The great bloat

In a profound sense it won't matter much who becomes the next President of the US - neither of the candidates will be able to prevent the further slide into national bankruptcy. 53 years ago President Nixon abandoned the gold standard and the US lost its only restraint on government spending. In 1971, when Nixon freed the government to print, borrow and spend, the US national debt was $398 billion. This month it has surpassed $35 trillion, expanding by almost $2.3 trillion in the last 12 months, or about $4.44 million every minute.

Bankruptcy is the inability to repay debts. The US is bankrupt. This year notches up a shameful first in American history. For the first time ever the US will spend more on net interest payments on the debt than it does on its entire national discretionary defense. If the current course is maintained then in a decade debt interest payments will exceed defense spending by more than half a trillion Dollars. Not only is the national debt a great bloat - it's a bloat that is rapidly expanding. In the first 220 years of the US just $6.5 trillion in debt held by the public was racked up. In the last 16 years that sum has risen to $16.2 trillion. Some two-thirds of this debt is held by the American public through pension funds, mutual funds, state and local governments and the like.

It's not tanks and guns

Don't blame the military. Real per capita spending on defense in 2012 Dollar terms fell from $2,283 in 1962 to $1,953 in 2020, while all other federal spending rose more than eightfold, from $1,930 to $15,646. Defense spending has dropped half of the budget in the Kennedy presidency to less than one-seventh today. It's not bullets but bandages that have bloated the debt. Another President, Lyndon Johnson, spearheaded through Congress health-care programs, the cost of which in their present guise is not covered by taxation. A similar problem faces the new Labour government in the UK. According to the Congressional Budget Office (CBO) a decade from today the major federal health-care programs and debt interest payments will gobble up 61% of all tax revenues. Before Congress even begins the annual appropriations process the US will by then run a $587 billion deficit. If you are a US citizen then its a sorrowful truth that this year the first $892 billion you pay in taxes essentially goes into the trash - it will buy nothing but simply pay the interest on the existing debt. That's 18 cents on the Dollar, probably rising to 20 cents next year.

Unsustainable

The US is on an unsustainable course and it is doubtful that any of the candidates for November's Presidential election intends to try to steer the country into safer waters. The CBO estimates that federal debt, as a percentage of gross domestic product (GDP) will shortly rise beyond what it was at the end of World War II, 106.1%. Without action it will be 122% of GDP by 2034, says the CBO. In other words, within a decade the US will have a debt more than 20% bigger than the entire production of its economy.

There is a general belief that 'countries don't go bankrupt'. That may be true; it's a case of the emperor's new clothes, no-one will be crass enough to point out the truth, that the emperor is naked. But confidence in that country's financial stability can disappear in a puff and, if the country has the mixed blessing of possessing the world's most desired reserve currency, that disappeared confidence can damage citizens. As the national debt carries on getting fatter, it will be tempting for one President or another to devalue the Dollar and cut the interest bill. Such devaluation already happens, thanks to the Federal Reserve's policy of aiming to achieve annual inflation of 2%; each year the Dollar loses (at least) 2% of its purchasing power.

We have noted in previous newsletters how the US Dollar is losing its international status, is a less attractive reserve currency today than it used to be. In a world which is increasingly divided between those that back the US and those who don't, the Dollar will slip ever further in the great reserve game. Other forms of money - gold, cryptocurrencies - are burnishing their appeal.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.