March 31, 1985 was an important night. I thought so at the time at least.
19,121 people gathered at Madison Square Garden. I wasn’t one of them. I was one of the millions watching the television feed from home.
After months of hype, we all felt this was the biggest, most important “sports” event of all time. The promoters billed it, “The greatest wrestling event of all time.” Persuasive marketing at its finest.
Nobody bothered to tell me Hulk Hogan and Mr. T’s dramatic win was pre-planned. Every move seemed important. It built suspense. The villains, Rowdy Roddy Piper and Paul Orndorff seemed like a real threat. If Cowboy Bob Orton hadn’t interfered with the match, the good guys might have lost that night.
In the end, I had nothing to worry about. The whole thing was a setup. The suspense had me unable to think about anything else, for a few days at least. Then it was history. Marketing history.
We get wrapped up in well-choreographed drama. It seems so real. Every detail so critical. The future depends on each little move. Sometimes, the outcome is obvious. The only way to see the path ahead is to ignore the endless stream of minor details. In the end, the big picture is all that matters.
There Is No Debt Ceiling
In 2016 I wrote the U.S. federal debt doubled every eight years. That’s going back to the 1970s.
At the time, we had an election brewing. It was a lot like WrestleMania. Every headline seemed critical. In retrospect, those headlines were a distraction from getting the big picture in focus.
My point in talking about debt doubling every eight years was it didn’t matter who voters chose. Sure, there’d be a little more of this and less of that. In the end, the debt doubles.
It’s now seven years later. The debt in 2016, $19 trillion. The debt today, $31.5 trillion. We have 18 months to go before the 8-year mark. As I’ll show you today, a doubling before then still looks like a good bet.
Maybe it’s only 90% higher when the buzzer sounds at the end of next year. After all, a mere 90% increase would represent another $17.1 trillion added to the debt pile over that time.
90% is close enough to count as a double in my opinion. It doubled under 8-year presidents for the most part.
· Reagan 1980-1988 – $850 billion to $2.5 trillion
· Bush Sr 1988-1992 – $2.5 trillion to $4 trillion
· Clinton 1992-2000 – $4 trillion to $5.5 trillion
· Bush Jr. 2000-2008 – $5.5 trillion to $10 trillion
· Obama 2008-2016 – $10 trillion to $19 trillion
· Trump 2016-2020 – $19 trillion to $25 trillion
· Biden 2020-2024 – $25 trillion to $31.5 trillion
These numbers are big. They’ll get bigger. There’s a trend here.
Forget about the daily headlines, this debt pile never shrinks. If it did, you’d squeal. You’d beg for relief. In a debt-based money system, the whole thing breaks without more debt.
Meanwhile, the headlines seem urgent. People forward these stories to me in a panic asking if everything will be OK. It reminds me of how I felt watching WrestleMania. I didn’t realize there was a predetermined outcome.
Out of Cash
Out of cash by June. That’s the focus this week.
It’s important to remember how government works. Take your local municipality as an example.
The local government feeds on property taxes. Higher property values, more tax revenue. It’s even better when owners sell property. In Florida, there’s a transfer tax called a “Document Stamp” attached to every transaction. It’s another nearly 1% tacked on to the sale. Nobody notices. It’s a fee the county takes every time a property trades, someone records a mortgage, or practically any instrument of value changes hands. Higher asset values yield more revenue for the county.
If sales stall, the county takes in less revenue. Worry mounts. Even during good times, it borrowed heavily issuing municipal bonds. Headlines threaten trouble ahead as “muni” bonds mature. The county might not be able to keep its borrowing up. Residents worry.
In response, it announces cutbacks. There will not be cutbacks to the bloated bureaucracy established during the boom times. The mayor’s pet projects, bloated departments focused on social initiatives, art festivals, etc. Those all stay. Instead, they cut the budget of something essential. Maybe reducing trash pickup from two days per week to one.
There’s a tactic here. They cut something you feel. Trash piles up, reporters write stories, everyone starts talking about it. The idea is, you’ll be willing to sacrifice to get it back. You might even pay a trash pickup surcharge to get that second day back. The surcharge is supposed to be temporary. Yet when good times return, the surcharge stays. The county budget gets bigger.
The same thing happens on the federal level. The U.S. government gets bigger, and bigger. Never smaller.
That’s why headlines about a made-up debt ceiling are dangerous. They distract from the overall trend. The government might run out of money in June, or September, or December. When it does, it will say the guy watching the nuclear missile silo door isn’t getting paid this week. It’s a scripted panic.
