.

Laramie is spot-on. Once a country reaches a certain level of debt relative to its economy, something tends to break. And usually, it’s not just one thing.

As it happens today under Biden, the U.S. government’s $34.8 trillion debt is already about 125% of America’s Gross Domestic Product (GDP). This places us in the company of nations like Venezuela, Sudan, and Lebanon on the list of Top 10 countries with the highest debt-to-GDP ratios.

None of these countries are successful, vibrant economies, or places you’d want to hang your hat in — quite the opposite. It’s just not a great club to be a part of.

And what’s really frustrating is that things haven’t always been like this in the good ol’ US of A. In fact, the only comparable period when the nation was this deep in debt relative to its economy was during World War II and its immediate aftermath. Not even the years of the Great Depression came close. Take a look at the chart below.

Just think about it — it took the mother of all emergencies, a world war no less, to bring the U.S. debt-to-GDP ratio to where it is now. If that doesn’t give you pause, I’m not sure what would.

…click on the above link to read the rest of the article…

Gold Gains 3% To $1,672 and Silver Surges 5% To $15.40; Goldman Warns Of $3 Trillion Explosion In U.S. Debt

April 7, 2020

Gold Gains 3% To $1,672 and Silver Surges 5% To $15.40; Goldman Warns Of $3 Trillion Explosion In U.S. Debt

◆ Gold surged 2.9% and silver by 5% yesterday, with futures leading the way higher with gold reaching it’s highest price in more than seven years

◆ Investors are diversifying into safe haven gold to hedge themselves from the coming destruction of balance sheets, trillions and trillions of fiscal and monetary stimulus and a likely economic depression

◆ JPMorgan Chase & Co.’s Jamie Dimon has blamed the pandemic on creating a “major major downturn” (see News below) and potentially an economic depression

◆Goldman Sachs have warned that the emergency “stimulus” may lead to an explosion of US national debt by about $4 trillion in just two years (see News below). This is not including the trillions in monetary stimulus by the Federal Reserve to bail out Wall Street including most large financial service providers including the mortgage sector and banks

◆ The “Everything bubble” is bursting before our eyes which is evident in the stock market crashes. Property and bond market bubbles will soon burst and confidence in the dollar and other fiat currencies will soon begin to evaporate

◆ Gold’s utility as a safe haven is again being experienced by those who own it. Gold is outperforming and has delivered a 12% dollar return in 2020 year to date, exactly when they need a safe haven and a source of returns as stocks and other assets under perform. Gold has seen even greater returns in other currencies and is 15% higher in euros and 19% higher in pounds year to date.

◆ The only major asset to outperform gold year to date is the U.S. 30 year bond. This out performance is unlikely to continue as the 30 year bond cannot go much higher. We are near 0% interest rates despite the appalling fiscal, financial and economic outlook for the U.S.

…click on the above link to read the rest of the article…

More Black Swans Arrive As U.S. Debt Balloons $800 Billion In Two Months

October 11, 2019

More Black Swans Arrive As U.S. Debt Balloons $800 Billion In Two Months

The rate at which black swans are showing up in the world should scare the hell out of people. But, unfortunately, everyone seems to be lost in the highly complex technology of I-phones, computers, social media, and the telly to notice that something is definitely wrong. The current situation reminds me of a famous scene in the Monty Python movie, The Holy Grail, where a guy is banging a bell and saying, “Bring out your dead.” Let me explain.

The scene in the movie takes place in England or Europe during the Black Plague, and due to the staggering amount of deaths, carts were used to pick up the bodies throughout the city. Yes, this is indeed a macabre subject matter, but Monty Python takes a serious situation and turns it into a comedy. However, the point I am trying to make is this… death is a very tragic and emotional part of life that impacts family members, friends, and coworkers. But, in this Monty Python scene, there is so much death, that it almost becomes numb to everyone.

