The Road We Have Been Kicking the Can Down is Coming to its Logical Dead End

Kit Webster

June 3, 2022

 

As you probably know by now, back in the early 90s, I came to the conclusion that the US was going to implode financially, and therefore socially, politically and militarily, sometime in the early 2000s.

We simply could not afford the combination of entitlements and deficits.

That, combined with the stories we told ourselves about our deserving never-ending prosperity.

Actually, our never-ending prosperity was the result of three, principal factors: we were the only ones left standing at the end of World War II, the Baby Boom was under way and we had assets from an educated population to natural resources. It was a one-off and is coming to its conclusion.

Once I came to that conclusion, other conclusions fell into place: political move to the left, civil strife, increasing authoritarianism, increasingly desperate measures to not only have it all but to have more – while not paying for it.

Essentially all of what I predicted has occurred – and more. While I felt that war was possible, even likely, I did not predict a pandemic.

While I have literally written books on global warming and sustainability, understanding that we were eroding the natural foundations, particularly energy, on which our civilization is founded, and generally believing that politicians are inept, and one of my guiding principles is that the average human has an IQ of 100, and being a natural cynic, I did not image the levels of self-destruction and stupidity to which we would stoop.

This process was always going to end badly, but we are outdoing ourselves to make the ending spectacularly bad.

It is good to have the world’s reserve currency and largest military. But they enable us to take unsustainable actions – for a while.

And we have taken unsustainable actions.

Where are we now?

We are in the end game, which was signaled by the Great Financial Crisis. Over the coming years – probably not as long as a decade - our economy and institutions will literally be reset.

Our unnatural actions will have their consequences.

Like what?

Well, war, probably; famine in parts of the world, probably; realignments in geopolitics, certainly; a continual erosion in quality of life, certainly; increased hardship, certainly.

It is not clear at all what is on the other side of the reset. Literally everything is up for grabs.

As for the short term (years) the primary issue, absent war, will be my ever-favorite subjects of debt, deficits and entitlements (and demography, but that will be a subject for another day).

Only fools believe in a free lunch.

Only fools believe that deficits can exist forever.

Only fools believe in free money.

Only fools believe that debt can expand indefinitely.

We are a nation of fools.

If I were to point to only one indication that the end is nigh, it would be that foreigners have essentially quit buying our debt. The reasons are complicated and many, but simplistically, foreigners see that there is no alternative than for the dollar to decline substantially as a part of the end game and they don’t want to see their debt-holdings devalued. (There are other issues, such as wanting to diminish the role of the dollar for geopolitical reasons and the inability to profitably hedge dollars.)

So, we are generating extraordinary levels of debt, while having to roll over past debt.

If foreigners are not buying, who will?

Well, banks and funds.

But when they “fill up,” again simplistically, the only buyer remaining is the Fed.

The Fed now owns something like 40% of all treasury bonds.

40%!

In what universe does this make any sense at all?

It is the result of our desperate attempts to fund entitlements and the military, along with normal government functions, while throwing around stimulus like it was water and not paying for our goodies.

There is now no alternative.

Debt, deficits and entitlements MUST be dealt with.

NOW.

If that sounds like a lot of pain, it is.

There are three alternatives for dealing with debt:

1. Inflation – make the debt worth less in real dollars

2. Austerity – run a budget surplus and pay down the debt

3. Default – decide not to pay

We are currently choosing inflation.

Apart from supply chains and the Russia/Ukraine war, we must have inflation to devalue the debt.

When supply chains are fixed and Russia has gone home we will still, necessarily, have inflation.

Inflation will disrupt society and burden your life, and it is unavoidable and necessary.

I have repeatedly said that the gods of economics are Calvinist gods. EVERY sin will be punished, eventually.

Eventually is now.

Inflation is part of the punishment.

And there we are.

It was a great ride – an historically monumental ride. And it is coming to an end.

It is likely that unintended consequences will interfere with the process of grinding down the debt with inflation. All kinds of interesting things will happen as the world becomes increasingly unstable. As people become poorer and hungrier.

The rock of the world, the foundation on which global order has existed for some 77 years – the reserve currency – the biggest military – the civil society – is coming apart and the consequences will be many and global and significant.

Your world will contain less prosperity and more civil strife, and if we can limit the effects to just that, we will be lucky.

I’ve been right so far, but I could well be wrong now.

But if I am right, prepare for significant inflation lasting years (probably coming in waves) and for increasing strife in many dimensions.

I have no good news, except that this destruction will likely end within the next decade.

And then we get to move on with whatever we have at that time.

But the good old days, as we knew them, are not ever coming back.

We will have to create a new, largely different world.