Woohoo!
Our national debt just hit $38 trillion – only two months after we hit $37 trillion!
That is almost $300,000 in debt per household.
It’s a bit frustrating when we consider that all that spending and borrowing actually makes us immensely worse off – and that it is all for the benefit of a relatively small group of politicians, people, and entities on the receiving end of the largesse.
I want to touch on a few misconceptions.
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Myth #1: We’ll be able to pay off our debt – without pain.
We have a couple of options, and one is much more painful than the other.
- Inflate it away. Lyn Alden talks about this all the time, as that is how we paid off our enormous WWII debt. We held rates artificially low (yield curve control) and then allowed inflation to run – which in turn allowed the U.S. to print money to pay off debt. It took over 20 years, but it largely worked until Lyndon B. Johnson’s “Great Society” programs and a war or two started firing up the debt spiral.
- Grow our way out of the debt. Jim Rickards frequently discusses this option, as he believes it is Trump’s strategy. With enough deregulation, cheap energy, sound money, new tech/AI, and strong trade policies, the U.S. could grow fast enough to make $38 trillion in debt a non-issue. Elon Musk believes this strategy is our only hope.
Note: Both of these solutions require that we freeze spending, or at least significantly slow the rate of increase.
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Myth #2: If we stop running deficits, everything will be rosy.
The world economy relies on U.S. debt and deficits!! Few people understand this. The U.S. Treasuries that we sell to borrow money are the collateral for the world’s financial system. If we pay off our debt and/or don’t run deficits, there will be an enormous liquidity crisis that will bring the world economy to a halt. If you want more info, ask Grok, “Why does Brent Johnson believe we need to run large government deficits?”
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Myth #3: Government spending stimulates the economy.
In the short run, it does – like we saw during COVID or like we see after hurricanes. But, when government debt exceeds 90% of GDP (per one famous study) or is just at a very high level, additional spending that results in borrowing ultimately slows down the economy. And when debt gets to nosebleed levels, economies are depressed far below normal growth rates (like we’re seeing in Europe, Japan, and the U.S. now). Politicians love to convince us otherwise because it gives them an excuse to spend.
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Myth #4: Government spending and borrowing are always inflationary.
When the government or the Fed prints money to buy its government debt (like we saw during COVID with quantitative easing), spending and borrowing can be inflationary. But, as long as the government can find buyers for our debt, borrowing can even be deflationary, as it tends to suck productive dollars out of the financial system. I am oversimplifying this, and I will get shredded on some of the forums in which we post my blog 😊, but the point is that deficit spending is not always inflationary (see Japan, for example).
Why Do I Address This Topic in a Mortgage Blog?
I am addressing this because all too many people believe that our spending and borrowing will drive up interest rates, when it can, in fact, result in lower rates.
This is especially the case if it results in slower economic growth (a point George Gammon makes frequently).
Slower growth means more demand for Treasuries, resulting in lower yields or interest rates.
So yeah, the mortgage industry could boom while our dumb government borrows its way into oblivion…
Woohoo, indeed.