And, that is precisely what I see now in the public. There are so many warning signs, or black swans, that no one seems to notice. Everyone has become… QUITE NUMB to it all. So, when the U.S. Government adds $814 billion of new debt in a little more than two months, the public yawns as this is no big deal:

Since the beginning of August, the total U.S. federal debt has increased from $22,023 billion to $22,837 billion. Thus, the U.S. public debt has increased by nearly 4% in just two months! Here is the debt table from TreasuryDirect.gov website since August 1st:

…click on the above link to read the rest of the article…

The US Government Debt Crisis

April 26, 2019

The US Government Debt Crisis

This article explains why the US Government is ensnared in a debt trap from which there is no escape. Its finances are spiralling out of control. In the context of a rapidly slowing global economy, the budget deficit can only be financed by QE and bank credit expansion. Do not draw comfort from trade protectionism: it will not prevent the trade deficit increasing at the expense of domestic production, unless you believe there will be an unlikely resurgence in personal saving rates. We can now begin to see how the debt crisis will evolve, leading to the destruction of the dollar.

Introduction

At the time of writing (Thursday April 24) bond yields are crashing, the euro has broken down against the dollar and equities are hitting new highs. Obviously, equities are taking their queue from bonds. But bond yields are crashing because the global economy is sending some very worrying signals. Equity investors will be hoping monetary easing (which they now fully expect) will kick the can down the road once again and economies will continue to bubble along. They are ignoring some very basic economic facts…

Regular readers of my Insight articles will be aware of strong indications that the expansionary phase of the credit cycle is now over, and that we at grave risk of falling headlong into a global credit and systemic crisis. The underlying condition is that economic actors and their bankers accustomed to credit expansion are beginning to realise the assumptions behind their borrowing commitments earlier in the credit cycle were incorrect.

That’s why it is a credit cycle. It is driven by prior credit expansion which corrals all producers into acting in an expansionary manner at the same time. Random activity, the condition of a true laissez-faire economy, ceases. Instead, credit conditions act on profit-seeking businesses in a state-managed context.

…click on the above link to read the rest of the article…

Distressed Nation: Each American Would Owe $700,000 To Eliminate Worsening Debt Situation

April 19, 2019

Distressed Nation: Each American Would Owe $700,000 To Eliminate Worsening Debt Situation

Truth In Accounting (TIA), a 501(c)(3) – focused on government financial information, published a new report that suggests the federal government’s overall financial conditions worsened by $4.5 trillion in 2018. The report also calculates the actual national debt on a per taxpayer basis.

With assets of $3.84 trillion, the federal government’s unfunded obligations and debt total $108.94 trillion, which contributed to a $105 trillion debt burden.

“Our elected officials have made repeated financial decisions that have left the federal government with a debt burden of $105 trillion, including unfunded Social Security and Medicare promises. That equates to a $696,000 burden for every federal taxpayer,” TIA states.

TIA rated the federal federal government with an “F” for its financial outlook and worsening fiscal situation that could trigger a crisis in the not too distant future.

TIA explains that while the $779 billion national deficit is troubling, it doesn’t reflect the true financial situation.

“The overall decline in Net Position presents a better picture of the government’s financial decline,” the report states.

“The federal government’s financial position continued to deteriorate – and much faster than indicated by the government’s own ‘bottom-line,’” TIA’s Director of Research, Bill Bergman, said.

TIA pulled data from the “Financial Report of the U.S. Government” for the fiscal year ending Sept. 2018.

TIA’s “bottom line” measures the government’s unfunded debt, jumped by $4 trillion in 2018, about 4 times faster than the budget deficit or net operating cost.

Interest expenses on the national debt have been one of the fastest growing expenses, “while the government’s estimate of the fiscal gap – the amount of spending cuts and/or tax increases necessary to keep the debt/Gross Domestic Product ratio from rising in the future – doubled,” TIA reports.

“Perhaps the most alarming feature of the government’s release of its annual financial report was the public reaction: deafening silence; zero coverage in the mainstream media,” Bergman added.

