D.C. We Have a Problem

Daniel Shainberg

September 21, 2018

Is the U.S. really going to turn into Venezuela with a hyperinflation apocalypse? Last month the Venezuelan Bolívar declined by 96% after President Nicolas Maduro announced plans to raise his country's minimum wage and create a single exchange rate pegged to his government's petro-backed cryptocurrency.

Even if the neo-socialist party fails to win any material political nominations, we are still printing money and running up our national debt at astounding levels. Just a few years ago the U.S. federal debt represented about $46,000 per capita. Today we are well over $100,000 per taxpayer. 

Like Tom Hanks in Universal Picture's 1995 release of Apollo 13 we have a big problem ahead. The Apollo 13 spacecraft passed the far side of the Moon at an altitude of 137 nautical miles above the lunar surface, and 248,655 miles from Earth. That mission marked a record for the farthest humans have ever traveled from Earth. Our stock market is in the midst of a similar boom having risen over 4x in nominal terms since the 2008 financial crises.

Upon re-entry the spacecraft experienced similar issues to Venezuela's economy today, notably: limited power, loss of heat, shortage of potable water, and the critical need to make makeshift repairs. The astronauts weren't forced into slavery like women in Venezuela today, but the comparison is still valid. I think.

A Chicken Next to its 15 Million Bolívar Cost ($2.22)

It was a common political talking point to comment on President Obama's increase to the federal debt. His opponents would point out that he increased the debt by more than all of his Presidential predecessors combined. True. When he entered the office it stood at about $10 trillion, and over his tenure it increased to approximately $19 trillion. Of course this comparison does not take inflation into account, but nonetheless we had a rapid increase in the Obama years post the financial crises. 

Shockingly, President Trump has already spent about $2 trillion in the first two years of his term, so he is tracking his spending at an even greater rate. With over $20 trillion in actual debt, and likely closer to $30 trillion or more when taking into consideration our unfunded liabilities, the interest expense on the federal debt at current rates seems barely manageable. 

As the debt and rates rise, we seem to have no possible way out. Moody’s reported that not only will rates increase substantially, but "the average time to maturity on U.S. debt is six years, meaning that most of the low-yielding bonds now on the books will be exchanged for more expensive debt over the next decade, further raising future interest costs." 

It appears that we are doomed to crash.

But like Apollo 13 we actually have some options to avoid a total disaster. Firstly, the comparison to Venezuela is cute, but not realistic. We have assets, a pretty darn strong military and a printing press. 

Secondly, we don't need to pay off the debt just as you don't need to pay off your mortgage. You just have to pay the interest due. While that number is set to rise dramatically over the next decade, there are avenues to redemption... Like economic growth. 

Lastly, the federal government rakes in about $3.6 trillion per year from taxes,  investments and other sources of income today. Much of that income is used for spending on the military and other issues. Assume in a few years the economy continues to grow and rates continue to rise. With inflation the government should see an annual haul of $4.0-$4.5 trillion. Even if rates doubled to 6% and we have to finance $30 trillion of debt, the annual interest expense would still be manageable at <$2 trillion, less than half its total intake.

While not economically friendly, we can also raise taxes, reduce non-critical spending or launch another round of QE. Hopefully we can maneuver the deficit back to a safe spot like the crew of that spacecraft that also appeared to have no great options.

Dan Shainberg
#DanShainberg
#RecessionResister
@DanShainberg