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Riding the Vicious Debt Cycle

June 10, 2019

|Daniel A. White

Our last post focused on fiscal insanity. Consider this the sequel!

U.S gross domestic product (GDP) is currently around $20 trillion, and the Congressional Budget Office projects it to grow. That’s a good thing, especially in the face of budget deficits and the national debt, which is expected to be $40 trillion by 2029.

But if we experience a recession (which I expect), we’ll hit $40 trillion in debt by 2026 or soon after. There have been some token efforts to reduce federal spending. But they mean little because “mandatory spending” like entitlement programs and interest on the debt, along with military spending, greatly surpass the government’s discretionary spending.

Even if discretionary expenses were severely cut, a problem remains – no voters favor cutting entitlement programs. And military spending doesn’t tend to decrease.

What are we to do?

The government will sell bonds and run up (more) debt – that much is nearly certain.

A recession will follow, as tends to happen.

That’s when the Federal Reserve will lower interest rates to nearly zero, upsetting savers and potentially leading us towards a situation where the only cure is heavy quantitative easing (QE), like the Japanese are doing.

This mess was easy to create. QE has opened the floodgates of cheap money and government spending, including company bailouts. The result is more debt, both public and private. And some of it won’t be paid back.

Debt problems revolve around solvency, whereas central banks deal in liquidity. Bailing out borrowers who can’t repay is bad business and strays from a central bank’s core focus.

The Fed flung money everywhere and hoped it would stick. It did, leading to stock buybacks.

Eventually though, some company will be unable to refinance for the 99th time and who knows what will happen.

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