I Owe! I Owe! The Debt Bubble

The U.S. economy is a massive debt bubble.

And what happens to bubbles?

They pop.

On this episode of the Midweek Memo podcast, host Mike Maharrey provides an overview of government, corporate, and consumer debt, explaining how we got into this situation, the ramifications, the potential for stagflation, and how you can shield yourself from the consequences.

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Mike opens the show, reminiscing about how his mom pounded a specific bit of advice into his head as a teenager: “Do not get into debt!”

“Of course, as a young man, I did not heed my mother’s advice, and sure enough, I got myself into a pretty difficult financial situation with credit cards.”

Mike emphasises that he understands debt isn’t all bad, and there is a place and time for it.

“It can be an effective tool in navigating our financial lives. And I also understand that running a corporation or a government isn’t the same as my personal finances. There is a place for debt. But the reality is the US economy is built on borrowing and spending. That’s not a strong foundation. You have to produce before you can consume. We don’t do that here in America. We import stuff from other places and borrow money to buy it. This business model is catching up with us.”

Mike notes that virtually everybody in the U.S. is leveraged to the hilt — from the government to corporations to consumers.

“I say this often, but the problem with an economy built on credit is that eventually you hit the limit. And we may be getting close. This is exactly why everybody is so desperate for rate cuts, even though there are plenty of signs that inflation is alive and well. I covered that at length last week, so I won’t go into the inflation numbers again. If you missed that show, make sure you go back and give it a listen.

“I want to talk about debt today and give you an overview of exactly where we are and the possible ramifications. This is of great significance if you are an investor. Because when the debt bubble pops – and I think it’s getting close – it’s going to be just one more factor driving gold and silver higher. That’s because the central bank will have to respond with even more easy money – and by that, I mean inflation – to keep the economy stumbling along.”

Mike kicks off the discussion with the national debt, noting that it surged above $37 trillion earlier this month. It only took 265 days for the debt to increase from $36 trillion to $37 trillion. And that’s with the government barred from borrowing for six months due to the debt ceiling.

“The growth of the national debt is increasing at an exponential rate. In 2020, the Congressional Budget Office (CBO) projected that the debt wouldn’t hit $37 trillion until 2030. Putting the growth in context, the national debt hit $34 trillion in January 2024 and $35 trillion in November 2024.”

Mike points out that the rate of increase isn’t going to slow down because the U.S. government keeps spending more and more money.

“The Big Beautiful Bill ‘cut’ some spending but increased it in other areas. Furthermore, those “cuts” were from projected spending increases. Actual spending will still go up, just not as fast as originally planned. The bottom line is that even with the Big Beautiful Bill, spending will increase on an absolute basis. The CBO estimates the legislation will result in an additional $4.1 trillion budget deficit over the next decade. That will have to be covered by additional borrowing, further accelerating the growth of the national debt.”

Mike provides some context to illustrate just how big the debt is. For instance, $37 trillion is more than the annual GDP of China, Germany, India, Japan, and the UK combined.

But despite the scope of the debt problem, most people don’t seem to care. They seem to believe that since nothing bad has happened yet, nothing bad will ever happen.

So, why does it matter?

First, large government debts retard economic growth. Second, if the fiscal mismanagement continues, people will eventually quit loaning Uncle Sam money.

“This appears to already be happening. Demand for U.S. Treasuries is sagging, and yields are rising. That means it costs more for the federal government to service the massive debt.”

Mike says he thinks rate cuts won’t be enough. The central bank will ultimately have to step in with https://www.moneymetals.com/news/2024/04/02/what-is-quantitative-easing-and-how-does-it-work-003092" rel=”noreferrer”>quantitative easing (QE) and put its big fat thumb on the bond market to increase the demand for U.S. debt.

“But the Fed runs QE operations with money created out of thin air. The new money gets injected into the monetary system and the economy. This is, by definition, inflation.”

Mike says people should be more worried about the government debt than they are.

“People seem unconcerned about the growing debt because people have warned about it for decades, and the promised crisis hasn’t occurred – yet. But the bottom line is that just because the debt hasn’t caused a crisis doesn’t mean it won’t. After all, things happen slowly and then all at once.”

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Of course, the federal government isn’t the only one buried in debt. Corporate debt is at record levels, and businesses are starting to buckle under the load. Corporate bankruptcies are at a 14-year high. In July, corporate bankruptcies hit the highest monthly total (71) since July 2020, when governments shut down the economy for the pandemic.

“This is one of the reasons the markets are desperate for interest rate cuts. However, it’s not altogether clear that a Fed move will relieve corporate strain.”

And then you have consumer debt.

“Over the last several months, consumer credit data has suggested that Americans may have reached their credit limits. Now, there is further evidence of debt stress, as more consumers with high credit scores are falling behind on their credit card payments.”

In the wake of the pandemic, Americans blew through their savings and turned to credit cards to cope with surging prices. But in recent months, borrowing has slowed. That’s bad news for an economy that depends on people spending money on stuff.

“So, the government is tapped out. Corporations are tapped out. Individuals are tapped out. No wonder everybody wants interest rate cuts!”

However, it’s not as simple as that.

“I’ve said over and over, the Fed is stuck between a rock and a hard place. Yes. Rate cuts are justified given the debt. But holding rates steady or even raising them is also justified because of inflation. The Fed people can’t do both, right? This is the dilemma caused when you have a low economic growth and a high inflation environment. The tools the Fed typically uses to direct the economy can only address one side of this equation. By the way, there is a word for this environment. Stagflation.”

So, how did we get into this situation?

“Well, you can blame the same people who are telling you they’ll fix it.”

Decades of artificially low interest rates incentivized borrowing and blew up this massive debt bubble.

“Yes. The central planners WANTED this debt because borrowing and spending stimulate the economy. Of course, this also causes inflation, and the Fed people don’t want you to notice that! You did. And they had to raise rates. And here we are.”

Mike emphasizes that you can’t vote this away. You can only shield yourself from the consequences.