…click on the above link to read the rest of the article…

America’s “Debt Crisis Is Coming Soon”

March 25, 2019

America’s “Debt Crisis Is Coming Soon”

– America’s “debt crisis is coming soon” warns economist Martin Feldstein
– To avoid economic distress, the government has to reduce future entitlement spending
– The most dangerous domestic problem facing America’s federal government is the rapid growth of its budget deficit and national debt

According to the Congressional Budget Office, the deficit this year will be $900 billion, more than 4% of gross domestic product. It will surpass $1 trillion in 2022.

The federal debt is now 78% of GDP. By 2028, it is projected to be nearly 100% of GDP and still rising.

All this will have very serious economic consequences, and the CBO understates the problem. It has to base its projections on current law—in this case, the levels of spending and the future tax rules and rates that appear in law today.

Source: USDebtClock.org

Those levels don’t match realistic predictions.

Current law projects that defense spending will decline as a share of GDP, from a very low 3.1% now to about 2.5% over the next 10 years. None of the military and civilian defense experts with whom I’ve spoken believe that will happen, given America’s global responsibilities and the need to modernize U.S. military equipment. It is likelier that defense spending will stay around 3% of GDP or even increase in the coming decade. And if the outlook for defense spending is increased, the Democratic House majority will insist that the non-defense discretionary spending should rise to match its trajectory.

If defense and other discretionary spending stays steady as a share of GDP, the annual deficit will increase by nearly 1% of GDP—from 4.2% of GDP now to about 5% of GDP 10 years from now. At the same time, the tax increases in current law that the CBO assumes will occur during the next decade as some of the recent cuts are phased out probably won’t happen. Congress will face strong political pressure to avoid a functional tax increase.

…click on the above link to read the rest of the article…

U.S. Government Debt Bomb Much Higher Than Americans Realize

January 17, 2019

U.S. Government Debt Bomb Much Higher Than Americans Realize

The U.S. Federal debt bomb continues to increase, even with the government shut down. In just one day, the U.S. public debt increased $50 billion on Jan 15th. While the total outstanding Federal debt has now reached nearly $22 trillion, it doesn’t include all U.S. government debt.

That’s correct… there’s a lot more debt than Americans realize sitting on the balance sheet of the U.S. Government. For example, there are other obligations such as U.S Government Agency Debt that isn’t well-known. According to the USGovernmentSpending.com website, U.S. Agency debt is the amount of outstanding debt issued by federal agencies (such as FHLB and GNMA) and government-sponsored enterprises (such as Fannie Mae and Freddie Mac). The amount of U.S. Agency debt

Then we have also to include State and Local Debt that is not apart of the U.S. Federal public debt. California holds the highest amount of State Debt in the country at $155 billion followed by New York at $141 billion. You can check out the debt of each state here: Compare State Debt.

Okay, let’s start adding up all the U.S. Government debt and put it into perspective. The total U.S. Federal debt is $21.97 trillion while U.S. Agency debt comes in at a whopping $9.26 trillion and State-Local Debt is $3.1 trillion:

Thus, total outstanding U.S. Government debt is a staggering $34.3 trillion. So, there is an additional $12.4 trillion of debt on the U.S. Government balance sheet, which turns out to be more than half of U.S. Federal Debt. A trillion here and a trillion there really starts to add up.

So, if we include all of this debt and compare it to the U.S. GDP, it is substantially higher than the current 104% stated by the Federal Reserve.

…click on the above link to read the rest of the article…

Total U.S. Debt and Gold

February 28, 2018

Total U.S. Debt and Gold

After rising together through 2012, the past five years have seen a massive divergence between the total amount of accumulated U.S. government debt and the price of COMEX gold. When, if ever, will we see this correlation reappear?

