How the US national debt system works.
June 1st is the date that Yellen has given as the notion that the US *could* run out of money. Now, I already produced a detailed article on the implications of a potential debt default, (see it here: https://medium.com/@DefiHustle/the-reality-of-where-were-heading-a91f07e45652 ), but I figured a lesson on the US national debt system would be important for you to understand how this all really works.
Lesson 101:
Currently, and as publicly stated across mainstream media now, the national debt in the US is increasing aggressively, currently over $31T. Most people can agree that the pace the debt is accumulating and the expenses increasing is very unsustainable. So the question is clear… If this was really such a disastrous scenario, why is nobody acting quicker? If it were so bad, you’d expect there would be something somebody is trying to implement, right?
Well, let me explain; here is how it works. The $31T is the principle minus the interest on all that debt. At the moment, the government takes in taxes around $5T every single year.
Now, although it may seem extremely far off, the $5T income vs $31T debt pile is NOT a terrible ratio. The problem with the US government is the fact that they take in $5T from taxes, and they spend $6.3T (the past year). The congressional budget office released information showing that instead of subtracting from the debt pile, they’re simply adding to it.
Now, many argue that it depends on what the government spend the money on. Example: Maybe they’re spending it on education to increase productivity from the nation > which would then lead to better jobs being filled > and those higher income jobs paying more taxes. But the proof is still in the pudding; they’re still deficit spending, and the debt loading is currently at an unsustainable rate.
We can see that from what they spend, around $4T is mandatory, $1.7T discretionary and $500bn was interest. Breaking this down further, of the mandatory spending, $1.2T went towards social security, $750bn into Medicare, $600bn in medicade and $1.5T in other. The $1.7T discretionary is on defence and $1T on non-defence.
As established in my previous article on the debt ceiling, spending more than they take on income is nothing new for the US. Over the past 50 years since 1973, only brief times did the US run a surplus, other than that, it spent more than it took in taxes.
So what about the interest portion? $500bn USD is what the US spends on interest on that massive pile of debt. The problem is that this number is growing. For several years, the average interest rate for the US national debt has been decreasing. As we know, over the past year, the average interest rate has gone above 2%. This is because the current interest rate and borrowing costs for the US are at a higher rate than at any time over the past decade.
The major red flag occurring is that a good portion of the massive $31T the government owes is maturing and coming due over time. This means that whatever portion matures, they owe that money back + interest. But if the US doesn’t even take enough money in taxes to pay its bills, it has to borrow money on top of that and so on just to pay off the old debt. Do you see how huge this problem is? And how much fraud is blatantly taking place, hidden from 90% of the public’s view or recognition?
Imagine how all of the debt borrowed in 2011–2021, the US government were borrowing at an interest rate that was far lower than that of the interest rate in 2023. This means that if the US doesn’t increase its spending by a single dime, nothing changes; their expenses STILL go up yearly because the interest will be getting more expensive. They’ll be borrowing new debt at a higher interest rate to pay off the old debt at a lower interest rate… and the cycle continues.
But to reiterate, that is only IF their spending doesn’t increase, and if you know anything about government spending, it doesn’t ever stay the same or go down. This is why the Congressional budget office projects that by 2053, the federal debt held by the public as a % of GDP will be over 200%.
An even more, bigger red flag? Unfunded liabilities of social security and Medicare alone total $163T at the moment. Again, this is UNFUNDED because the social security trust fund is estimated to be depleted by 2034. Furthermore, as we also know, the overall agenda and lack of newborns is encouraging an ageing population which means that even without increasing expenses, we can accurately predict that the US government will not be able to afford the interest on all of its debt.
Again… as said numerous times, this is a spending problem, not an income problem. We can also see through recent mainstream headlines that nations around the world are becoming net sellers of US treasuries, meaning they loan less to the government. Now, although this is likely temporary as we go into a recession, the long-term aspect is very real. As the US receives fewer lenders, it means higher borrowing costs.
The FED’s plays:
Even if the market gets its FED pivot and we get lowered rates, we can still expect US government borrowing costs and treasury rates to continue increasing. This is because they will try and borrow to pay off existing debt, but there will be too few lenders to lend to the US government at lower rates.
So, it plays out 1 of 2 ways.
No1, is that the FED buys all of the US debt. The FED balance sheet shows the number of dollars printed and subsequently loaned out. So when lenders for the US government dry up, and interest rates shoot up to 10–15% due to higher borrowing costs, the FED come in, prints the money and lends to the government at whatever rate they can afford. This is called inflationary financing. Promoted by modern monetary theory that says the debt is not real, never getting re-paid, and that it can be financed through the printing of money. Additionally, Congress could also take full control and cause all spending to be financed through monetary policy QE. This would mean again, that the debt is no longer real, the Interest no longer matters and any dollars that the gov needs to spend they simply print.
Now, if you remove the hurdle of the debt ceiling and the hurdle of paying for interest on debt, and all you have to do is offer the money printer, we know that expenses will very likely increase in addition to everything we know they already have to spend. The net result of this is that the money supply would expand rapidly, like in 2020 and 2021. This would happen to a larger extent if the government gets a better hold of the money printer for financing expenses. We would get rampant inflation as well as leading to hyperinflation.
The other option is an outright default. As explained in my debt default article (here: https://medium.com/@DefiHustle/the-reality-of-where-were-heading-a91f07e45652 ), where debts get wiped out, we see defaults roll across the board; nobody can pay for anything. A hard reset is as bad or worse than the great depression.
Is this outcome avoidable? This is avoidable, we just need to outlaw deficits, but will they do that? doubt. What’s the best way to protect yourself? Hold physical metals.
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