Fiscal conservatives point to the growing body of evidence that very bad things happen when government debt exceeds its GDP by more than 125%—as is the case in the US today. Apologists for government profligacy counter that US debt to GDP exceeded by almost as much by the end of World War II, and the US “grew” its way out of it. Trump himself said the COVID-19 situation was like WWII, so why shouldn’t the US take on just as much debt to defeat its enemy?
Before I answer, let’s have a look at a long-term chart for some context.
Several things on this chart stand out to me:
- The increase in debt during WWII is the biggest on record, but it took several years to get that way. The current leap above 125% happened in months.
- The WWII surge started from a much lower base. The current leap started from a base already in the danger zone north of 100%.
- WWII is over. The COVID-19 situation is not.
- Even if vaccination puts an end to COVID-19 shutdowns in the US, variations of the Green Dew Deal promise even higher levels of debt. New tax proposals scarcely begin to cover the politically correct wish list of government largess.
- Debt increase from the previous New Deal is dwarfed by what’s already been done since the crash of 2008.
- Even The Powers That Be admit that this year’s expected record GDP growth will be transitory, due to “base effects.” The US and the world are a long way from true recovery—meaning, a long way from even beginning to make a real dent in that mountain peak of debt.
- The USD was still backed by gold during and after WWII. Today, it’s an abstraction, backed by nothing. That means debt can be “monetized” (“paid” for by “printing” more “money” which debases the currency) more easily than 70 years ago. Or, ever before, for that matter.
In short, the situation today is much worse than what the US experienced after WWII—and it’s still getting worse.
I wish someone would ask Powell, Lagarde, and Yellen why anyone should pay taxes at all if money supply no longer matters.
I’m not going to hold my breath on that.
My point today is simple: this mountain of debt has clear and, in my opinion, inescapable consequences.
The primary result is that the value of the US dollar is going to be eviscerated.
This may be masked by other governments doing the same to their currencies in the “race to the bottom.” Don’t be fooled. We’ll see the loss of value in all these fiat currency units when we go to the food store, or seek to exchange them for anything real.
This includes commodities in general, of course—but gold and silver in spades.
What about cryptos?
Well, I said anything real… by this I meant physical. Like real estate. Commodities. And physical wealth I can hold in my hand, like an ounce of gold or silver.
How real cryptocurrencies are is still very much subject to debate.
And it remains to be seen how much their prices will hold up if or when they become real enough in use to pose a serious threat to the fiat currencies of major world powers.
If the market writ large decides to accept Bitcoin or any other crypto as real money in the future, I won’t boycott it. But until then, gambling on their exchange rates with fiat currencies is too risky for me.
Maybe I’m just an old curmudgeon, but I like value I can touch. Hold in my hand. Own without counterparty risk. Save without worrying about it becoming frozen in some great systemic crisis.
Call me a gold bug; I’m fine with that.
But whatever you do, don’t forget about the mountain of debt the world is taking on, encouraged by central bankers who say that money supply doesn’t matter.
That’s my take,
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