Registered Investment Adviser Caleb Lawrence
Another unsteady early session sent the major averages into the final hour with small gains on little news. The official national debt broke 20 trillion late last week putting the Treasury on the hook for 6 trillion in interest payments over the next 10-years. The real challenge is where to from here, do we print another 10 trillion to cover the next few years of deficits, and another, and another, each time buying a little less time than the period before? At what point do we declare the debt unpayable? If you add all the unfunded Social Security, Medicare, and other liabilities the official debt number is closer to 128 trillion as per the National Center for Policy Analysis in 2013, given that deficits have ballooned since, it’s safe to say that the number didn’t get any smaller. Given the numbers and all of the accounting gimmicks that go along with them it’s hard to get an accurate picture of exactly what Uncle Sam owes but it’s safe to say that we long ago crossed the Rubicon with respect to actually paying for this.
Debt has been the curse of the last 20-years, many would argue the last 120-years as it featured prominently in the Great Depression of 1929-1936 as well. Spawning two disastrous economic resets, the Dot-Com bubble popped in mid-2000, followed 7-years later by the Great Financial Crisis of 2007-2009. Here we are in 2017 and many of the same debt and valuation extremes set in the last crisis have either been met or exceeded. I sure hope that it really is different this time because negative interest rates may help Uncle Sam it won’t help your average debtor as there is a lower bound at which a loan can be made even if the interest rate is zero because of default and administrative costs. This means that the Federal Reserve’s ability to slash interest rates to get the party going again is essentially a non-starter. In turn, this implies that the Fed will resort to printing money out of necessity, ballooning the debt even further in the process just like most everybody and everything else. If you’re thinking that sounds an awful lot like a Ponzi scheme, your right. Fed chairwomen Janet Yellen’s quote “no new financial crisis in her lifetime” is all but certain to go down in history as one of the worst ever far eclipsing her predecessor Ben Bernanke’s quote about sub-prime mortgage defaults in 2007, “it’s contained” when addressing Congress.