The Real Issue with Federal Debt
Be careful listening to people’s comments about the U.S. debt pile.
The problem is not the debt pile. It’s the debt pile compared to GDP.
GDP measures the country’s economic engine. It’s the horsepower of that engine. 40 years ago, we had one of those diesel engines they put into a Peterbilt 18-wheeler. Our Peterbilt had an empty trailer back then. It charged down the freeway with no resistance.
We started adding cargo to the trailer. We filled it. We tied another trailer to it. You’ve seen those double trailer loads making overnight hauls on U.S. freeways. We had those double trailers full of cargo and pushed our Peterbilt to get the job done.
Then we stopped servicing the Peterbilt. Diesel engines are resilient, but there are limits. The once-powerful engine still turns on, still produces some horsepower, but looks nothing like the one charging down the freeway 40 years ago.
From the outside, you might not notice the problem. You think it needs cosmetic attention, a paint touchup. But the engine is the problem.
The U.S. debt pile gets a lot of attention. It’s a big number, with a lot of zeros. But it’s not the real issue. It’s the debt pile as a percentage of GDP that matters.
Think about this on an individual level. A person’s earning power compared to their debt load. With $100,000 of income and $20,000 of debt, their debt-to-earning power ratio is 20%. That’s manageable. If they have $80,000 of debt it’s 80%. That’s less manageable. If they have $120,000 of debt that’s 120%. That’s completely unmanageable.
Here’s a chart of the U.S. debt pile as a percentage of GDP. It’s the nation’s debt load compared to its economic engine.
The chart goes back to 1970. You’ll notice in the early 1980s the debt was ~35% of GDP.
Think about that, ~35%. Thrifty Americans warned, “We’ve got to get this debt under control, or the Soviets will take us over, the Japanese will own Manhattan, it’ll be awful.” Yet it was a mere ~35% of GDP.
Today, it’s ~120%.
The U.S. is a hollowed-out economy. In order to keep our consumption lifestyle, we moved production offshore. We used our preeminent status on the world stage to borrow. We encouraged American citizens to borrow too.
Take housing for instance. We transformed the American home from a place to live to a source of extra spending cash. That’s on top of seeing builders outright refuse to construct anything but clapboard boxes. Even the mortgage broker has more say over what a new home looks like than the buyer these days.
No Good Path Forward
With a hollowed-out economy, the only way to generate growth is to encourage borrowing.
For more than 20 years, we grew the U.S. economy by lowering the cost to borrow. That made assets more valuable.
People bought and sold assets thinking they were smarter than each other. Every transaction meant tax revenue for federal, state, and local governments. It meant fees for brokers and middle men. The Fed’s radical money experiment worked. For a while at least.
The cost to borrow fell to zero, and stayed there. This chart shows the Fed’s key interest rate going back to 2009.
Free money doesn’t spend well. We all know the feeling of spending money we earned versus money someone else earned. Imagine spending money you get from a faceless entity charging 0% interest. Bad investments are inevitable.
Money can’t stay free forever. There are consequences. Namely, it pools up in odd places. It drives up prices of some things more than others. We all felt that after the Covid situation. Then the Fed moved to reverse its radical money experiment almost overnight.
Today, that 0% rate is 5.25%. It’s a problem for big borrowers. The biggest of them all is the U.S. government.
As we discussed, government grows, and grows. It does not shrink. If it does, it shrinks the services you feel most. It would reduce the number of TSA agents clearing you to board an airplane before cutting wasteful bureaucracy.
This chart tracks U.S. government expenditures back to 1970. Spending always rises. On the back of the Fed’s radical money experiment, it rose dramatically.
Remember, government spends every dollar it sees. Worse yet, it borrows against future tax collections. With interest rates on the rise, the cost to borrow follows.
This chart shows the U.S. government’s interest expense. Think of this like the mortgage borrower who bought too much house with a variable rate mortgage. Rates shot up overnight. So did the government’s interest expense. It now spends almost $1 trillion each year on interest alone.
Add to that, the Congressional Budget Office predicts a federal deficit of $1.4 trillion this year.
Between the budget deficit and interest expenses that leaves a gaping hole of ~$2.5 trillion this year.
Meanwhile, the hollowed-out U.S. economy needs more debt. Without more debt, it can’t grow. Asset prices can’t rise. Consumers can’t borrow to fund consumption. The whole system stops working.
You and I Will Pay for This
The WrestleMania debt ceiling crisis has a predictable ending.
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