The year was 1991. The shoulder pad fashion craze of the 1980s was finally coming to an end, and Kurt Cobain’s “grunge” look was in.
The Silence of the Lambs hit the theaters and swept the Academy Awards that season (with a nice chianti and some fava beans)— Best Actor, Best Actress, Best Director, and Best Picture.
The World Wide Web became accessible to the public that year.
The Berlin Wall was a distant memory, and the Soviet Union was dissolving in front of the world’s eyes. Gorbachev resigned on Christmas Day, and the Soviet flag was lowered over the Kremlin for the last time.
Overnight America became THE dominant, unchallenged global superpower.
Simultaneously the US economy was booming. Inflation was low. And by the end of the decade, the government was actually running budget surpluses— thanks to explosive economic growth and responsible spending. Crazy concept.
America’s debt-to-GDP ratio never rose above 65% in the 90s, and was actually headed down at the turn of the century.
Yet, despite such stellar financial and economic conditions, the average yield on US government debt throughout the 1990s was 6.7%.
In other words, even though the US government was almost infinitely powerful and affluent, bond investors STILL demanded a nearly 7% return on Treasury bonds.
And the government was happy to pay; 6.7% didn’t cripple the economy— it was a completely manageable interest rate. In fact, it was considered low by historical standards, given the double-digit rates of the 1980s.
Today’s fiscal situation is far from the 1990s. Just about everything that could go wrong is going wrong for Uncle Sam today.
The US government’s credibility is in tatters. They go into debt to give money to their adversaries, and political dysfunction is so extreme that hardly a year goes by anymore without some crisis— Congressional leadership, debt ceiling, government shutdown, etc.
Meanwhile their finances are horrendous. Mandatory spending, i.e. Social Security, welfare, healthcare, plus interest on the national debt, together consume 100% of tax revenue.
Literally the ENTIRE discretionary budget, including military spending, has to be paid for with MORE DEBT.
The national debt is now closing in on $36 trillion, more than 120% of GDP. Interest on the debt exceeds defense spending for the first time in US history… and it goes higher each year.
If a country like New Zealand or Taiwan were in this position, their currencies would be in the toilet… and local interest rates would be through the roof. No one would trust them enough to buy their government bonds without demanding a huge yield to compensate them for the risk of default.
Yet despite such an atrocious financial position, the US government is still able to borrow money at 4%.
Remember, in the ‘everything was awesome’ 1990s, rates were nearly 7%. The fact that the government is so much WORSE off, yet still able to borrow at just 4%, is almost miraculous.
Technically the ‘average’ interest rate on the federal debt today is even less— just 3.1%; but even that laughably low rate is too expensive.
The national debt is now so high that, even with an average interest rate of just 3.1%, the federal government STILL spent over a trillion dollars a year on interest. And that amount will be even HIGHER next year.
We’ve explained before how this interest problem will grow exponentially until it suffocates federal spending.
But for now, while it’s a major, major problem, it is still technically fixable. But urgent action is required.
The logical solution is to cut spending while simultaneously embracing capitalism… and allowing America’s robust private sector to do what it does best.
The US has deep capital markets, innovative businesses, and talented people. With sensible immigration policies that attract skilled workers, as well as spending cuts, waste reduction, and deregulation, the government could potentially solve this debt/interest problem.
But hardly anyone is talking about this. The media is constantly whining about abortion, making up absurd stories about fascism, etc. There is almost zero discussion about a looming economic crisis that will threaten the livelihoods of 350 million people.
Most politicians aren’t thinking about it either. Who needs sensible policies when you can just print money? And that’s basically their solution.
Since 3.1% interest is ‘too high’ for the US government to afford, the plan is to ensure the Federal Reserve slashes interest rates all the way back down to zero. Maybe even negative.
Of course, the only way this can really happen is if the Fed expands the money supply (i.e. ‘prints’ money) to the tune of tens of trillions of dollars.
Janet Yellen, the US Treasury Secretary has acknowledged this last week, saying that the government has to bring its interest costs down.
Well there’s only two ways to do this— either cut spending and pay down the debt (fat chance); or print absurd amounts of money to bring interest rates down.
Remember what happened during the pandemic; the Fed printed $5 trillion in new money, and we got 9% inflation. How much inflation will we see if the Fed prints $36 trillion?
No one knows. But it will probably be more than their magical 2% target.
This is why we focus so much on real assets, i.e. the most critical and valuable resources in an economy, like energy, key minerals, food, productive technology… and the companies which produce them.
Real assets cannot be conjured out of thin air by central banks or politicians; they’re scarce, and extremely important. And that’s why they do so well during inflationary times.
And as we’ve highlighted on many occasions, many real assets just happen to be historically, laughably cheap right now… making this a very good time to set yourself up for a future defined by inflation.
