Monday, November 06, 2023

Every American financial crisis since the Federal Reserve’s inception in 1913 has seen the central bank bail out America’s leading institutions when they needed it most. It’s like the Fed is the American “sugar daddy.”

For instance, the 2008 mortgage meltdown saw the Fed buy mortgage-backed securities in addition to its usual Treasurys purchases. Similarly, the Fed’s various quantitative easing (QE) policies over the years provided cheap money and created trillions in new currency that ballooned government budget deficits.

During COVID-19, the Fed started buying corporate bonds for the first time. It also unleased a QE program that subsidized $10 trillion in government spending and introduced $5 trillion in new currency in just two years.

We’re all now realizing the downside of being a lender of last resort to an insolvent borrower. To me, it seems the U.S. government and the U.S. dollar are huge credit risks.

The next crisis could usher in a Fed intervention where the country will head into unchartered territory (i.e., more outsized spending). With debt topping $33 trillion (and counting), that’s a frightening prospect.

Even worse, nearly a third of outstanding U.S. debt is set to mature over the next year. By 2026, half of America’s debt must be refinanced. Since it was last financed, interest rates on Treasury securities have more than tripled. This mounting interest will consume an even greater share of the federal budget.

It’s getting to a point where no tax increase will bring in enough revenue to repay the debt.

We could see a loss of faith in the U.S. dollar and its rapid devaluing. Consider that the average lifespan for global reserve currencies is roughly 100 years. The U.S. dollar’s time on top is just over the century mark.

We’ve kicked the can down the road for years. The road may be ending.

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