Monday , 17 June 2024

Get Ready! Here’s How Fed Will Deal With U.S. Debt

…The U.S. government’s deficit for 2019 should come in around $1T – equivalent of about 5.1% of our gross domestic product – and it will push the total federal debt to more than $22T so we’re 10 years into this bull market, yet we’re annually adding debt equal to 5% of the entire economy. That’s crazy.…How the heck are we going to deal with all the debt?

As I see it, we have very few options…

  1. Raise taxes dramatically.
  2. Cut government spending by 40%.
  3. Erase the debt with inflation.
[Again, as I see it]
  • we can’t tax our way out of this one. Wealthy people would flee the country, as they did in France in 2015 when 10,000 millionaires left…[the country] and
  • cutting government spending 40% is not going to happen (yet) as the forces that benefit from this spending are still too powerful and influential.

I believe the powers that be will choose No. 3. The other options simply aren’t viable in this environment. If we raised taxes enough to pay for all this debt, along with the $100 trillion-plus in unfunded liabilities that are coming, the economy would basically stop working.

For now, inflation is the only real option…[I believe] that the Fed will print money to fund (i.e. monetize) U.S. deficit spending…[and that that] will stoke serious inflation ( I believe that is why we’re hearing so much about Modern Monetary Theory, which is essentially just deficit spending combined with monetization)…and if that doesn’t cause enough inflation, then I bet the Fed will do just about anything to make it happen. It might give out $25,000 checks every year to every citizen or fund huge development projects with newly printed money.

…Inflation is horrible, but many see it as the least horrible option. People are adaptable. We can survive surprisingly high levels of inflation, and citizens don’t complain about it as much as they complain about taxes, so I think that’s how the U.S., and other highly indebted countries around the world, plans to deal with all this debt. Unfortunately, it’s very hard to put a timeline on this as these types of events tend to be drawn out over a decade or so but it does seem like things are beginning to heat up…

  • the Fed is providing liquidity to the overnight repo markets (now up to $120 billion a day) and
  • the Fed has just announced that it’s buying $60 billion in Treasury bills per month…[which] is effectively monetizing the deficit (paying our bills with newly created money).

I think the Federal Reserve is just getting started and…will go to extreme lengths to prevent deflation and, unless it acts drastically, that’s what we’re going to get.

Editor’s Note: The above excerpts are from the original article by Adam Sharpand have been re-formatted, color highlighted, edited ([ ])* and abridged (…) by Lorimer Wilson, editor of – Your KEY To Making Money! – for the sake of clarity, and brevity to provide a fast and easy read.

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*(The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)