Spending Like Drunken Sailors

Spain must have seemed invincible back in the 15th century. King Philip II probably thought his Empire’s dominance would last forever and yet less than 100 years later, Spain had succumbed to the same historical fates that have caused all empires to decline. Decades of bad decision making. Corruption. Bureaucracy. Inflation. Endless and costly warfare. Idiotic decrees that restrain economic growth. Chasing away productive citizens and businesses. Excessive spending. Excessive debt. Debt, in fact, was such an enormous problem for Spain that its kings had to default on their debt multiple times. Empires are extremely expensive to maintain. Governments become bloated and costly. Administering colonies requires a lot of money. Military expenditures skyrocket. And Spanish leaders didn’t exactly hold back when it came to spending on lavish courts and luxuries. So even though Spain should have been immensely wealthy, it was actually creating on a mountain of debt.

It’s almost incomprehensible how a nation with so much income and so many resources could have squandered its wealth. Yet we’re seeing the same phenomenon play out in real time in the United States, for many of the same reasons as the Spanish Empire’s decline. And it’s even more incomprehensible. Like Spain, the US was once the clear, dominant leader in the world, synonymous with wealth and power. But decades of war, excessive spending, debt, etc. have taken a toll.A few days ago, the final numbers for the US government’s Fiscal Year 2023 were published. (Remember that the Fiscal Year runs from October 1 through September 30, so FY23 ended a few weeks ago.)

The numbers are atrocious and an obvious sign of America’s fiscal decline. I’m not saying this to be sensational. I’m saying this because it’s a cold, hard fact. You cannot sugarcoat a $2 trillion annual increase in the national debt– which is what the numbers show. What’s really concerning about this, however, is how little the people in charge seem to care. The President of the United States is so clueless that he doesn’t even understand the difference between the national debt, versus the annual budget deficit. The same can be said of his political acolytes. He’s also so clueless that he even claimed as recently as two weeks ago that the government is running a budget surplus. It’s obviously not. He’s totally wrong, of course… as evidenced by the national debt having increased $2 TRILLION for Fiscal Year 2023.It’s worth noting that the national debt has already increased more than $500 BILLION just so far this MONTH. So, this addiction to debt and spending does not seem to be abating anytime soon.

Treasury Secretary Janet Yellen– who was formerly the head of the Federal Reserve– went so far as to say that America “can certainly” afford to fund two wars at the same time, both Ukraine and Israel. There’s simply no instinct for restraint. Then there are lawmakers like AOC who believe that deficits don’t matter, and that “we should eliminate the debt ceiling in the United States because of the Constitutional reasons. Yet despite sounding like an inarticulate buffoon every time she opens her mouth, AOC is representative of an entire movement of prominent economists and PhD ‘experts’ who similarly believe that deficits and debts are irrelevant. Spending us into oblivion.

Nobel Prize winner Paul Krugman has said in the past that the US national debt is simply “money we owe to ourselves” therefore no one should really worry too much about it.(Coincidentally, Krugman wrote those words in February 2015 when the national debt was ‘only’ $18 trillion. Today it’s almost twice that level.) Well, Krugman is completely wrong, and the facts are clear. Out of the $33.6 trillion national debt, it’s true that roughly $7.1 trillion of that is owned by different agencies and departments within the federal government. I suppose that’s the “we” that people always refer to when they say “we” owe the debt to “ourselves”. But nearly all of that $7.1 trillion is owned by Social Security and government retirement programs for its civilian and military personnel. Other programs like the FDIC, US Post Office, and the federal unemployment office also own a lot of US government bonds.

So, the argument that ‘we owe the debt to ourselves’ absurdly presumes that it’s OK to default on Social Security… or military retirement obligations… or the FDIC. Such a default would trigger a massive financial and social crisis in America, and few politicians are willing to go down that road.$7.7 trillion of the national debt is owed to foreign nations. And nearly all of those bonds are owned by countries who are flat broke (like Japan) or who are major adversaries of the United States (China).This is pretty important, because it means that those countries will be less and less likely to buy and own US government debt in the future.

