The Threat of Debt

Democrats pass the torch of caring about the debt back to Republicans, but people should genuinely care about the US debt for more than political posturing.

February 15, 2021

By: Bobby Casey, Managing Director GWP

debt threat A name that has resurfaced in the United States is that of Janet Yellen. She stepped down as Federal Reserve Chair in 2018, succeeded by one Jerome Powell. Seems she’s been tapped once again by the Biden administration to be Secretary of the Treasury.

As she was leaving in 2018, she expressed great concern about the US debt:

“I would simply say that I am very worried about the sustainability of the U.S. debt trajectory,” Yellen said. “Our current debt-to-GDP ratio of about 75 percent is not frightening but it’s also not low.”

“It’s the type of thing that should keep people awake at night,” she added.

It was on her watch that the US national debt broke the $20 trillion mark. The Federal Reserve is an extension of Congress. Constitutionally, Congress holds the right to coin money. They outsourced that to a central bank we know as the Federal Reserve.

The Federal Reserve isn’t part of the US Constitution. Any more than the FBI, DHS, CIA, NSA, TSA, or IRS are. These are just delegations from the primary branches of government.

Circling back to our very concerned Janet, she seems surprisingly at ease! Since she left, the US is $7.8 trillion further into debt, but all she can say is:

“…[W]ith interest rates at historic lows, the smartest thing we can do is act big.”

Debt is like fire. It has some utility, but can also be very destructive and dangerous. People who mishandle it will inevitably get burned.

The US is finding this out. The national debt on more than one occasion has been called a threat to national security. It most certainly is. The current debt is already obscene and untenable. The worse news is that there’s no sign of slowing down much less stopping.

The threat is economic vulnerability. The US precariously relies on its reserve status and credit ranking to continue on this path… with the taxpayers as collateral.

Yellen got it right the first time. When you look at what happened with Game Stop and the coordinated effort behind that short, you see how the system hinges on everyone playing nice. If everyone just dumps US Treasuries what happens? Put another way, what if, instead of buying US currency, people bought crypto currency?

The USD is worth less but also worthless. At near zero interest rates, there’s no money to be made on it. The last time the Federal Reserve attempted to jack up interest rates, it quickly retreated when the market balked.

It’s painful, yes. But if there’s no profit in using USD, investors are going to bail out… rather than bail the US out.

With the recent rally in cryptocurrencies, coupled with Janet Yellen saying she would “consider limiting the use of cryptocurrency“, I can’t help but wonder if that’s not a preventive measure she’s putting in place. Of course the premise of curtailing crypto is couched in the context of illicit dealings , making it a political imperative that they be heavy-handed with the exchanges.

But what if the illicit behavior is just using crypto rather than the USD? If Venezuela can do it, so can the US right?

The fact remains there’s only one way out of this. If someone is morbidly obese, they have an extreme condition that requires an extreme solution. They will need to drastically reduce their caloric intake and start some sort of exercise regimen.

The same holds for extreme debt. The US will need to drastically cut its spending, and likely stimulate some source of revenue allocating much more toward paying down the debt, and much less to public works, wars, and other random projects.

Love him or hate him, the tax receipts under Trump were high. High enough to offset the utter inefficiency of the IRS. The economy expanded due in part to the tax cuts. A great source of revenue is people being self-sufficient and employed. It also happens to be a great source of savings because then they don’t rely on programs as much.

The problem is, no one wants to cut spending and taxes. The Trump tax cuts are about to expire… and Biden is talking about a $15 minimum wage. If states don’t reopen, that’s going to be even worse. The revenue side of things looks grim.

The spending side of things likewise seems grim. Democrats are no more likely to slow spending than Republicans, and given the hawkish nature of the people pulling the strings, we will not see a dime pulled from the military. Democrats won’t touch Medicare, Medicaid, or Social Security. So all that’s left is some tinkering around the edges in terms of spending cuts.

Deficits and debts aren’t partisan. They are a threat to the country’s fiscal integrity, and that will inevitably affect economic prosperity and people’s quality of life.  This doesn’t even touch on the private debts of individuals ranging from credit cards to get through the lockdowns, student loans, and mortgages.  But ask anyone who’s been buried in any or all of those and the consequences are years of ruin and rebuilding.

National deficits and debts happen in congress. The people who have been rotting away in their seats for decades are the ones who have been tucking expenditures and passing ridiculous omnibus packages that mortgage the future for generations to come.

The fiscal instability coupled with the shaken trust of the public is an incendiary combination. People have been looking to Bitcoin and other cryptocurrencies as the new hedge against the dollar. Others have looked to it as a way to work around the United States in general. And then there’s Venezuela where many just replaced the Bolivar with Bitcoin.

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