Uncertainties

The Credit Strategist - August 2024

The 2024 presidential and Congressional elections will determine the course of economic and social policy for the next four years with major implications for investors.  The backdrop to the election is a topic that receives very little attention from the candidates or the media covering theWith the federal deficit hitting $35 trillion on July 29^th, the House Budget Committee released some numbers illustrating how quickly America’s balance sheet is deteriorating:

·                $196 billion in new debt per month.

·                $6.4 billion in new debt per day.

·                $268 million in new debt per hour.

·                $4.5 million in new debt per minute.

·                $74,401 in new debt per second.

While the physicist Carlo Rovelli (whose books I strongly recommend) wisely counsels us that the world is characterized by uncertainty, there are some things that can be predicted with a high degree of confidence.  One of those things is that unless America takes immediate steps to address its budget crisis, it will place future economic stability and prosperity at risk.

There are only three ways for the government to deal with its mountain of  debt – inflation, currency debauchment, or default.  The first two are effectively sides of the same coin and already in process – the value of the dollar is eroding every day which can be seen in the hyperinflation of financial asset prices and high inflation in products and services prices.  The debauchment of the dollar is reflected in the price of gold, which is trading around record highs (and should – and will - be trading much higher in my view).  It is also reflected in the price of Bitcoin, an alternative currency gaining increasing institutional adoption every day (and also trading not far off its record highs).  The prices of financial assets are rising not because of any increase in their inherent value but because the fiat currencies in which their values are expressed are worth less every day.

In my opinion, the most important domestic challenge facing the United States government right now is gaining control over its fiscal deficit which requires both spending cuts and tax reform that both raises taxes and changes radically how they are paid (simply raising tax rates won’t solve the problem). 

Unfortunately, there is little discussion of this on the campaign trail because the candidates don’t want to tell voters the truth about what will have to be done.  But if we don’t secure our economic future, it will severely compromise our ability to solve other problems at home and abroad.  Both parties are equally responsible for what can only be described as policies of economic self-destruction over the last forty years.  And neither party is currently discussing in a remotely serious way how to address an obvious crisis staring us in the face.  Solutions exist but the political will to enact them does not.  Unless we divest ourselves of our current political and regulatory classes and replace them with entirely new leadership, nothing will change.  The contest in November, which changed radically in July, won’t alter the ultimate outcome to which we are headed which is destruction of the value of our currency, deterioration in the standard of living for most of our citizens, and national insolvency.  The best thing we have going for us is that our strategic rivals – Russia and China – are in even worse shape, but in a nuclear-armed world that may prove cold comfort – a burgeoning debt crisis that grows closer every day.