• 21 hours UK To Invest In Europe's First Geothermal Lithium Recovery Plant
  • 2 days TikTok Takes Center Stage In US-China Tech War
  • 2 days Are Semiconductor Stocks Overvalued?
  • 3 days Jobs Report Doesn’t Say Much Amid COVID Uncertainty
  • 3 days Crypto FOMO Heats Up As Bitcoin Climbs Above $11,000
  • 4 days Aluminum Is Bouncing Back In China
  • 4 days The Deep-Sea Mining Debate
  • 5 days Markets Trending Down Despite Tech Blow-Out
  • 5 days Big Oil Battered On Dismal Earnings
  • 6 days Russian Billionaire Bails On Mid-Sized Gold Miner
  • 6 days Gold Stocks Gear Up For A Big Autumn
  • 7 days America Is Looking To Bring Nuclear Power To Space
  • 7 days What Is Behind Gold's Astonishing Rally?
  • 8 days Stocks Tumble On Brutal Economic Report
  • 8 days Kodak Soars By 400% After Trump Bump
  • 9 days U.S. Coal Production Falls To 42 Year Lows
  • 9 days Indonesia Moves To Bolster Mining Sector
  • 10 days The U.S. Dollar Is Losing Ground As A Reserve Currency
  • 10 days Gold Prices Soar To Record Highs As Dollar Dips
  • 11 days Republicans Unveil Stimulus 2.0
How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

Jes Black

Jes Black

Jes Black, hedge fund manager at Black Flag Capital Partners, specializes in foreign exchange and global macro trends. Prior to organizing the fund he helped…

Contact Author

  1. Home
  2. Markets
  3. Other

The Perils of Monetizing US Debt

In our weekly reports, we often take the classical view on money. While we admit that monetarism may fail as an easy policy approach, from a fundamental standpoint, the supply of money will ultimately decide the long term rate of interest.

The classical view holds that interest rates will adjust to the equilibrium level between savings and investment. The prevailing Keynesian view is that interest rates will adjust to the supply and demand for money.

When we speak of money supply, we are talking about money and credit created. But what is conspicuously missing from this classical versus Keynesian view is the effect of interest owed to national debt which is the purely Keynesian phenomenon.

Consider that the current national debt is $8.4 trillion dollars, which amounts to roughly $30,000 for every man, woman and child in the United States. In 2005 there were approximately 113,146,000 households, which means each household's share of the national debt is $74,000.

In 2005, the median annual household income according to the US Census Bureau was determined to be $46,326, or just 62% of the total owed by each family.

While this does not seem daunting, the fact is that because of this ratio current income taxes collected by the IRS pay off only the interest on the debt owed. This is part of the reason that the government continually spends more than it receives - because tax receipts pay only interest owed on the debt.

However, if the US government were to follow GAAP accounting rules the net present value of future unfunded liabilities approaches $50 trillion dollars or $441,906 per household.

Now consider that the average household income is just 10% of each household's share of the net present value of future unfunded liabilities. Therefore, at the rate that debt is increasing, eventually we'll reach a point where even if the government takes every penny of its citizens' income through taxation, it will still not collect enough to keep up with the interest payments.

As we said in our regular weekly report last time, "Googlers, we might call them, by an overwhelming majority have voted for the libertarian minded Paul, to the point that the results are so far skewed from a normal distribution bell curve that organizations like MSNBC, CNN and others have questioned the validity of their own polls."

One of reasons we think netizens are seeking out more information on Ron Paul is that the debt burden is a future problem that will have to be dealt with primarily by Generation Xer's. As a proponent of 'sound' money, Mr. Ron Paul is generating the most interest of any candidate, Republican or Democrat, according to mainstream online polls.

In the financial markets, the main pillar in government backed securities is the ability of the said government to tax citizens or send them to jail. But if debt reaches a point where even taxing every cent made only covers the debt, then any net new borrowing will not be able to be paid for. At this point, the basic supply and demand function of either classical or Keynesian theories will succumb to the reality that the government needs more money and that while there may be willing lenders, the risk premium attached to that lending must be higher.

We have harped on this point for a number of years and is the main pillar of our contention that U.S. interest rates will rise, regardless of a "savings glut" or whatever other moniker they ascribe to this imbalance. As such, we think that long term yields are breaking out and after a needed pullback, the next big move in yields is higher. Much higher.

More investment-specific commentary on Treasury, Commodity, and Currency markets is available at www.fxmoneytrends.com.


Back to homepage

Leave a comment

Leave a comment