The financing of the U.S. government’s enormous budget deficit—the disparity between what the government spends and what it collects in taxes—has become a troubling issue. Recently, the U.S. Treasury introduced $180 billion in new debt. Did you invest in any?
Government expenditures in Washington are spiraling out of control, prompting even the International Monetary Fund (IMF) to take notice. Its recent World Economic Outlook warns of spending “that is out of line with long-term fiscal sustainability.”
Notably, U.S. budget deficits have surged, climbing from $1.4 trillion in fiscal year 2022 to $1.7 trillion in fiscal year 2023. This trajectory shows no signs of reversing. Currently, we are more than six months into fiscal year 2024, with expectations that Washington will face a deficit exceeding $2 trillion.
Each year presents a new beginning, bringing with it another fresh deficit. Yet, previous deficits don’t simply vanish at the start of a new year. These recurring deficits accumulate, contributing to the national debt, which now stands at over $34.6 trillion. The IMF has cautioned, “Something will have to give.”
This warning is not without precedent. In 1986, economist Herbert Stein, father of Ben Stein, noted the unsustainable trajectory of U.S. government debt, coining Stein’s Law:
“If something cannot go on forever, it will stop.”
Generally, a scientific law, unlike a theory, is based on consistent observation that explains a specific aspect of the universe. For instance, water boiling at 212 degrees Fahrenheit is a scientific law, established long before the proper measuring scales were even devised.
So, what’s the takeaway?
Postponing the Crackup
The current financial and economic situation challenges Herbert Stein’s Law. We are in an age where unsustainable practices do not cease; astonishingly, they persist.
Year after year. Decade after decade. The debt mounts at a rate significantly outpacing GDP growth. At the dawn of the new millennium, U.S. national debt was $5.6 trillion, with GDP at $10 trillion. Today, the national debt is $34.6 trillion, while GDP has risen to $27.9 trillion.
During this period, GDP has grown by 179 percent, yet national debt has surged by 517 percent. The enormity of national debt is overshadowing the nation’s income. Both Herbert Stein and the IMF emphasize that “something will have to give.” The critical question remains: when?
At present, the economy is heavily reliant on government debt. Any major cuts to spending or increases in taxes could lead to stagnant or declining GDP, triggering a complete credit collapse reminiscent of the Great Depression of the 1930s—precisely what may be necessary to restore economic integrity.
Central figures like Fed Chair Jerome Powell and Treasury Secretary Janet Yellen are resisting this necessary adjustment. Their positions and the financial elite depend on maintaining the current system, opting instead for inflation and financial repression. This is their strategy, or at least the initial stages—until the dollar loses all its value.
Jerome Powell is 71, Janet Yellen is 77, Joe Biden is 81, Donald Trump is 77, and Chuck Schumer is 73. The established leaders’ goal is to defer the inevitable debt crisis—continuing to stimulate until they are no longer around. They seem determined to avoid witnessing the ultimate consequences of their actions.
Out of Thin Air
When applying Stein’s Law, “forever” represents a vast stretch of time. Along that timeline, the unexpected may occur.
However, just because certain events have yet to transpire doesn’t guarantee they never will. It is undeniable that debt deemed unsustainable must ultimately cease. Will you be here to witness it?
The deteriorating trend of U.S. government debt that Herbert Stein experienced outlasted him; he passed away in 1999, long before any crisis unfolded. Those reading this may not be so fortunate.
For decades, Washington has tackled the issue of excessive debt by simply accruing more debt. For instance, when one credit card reaches its limit, they just use another.
As long as the U.S. government can continue borrowing trillions each year, it can dodge confronting the reality of its financial health. Yet the moment countries like Japan, China, or the United Kingdom cease lending to the U.S. government, reality will hit hard.
Thanks to central banking, the U.S. government can borrow without constraints. The Fed creates credit out of thin air and extends loans to the Treasury, which then spends it on foreign conflicts, domestic projects, and subsidized pharmaceuticals. This kind of expenditure, a form of corporate welfare, is deemed beneficial for business.
As we learned during the pandemic-era money-printing surge, such actions have detrimental effects. A devalued currency triggers all sorts of instabilities, not just higher prices for consumers—it causes societal breakdown.
Destination TEOTWAWKI
“In the long run we are all dead,” proclaimed John Maynard Keynes, a 20th-century economist and Fabian socialist. This sentiment underpinned his belief that governments should borrow from the future to accelerate present economic growth.
This viewpoint, much like consuming one’s seed corn, is shortsighted. It may provide temporary ease, but it guarantees future hardship.
Nevertheless, politicians favor economic theories that rationalize spending others’ money to secure votes. Keynesian economics, especially its advocacy for unrestricted stimulus, fulfills this requirement.
For the last 90 years, U.S. politicians have tried to borrow and spend their way to prosperity. Over the past 15 years, the Fed has printed money aggressively to support this massive borrowing spree. This course is leading us toward immense challenges—and we are still here to face them.
Often, the end of the world as we know it (TEOTWAWKI) unfolds while some of us are still present. We believe that the current episode of debt accumulation, deficits, and state-sponsored economic devastation has positioned us at the brink of one of these pivotal moments. Something explosive and world-altering appears imminent. We are arriving at our destination TEOTWAWKI.
The once-familiar world—where a dollar equated to gold—has vanished. Today, in this post-golden world, we are witnessing the collapse of the mirage of wealth built by five generations of borrowing and spending.
Moreover, in stark contrast to Keynes’ assertion, we are not all dead in the long run. In fact, in the long run, we are all quite alive, grappling with the compounded consequences of myopic, politically-motivated economic policies.
[Editor’s note: It’s remarkable how a few simple, contrary decisions can lead to life-changing wealth. Right now, at this moment, I’m preparing to make another such decision. >> I’d like to show you how you can, too.]
Sincerely,
MN Gordon
for Economic Prism
