Spending Crisis Has Begun

America is being forever transformed

GEORGE NOGA
MAY 5, 2024

I have been writing about the spending crisis for many years. I began by explaining how to avoid it; this was followed by warnings it was imminent. More recently, I wrote America had crossed the point of no return. During the past year, I debated whether or not the crisis had begun. Now – for the first time – I boldly declare the crisis has begun. In recent weeks dire warnings also have been issued by Jamie Dimon, Wall Street Journal, Bloomberg, CBO and Mises Wire.

US Government Bankruptcy Petition

In past blogs, I noted the crisis could begin gradually, or might suddenly be triggered by an unforeseen event. I now believe both will happen. More to the point, I believe the crisis already has begun gradually and there also will be a future sudden trigger, i.e. a Minsky Moment, after which nothing will be the same. For more information about Minsky Moments, please see my post dated February 4, 2023 titled “Watch for the Minsky Moment” in Substack archives and also on my website: www.mllg.us.

Why the Crisis has Begun

My deciding factor in declaring the crisis has begun is that it is having a discernible impact on markets. The ugly specter of unsustainable spending, and its concomitant debt, is making current interest rates higher than they otherwise would be. This has profound effects across the entire economy. It affects, inter alia, inflation, energy, mortgages, new construction and credit card debt. The present impact of the debt crisis, although real, may be moderate, but it will get worse – much worse.

Individuals, institutions and countries believe the Fed will be forced to monetize the debt, i.e. to print money. Consequently, they are demanding higher interest rates and much shorter maturities. This, of course, jacks up interest payments on the debt, which leads to more borrowing and then to higher rates – a classic vicious circle. Other indicia the spending crisis already has begun are:

$7.6 trillion of debt must be rolled over within 12 months. Treasury will have to hike rates to unload this debt. Why buy now if you can get higher rates soon?
Recent Treasury auctions have experienced considerable investor pushback.
This FY interest on the debt will consume 20% of government revenue. How much higher can this go before the market for US debt dries up entirely?
One major credit rating agency (Moody’s) has US Treasury securities on negative credit watch, i.e. they are about to downgrade them.
Foreigners have scaled back purchases of Treasuries by 30% in recent years.
Mainstream media reports about the debt spiral have increased dramatically while simultaneously becoming more apocalyptic in tone. The headline of one article was “As the US Treasury Runs Out of Creditors, Its Options Dwindle”.

Now that the spending crisis has begun, the next thing to watch for is the Minsky Moment, i.e. the event that makes it unmistakably clear things never again will be the same as before the Minsky Moment. Most likely, the Minsky Moment will be:

Significant downgrade of US debt
Inability of Treasury to roll over the debt, i.e. demand plummets
Statement by a highly credible source that the US is headed for default
Debt ratio and/or the share of interest expense to revenue reaches (or it becomes dead obvious soon will reach) obscene levels; think Zimbabwe
A sudden and unexpected event that, in and of itself, may not be significant but goes viral and by the end of the day the market for Treasury debt evaporates

Dire Warnings from Mainstream Media

Jamie Dimon, CEO of JPMorgan Chase, the world’s largest bank, called debt a “hockey stick”. Dimon is the most credible person on the planet; here is what he said at a recent event when asked for his assessment of the debt crisis.

“ It’s a hockey stick (describing how the debt looks on a graph). The US has not reached the surge yet, but when it starts, there will be a rebellion. It’s a cliff and we see the cliff, it’s about 10 years out and we’re going 60 miles per hour toward it. . . . (Snowballing debt) is the most predictable crisis we’ve ever had.” Other economists on the panel agreed.

The WSJ headline on March 25, 2024 read “Surging Treasury Sales Unnerve Investors”. The article describes Treasury debt as “exploding” and went on to say that “any instability in the market for Treasuries could be catastrophic”.
The head of the CBO warned Congress about rising national debt and interest costs, stating the debt ratio soon will be the highest in history.
Bloomberg Economics ran one million simulations on the US debt outlook and concluded that 88% of them were unsustainable.
Mises Wire headlined “America’s Fiscal Collapse Accelerates”. “At this point, there is nothing standing between us and fiscal collapse. The only question is when”.

There is a Great Deal of Ruin in a Nation

Of course, the 64 trillion dollar question is: when? The short answer is there is no way to know. I would not be shocked if the Minsky Moment occurred tomorrow, as all the predicates already are in place. More likely, we still are a few years away.

Adam Smith famously quipped, “There is a great deal of ruin in a nation”. He meant governments and citizens can survive destructive policies much longer than assumed. The economy, security and social cohesion of the United States of America are now on borrowed time. We will soon find out how much ruin America can tolerate.

© 2024 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com