After falling together through the late 1990s, the price of COMEX god and the total accumulated U.S. debt began to rise together since 2002. With the help of Nick Laird at GoldChartsRUs, we’ve been able to plot this relationship on the chart below:

As you’ll recall, and as you can see in the chart above, massive U.S. military efforts and the economic collapse during The Great Financial Crisis led to a surge in the total US debt from $6T to $15T in the ten years between 2003-2012. And what happened to the price of COMEX gold over the same time period? It moved up from $400 to $1,800 per ounce.

However, a (not so) funny thing happened in late 2012. The price of COMEX gold began to consistently fall, this despite the over $1T QE3 program that The Fed ran from late 2012 to early 2014 AND a continuing surge in total U.S. debt from $15T to $20T.

Of course, we can debate WHY and HOW this occurred, but that’s a topic for another day. For now, let’s just take another good, long look at that chart of total debt and gold.

It could be said that, beginning with The Great Financial Crisis, gold got ahead of itself. Price had consistently risen with the accumulated debt through 2009 but, by 2011, it was considerably above the established trend. In the correction that followed and ended in 2015, you might note that price fell to roughly the same distance below the established trend. Perhaps this visual aid will help?

…click on the above link to read the rest of the article…

Three Reasons Why the U.S. Government Should Default on Its Debt Today

September 19, 2015

Three Reasons Why the U.S. Government Should Default on Its Debt Today

The overleveraging of the U.S. federal, state, and local governments, some corporations, and consumers is well known.

This has long been the case, and most people are bored by the topic. If debt is a problem, it has been manageable for so long that it no longer seems like a problem. U.S. government debt has become an abstraction; it has no more meaning to the average investor than the prospect of a comet smacking into the earth in the next hundred millennia.

Many financial commentators believe that debt doesn’t matter. We still hear ridiculous sound bites, like “We owe it to ourselves,” that trivialize the topic. Actually, some people owe it to other people. There will be big transfers of wealth depending on what happens. More exactly, since Americans don’t save anymore, that dishonest phrase about how we owe it to ourselves isn’t even true in a manner of speaking; we owe most of it to the Chinese and Japanese.

Another chestnut is “We’ll grow out of it.” That’s impossible unless real growth is greater than the interest on the debt, which is questionable. And at this point, government deficits are likely to balloon, not contract. Even with artificially low interest rates.

One way of putting an annual deficit of, say, $700 billion into perspective is to compare it to the value of all publicly traded stocks in the U.S., which are worth roughly $20 trillion. The current U.S. government debt of $18 trillion is rapidly approaching the stock value of all public corporations — and that’s true even with stocks at bubble-like highs. If the annual deficit continues at the $700 billion rate — in fact it is likely to accelerate — the government will borrow the equivalent of the entire equity capital base of the country, which has taken more than 200 years to accumulate, in only 29 years.

…click on the above link to read the rest of the article…

The implications of a reduction of Chinese holdings of US government debt

August 30, 2015

The implications of a reduction of Chinese holdings of US government debt

Dear Readers,

Below is my response to a reader of my blog, who asked about the implications of China reducing its holdings of US treasury debt.

Pat Barron

Dear Lawrence,

I think that in the simplest terms, China is exiting the market for US Treasuries, which means that the US government must offer a larger yield in order to entice buyers who are still in the market to make up for the loss of Chinese demand. That means that US interest rates would have to rise, because the T Bill is the base upon which all other rates are set. Why would someone buy a corporate bond at a lower yield when he can buy a T Bill, which has less risk, for the same or even higher yield? Alternatively, the Fed could monetize the debt, which would cause US prices to rise (eventually) due to the increase in the money supply.

I have contended for some time that this event would lead to a crisis. When the world market eschews T Bills, the government is left with difficult choices. It can raise taxes to pay off the debt that it can’t roll over. It can cut spending to decrease the amount of debt that is required to fund all the government’s programs. It can increase interest rates to suck more money out of the private economy and into government bonds. Or it can monetize the whole thing. Of course, it could do a combination of all these things. My least favorite option is that the government monetizes the debt; i. e., prints more money. My favorite option is for government to drastically reduce its expenditures, but this is probably the most politically difficult option.

Pat

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