The rest of the US national debt, roughly $18.8 trillion, is owned mostly by large businesses, financial institutions, money market funds… plus state and local governments.  These are the real institutions that own the power in the United States and in owning that power they dictate policy and government actions. Money market funds, pension funds, and retirement funds own trillions of dollars of government bonds. Apple owns about $25 billion of US government bonds. Bank of America owns $200 billion. These are the real movers and shakers. It’s not like the US can default on the city of Chicago or the State of California. Or pension funds that manage the retirement assets of millions of Americans. Or big banks.

As I wrote last week, Bank of America has already suffered more than $107 billion in losses from its ownership of US government bonds (and related securities). If the Treasury Department decides to not pay its debts– because, you know, ‘we owe it to ourselves’– then nearly every bank in the US would be wiped out. That means your savings.

Again, none of these is a crisis that any politician wants to trigger. So not only is ‘we owe it to ourselves’ completely incorrect, but it also doesn’t even matter. Failure to make payments on the national debt would be catastrophic. According to the most recent Treasury Report, the federal government spent a whopping $879 billion on interest payments in FY23. But that’s with an average interest rate below 3%.Interest rates have now passed 5% and may be headed higher.

So, fast forward a few years to 2030 when the national debt could exceed $40 trillion and average interest rates reach 5% or more. That would mean potentially $2 TRILLION per year, just to pay interest. To say this is unaffordable would be an understatement.

Because on top of all this debt drama, the US government’s tax revenue from 2023 is also sagging because although the unemployment is down, its down because many of those jobs are minimum wage therefore…lower taxes. Total FY23 tax revenue was $4.4 trillion. And that’s down from nearly $5 trillion the year before.

The Federal Reserve will need to start cutting rates. This currently is not happening and might not happen right away. The Fed is far more concerned right now with appearing like they’re in control and know what they’re doing. But no Fed Chairman wants to preside over the bankruptcy of the United States. So… the Fed will have to cut rates and start printing money again to save the federal government, as well as the banking system and Social Security. This will lead to extremely bad inflation. This in turn will devalue the dollar thereby causing a loss of confidence in the dollar.

Higher inflation coupled with outright government dysfunction has already caused much of the world to seek alternatives to the dollar. Another bout of inflation, plus potentially several more years of incompetence under Biden and another progressive democrat will probably be enough to reset default currency from the dollar to Yuan or other currency.

Foreign nations will stop investing in US government bonds and this has already started. With the dollar no longer at the center of global finance, foreigners will no longer have the same incentives to own US debt. This means that one of the US government’s major funding sources will dry up, leaving politicians scrambling to find money. Politicians will demand new and higher taxes.

With foreigners no longer buying US government bonds at the same pace, politicians will try to raise tax revenue. Expect wealth taxes, higher income taxes, green taxes, and even windfall profits taxes on certain assets and income like crypto, gold, oil profits, etc. Based on even precursory observation…this is already happening via ESG and other outlets.

Americans believing the capitalistic system has failed them will move further left. Politicians and their media hacks will insist that capitalism has failed… and rescuing the nation from this hardship will require bigger government and more intervention in the form of Socialism. Again, we are already seeing this happen.

Although, I’m not suggesting that this outcome is imminent. Or even certain. It could still take several years for these issues to unravel. And I’ve written before that America’s challenges are still fixable… however the window of opportunity is narrowing quickly. It’s also true that other rival powers like China have their own critical challenges. But this is irrelevant; other nations’ challenges don’t eliminate the seriousness of America’s. We can certainly hope that the West will put itself back on course. But as they say in the military, ‘Hope is not a course of action’. A plan is, and right now, none of our government leaders have a plan. Instead, there is constant political infighting often within the individual parties with the ultimate goal being personal gain, not doing the will of their constituency. This nation and its government are a shell of their former selves. I pray for my children but my hope for a bright American future for my kids is dimming quickly with every dollar tacked onto our national debt. IF we don’t turn this boat around, we will be a footnote in history just like Spain with it’s invincible Spanish Armada.