Amid the chaos of election year rhetoric and the fervent push towards potential global conflict, one undeniable truth prevails: the United States is facing a dire financial crisis. The situation is deteriorating rapidly, and it appears that few have the power to intervene.
Diving into the intricate details of Washington’s financial state may not be the most exhilarating way to spend your time, but understanding the roots of the current crisis is essential. Join us as we explore why the system seems fundamentally broken.
As of the fiscal year 2024, spanning from October 2023 to May 2024, the federal government has shelled out an astonishing $4.49 trillion. According to the Treasury Department’s fiscal data website, this expenditure was purportedly aimed at “ensuring the well-being of the people of the United States.”
However, it remains unclear how such lavish spending translates into actual benefits. Does it enhance the quality of your morning coffee? Does it improve your health or alleviate your discomfort? Does it guarantee fresh produce at your local grocery store?
What is abundantly clear is that government spending is spiraling out of control. Alarmingly, $1.2 trillion of the $4.49 trillion has been financed through debt. To add to the severity, May alone saw a deficit of $347 billion, and the Congressional Budget Office’s latest projections indicate that deficit spending may reach $1.9 trillion by the end of FY2024.
It’s important to note that this projected deficit is layered atop a national debt that now exceeds $34.8 trillion. Presumably, this debt will eventually need to be repaid, along with the growing interest burden that is becoming an increasingly dominant part of the federal budget.
As of May, the federal government has already spent $601 billion on net interest alone, surpassing all expenditure categories except Social Security ($960 billion) and Medicare ($607 billion). For context, defense spending during the same period amounted to $576 billion.
The situation begs examination…
Ferguson’s Law
Roughly half of the $1.2 trillion deficit spending this fiscal year has been allocated to servicing the $601 billion interest on debt. As these monumental deficits continue to accumulate, the necessity for more borrowing to manage existing debt grows. This vicious cycle diminishes the funds available for other critical budget categories, leaving the U.S. government with increasingly fewer resources to “ensure the well-being of the people of the United States.”
As previously stated, net interest on the debt now surpasses defense spending, a point of significant concern regarding America’s capacity to sustain its global influence.
In this vein, financial analyst Luke Gromen recently highlighted Ferguson’s Law:
“Ferguson’s Law asserts that any great power that spends more on debt service (interest on the national debt) than on defense will not remain great for long. This has been observed in the histories of Hapsburg Spain, ancien régime France, the Ottoman Empire, and the British Empire.”
This law, rooted in historical patterns, underscores the inevitable consequences of an empire stretching beyond its limits. The United States now finds itself in the same predicament, having begun its decline decades ago when its debt started to escalate sharply.
Unfortunately, the path of return has vanished.
Political Expediency
As the debt mounts and interest payments swell, viable solutions to rectify the situation dwindle. The debt and deficit scenario has reached a catastrophic level.
Nonetheless, two potential avenues exist for mitigating the fiscal crisis: (1) reducing spending or (2) lowering interest rates.
In practicality, the first option is unlikely to gain traction. Congress has shown little capability or willingness to decrease spending, especially when such expenditures enrich them directly.
Hence, the politically convenient solution is to pursue the second option: the Federal Reserve lowering interest rates.
This approach, however, could carry severe consequences. The anticipated FY2024 deficit of $1.9 trillion poses a significant inflationary risk. This drastic fiscal policy is more likely to drive consumer prices up than current monetary policy actions.
Still, cutting interest rates amid these vast deficits would exacerbate inflation, raising costs for goods, services, and housing. Consequently, the dollar would continue to depreciate against tangible assets.
While lowering interest rates could temporarily alleviate the burden of net interest on debt, it may merely sustain Treasuries nominally. When adjusted for inflation, bond values would plummet, prompting international creditors to potentially divest their holdings.
This would effectively shift the responsibility of financing the debt back to the Federal Reserve. In turn, the Fed would likely need to resume its quantitative easing measures, creating credit to purchase Treasuries. This cycle would only further fuel government spending and escalating deficits, setting the stage for an even graver crisis ahead.
The United States is not the first nation to fall down this treacherous path, nor will it be the last.
For Americans striving to work, save, and secure their family’s future, this precarious situation has dire implications. Often, this trajectory culminates in societal unrest and turmoil.
Double Nickels on the Dime
In the world of fractional reserve banking, recessions are an inevitable element of the economic landscape. Booms and busts are a constant cycle in the movement of credit.
Over the next few years, as the Fed is compelled to lower interest rates and Washington maintains its reckless spending spree, the U.S. economy will likely enter a stagflationary crisis. This scenario would coincide with sluggish or negative economic growth and rising unemployment, despite an ongoing increase in consumer prices.
Stagflation does not arise spontaneously; instead, it results from prolonged mismanagement through excessive deficit spending, artificially low interest rates, and lavish welfare and military expenditures.
The last occurrence of stagflation was in the 1970s when inflation and unemployment surged simultaneously. After severing the gold standard in 1971, President Nixon attempted various measures to control prices, including wage and price freezes and import tariffs.
In 1974, following an unprecedented oil price shock in 1973, Nixon enforced a national 55 miles per hour speed limit to diminish fuel consumption. This meant that truckers along Interstate 10, traversing from Los Angeles to Jacksonville, had to adhere to double nickels on the dime (i.e., maintain a speed of 55 MPH).
Ultimately, stagflation was only resolved in 1981 when the 10-Year Treasury yield hit a staggering 15.32 percent.
Given the current colossal level of government debt, rekindling stable economic conditions will undoubtedly be impossible without a government default. With 10-Year Treasury yields hovering in the 4 to 5 percent range, net interest on debt has already surged to a point of significant fiscal distress. One must wonder: what would occur if yields rose to 15 percent?
Consequently, further monetary expansion will likely be necessary to stave off a complete default. Nevertheless, a default is inevitable—manifesting itself through profound dollar devaluation and rampant inflation.
This will fundamentally change everything we thought we understood about civil society.
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Sincerely,
MN Gordon
for Economic Prism
