The Fallacy You’ve Been Sold for Forty Years

Do Debts and Deficits Really Matter?

Maybe those addle-brained homeless dudes holding up signs urging “Repent! The end is nigh” were right after all.

For decades debts didn’t matter. Nor deficits. We know this to be true because politicians told us so. So did Ivory Tower economists who haven’t spent a single day earning an honest wage in the real economy.

How could they be wrong?

Well, dear reader, I sadly write to you with information that, lo and behold, the experts were wrong. Years ago, Dick Cheney—not the most upstanding human being ever—insisted that “Reagan proved deficits don’t matter.”

Alas, history is now standing up to say, “Wait—what? Have you lost your mind? Of course deficits matter, you buffoons.”

That’s not me talking. That’s me translating into words the bond market’s recent actions.

See, in recent weeks, yields on US Treasury debt have soared past 5%. That’s hurting the stock market because high yield, “safe” (a questionable word in this instance) bonds pull money away from stocks.

More importantly, this yield-rate increase highlights why debts and deficits most certainly do matter: Too much sovereign debt necessarily leads to an increasing need for Uncle Sam to sell ever-larger tranches of debt. But the world cannot absorb an ever-increasing quantity of US debt. There’s not enough demand for all the paper floating around.

Not enough demand leads to rising yields, since government has to sweeten the pot just to attract buyers.

But higher yields mean higher-than-projected interest costs…

Which means having to sell even more debt next time around…

Which means having to find even more reluctant buyers…

Which even higher yields to attract those reluctant buyers.

Play that out through numerous iterations, and you will come to the realization that this ends one of only two ways.

1. The world decides it will absorb all US debt for time immemorial.
2. The world reaches a point where it refuses to absorb debt from a financially abusive nation.

Option 1 seems highly illogical. I mean, reducto ad absurdum says that at some point US debt issuance would consume all the investable assets in the world. Clearly that can’t happen.

So Option 2 is the only answer.

And that’s bad news for Uncle Sam.

When even higher interest rates aren’t enough to prise open global wallets, collapse is the only path left.

Again, that’s not my personal assessment. It’s just a function of terrible math. If America needs to sell, say, $40 trillion in debt, but the world won’t buy more than $25 trillion, crisis ensues.

Probably a default of some sort.

Or, more darkly, the Machiavellians behind the curtain in D.C. gin up some kind of financial rejiggering that addresses the debt by devaluing the dollar… or maybe they legislate that all retirement accounts in America—IRAs, 401(k)s, etc.—must by law hold 100% US Treasury bonds. They’ll spin this as “protecting the little guy.”

Maybe they’ll even engineer a massive stock market crisis as their Reichstag Fire moment—giving them the power they need to ram those idiotic financial gymnastics through.

Whatever the case, the bond market is now telling us that trouble not only lurks, but it also openly prowls, fangs bared, ready to clamp onto Uncle Sam’s frail little neck.

American debts and deficits are part of the reason inflation is so intractable at the moment. Borrowing costs are up for companies, and that flows through prices charged for products and services. So, the Fed is actually fueling inflation even as it aims to it.

We are rapidly approaching the event horizon. Problem is, there’s no escaping the gravitational pull of so very much debt. A crisis must happen at this point.

Sadly, it will.

“Sadly” because it didn’t have to come to this.

We didn’t have to believe people like Dick Cheney or divorced-from-reality Ivory Tower economists when they said, “debts and deficits don’t matter.” But politicians and economists sold the world on this fallacy 40 years ago, and now here we are.

Disaster was always baked into that theology.

Now, the preacher is practicing one helluva fire and brimstone sermon.

Prepare accordingly.

Gold, silver, bitcoin, Swiss francs. They will help protect your wealth from that lurking trouble.