Armstrong Economics’ Post

The U.S. national debt, once a modest $70 million two centuries ago, has exploded to an astounding $35 trillion. What took over 220 years to reach $1 trillion has multiplied thirty-fivefold in just two decades. This unprecedented rise is driven by persistent government borrowing to fund expenses that far outpace tax revenues. While borrowing helps bridge the fiscal gap, it raises a pressing question: how sustainable is this debt-fueled growth? The U.S. government finances its shortfall by selling debt to investors, including major foreign holders like Japan and Saudi Arabia. This system thrives on global confidence in the U.S. dollar. However, this trust is precarious, as the dollar is no longer backed by tangible assets like gold. If global faith in the dollar wavers, the consequences could be severe, impacting not just the U.S. economy but the global financial system. History offers cautionary tales of nations like Venezuela and Argentina, where excessive borrowing and unsustainable policies led to economic collapse. While the U.S. benefits from the dollar’s status as the world’s reserve currency, overreliance on borrowing could eventually erode that privilege. A decline in trust could trigger a financial crisis of unprecedented scale. For individual investors, this scenario highlights the critical importance of diversification. Concentrating wealth in a single currency exposes portfolios to significant risks. A weakening currency can erode the value of assets overnight. To mitigate such risks, investors must diversify across currencies and asset classes. As global debt continues to rise, the lesson is clear: trust in any currency is not guaranteed. Diversify wisely, protect your portfolio, and prepare for a world of economic uncertainties. Follow Chakravarthy V for more such insights.

I disagree with Paul Krugman in that only one party has been “radicalized.” But that’s a subject for someone that’s interested in the politics of party hegemony. I do agree with his premise that national debt and deficit spending is more easily addressable if there is political will to do so. The psychology of debt is as important as the debt itself. Abstractly, debt can be viewed as a currency unto itself. As such, it should be managed. Too much debt in “the wild” makes it sometimes challenging to sell new debt instruments as a means to finance spending. While, I would like to see a combination of spending reduction and revenue increases to be better than 3%, 2.1% (as suggested by Krugman) is certainly better than the current growth of debt, deficit as a percentage of GDP. My reasoning for this position is it’s less impactful in times of crisis to raise “huge” amounts of debt to promote economic stability if the principal is less than annual average GDP. It is problematic, in my view, when servicing of debt competes for a substantial portion of budget. Krugman is also correct that the United States debt is manageable as it is in its own currency. This is relatively unique in the global context of convertible currencies. Governments that are currently challenged by debt to distress levels are those debts that are financed in other currencies than its own (as discussed in previous posts regarding debt). The crisis of United States debt is more in its failure to adequately address, reconcile the debt, than the amount of debt itself…

Why a recession today is an unusually challenging outcome While recessions always pose some degree of difficulty for policymakers, the backdrop against which one would unfold today is unusually challenging. This is because the usual pattern of cutting rates and increasing government spending in response to the drawdown in activity is unlikely to work as desired. There is significant risk that government borrowing to fund any accommodative recessionary policies crowds out the private sector. The familiar pattern around the start of recessions is short and long-term interest rates coming down, households refinancing mortgage debt, corporations with capacity increasing their debt to invest or restructure balance sheet. Indeed if we look at downturns over the past few decades purely from the lens of public vs. private sector debt growth in the US we generally see this pattern play out. Chart below uses data from the BIS on sectoral debt to GDP levels. The COVID period has been a notable aberration in the historical experience. After the initial spike in borrowing from both the government and private sector associated with historically low interest rates and stimulus the government and private sectors have diverged in recent years. Despite a continued economic expansion, both households and corporations continue reducing debt levels. Government debt issuance, a product of continued high absolute deficits, is expanding at a rate previously only encountered around recessions. As we look forward and think about the potential response to a recessionary jump in unemployment and a pronounced nominal growth deceleration, naturally we expect interest rates to be the main action lever. However, the unusually rapid pace of government debt issuance risks interfering with the mechanisms described above. Even as cash rates come down, the main channel of lower long-term rates through which Fed policy works could hampered. As a result of an artificially high long-term interest rate regime, the chances of a V-shaped recovery decline.

What is Sovereign Debt? Consider Maria, a small business owner in a country hit by a sovereign debt crisis. Her once-thriving bakery is now struggling due to soaring inflation and plummeting consumer spending. For Maria, it's not just about numbers on a spreadsheet; it's her livelihood and her family's future. When her government turned to the IMF for assistance, Maria was skeptical. Would this mean more austerity and less support for small businesses? However, over time, the IMF's involvement led to critical reforms and financial support that stabilized the economy. For Maria, it meant fewer sleepless nights worrying about skyrocketing prices and more time focusing on growing her business. 🦉 The Importance of Sovereign Debt and the IMF's Role Sovereign debt, the money borrowed by governments, is a double-edged sword. On one hand, it can fuel infrastructure projects, social programs, and economic growth. On the other, excessive debt can lead to crises, as seen in the 2008 financial meltdown and more recently in countries like Greece and Argentina. The IMF steps in as a global financial counselor. Established in 1944, the IMF's mission is to ensure the stability of the international monetary system. It provides policy advice, financial assistance, and technical support to member countries, especially those facing economic difficulties. Economic Surveillance: The IMF monitors global and national economies, identifying risks and providing policy recommendations. Financial Assistance: Through lending programs, the IMF supports countries in crisis, helping them restore economic stability. Capacity Development: The IMF offers training and technical assistance to help countries strengthen their economic institutions. 📓  How to Navigate Sovereign Debt with IMF Support Navigating sovereign debt is like walking a financial tightrope. Here are some steps, inspired by the IMF's approach, to maintain balance: Conduct Regular Assessments: Just as the IMF regularly reviews economies, countries should continuously assess their fiscal health to identify potential risks early. Implement Prudent Fiscal Policies: Balance spending with sustainable debt levels. Avoid excessive borrowing that could lead to crises. Strengthen Institutions: Invest in strong economic institutions that can withstand shocks. The IMF provides training and support in this area. Seek Technical Assistance: Use resources like the IMF for technical assistance in developing sound economic policies. Maintain Transparency: Transparent policies build trust with both domestic and international stakeholders, which is crucial for economic stability. #Kenya #KenyaFinanceBill2024

Debt Danger Ahead The US is on an unsustainable path (Ive been saying that we are in trouble. Article- A report released last month said the government is facing an “unsustainable” fiscal path that poses a “serious” threat to economic, security, and social issues if unaddressed) Article- Among the ranks of those in the concerned camp are Fed Chairman Jerome Powell, JPMorgan Chase CEO Jamie Dimon, Bank of America CEO Brian Moynihan, BlackRock CEO Larry Fink, and Wharton vice dean Joao Gomes. Their outlook is evidenced by a March report from the Congressional Budget Office (CBO). The CBO estimates that by 2054 public debt will represent 166% of GDP, reaching $141.1 trillion. Currently, the nation’s $34 trillion debt is approximately 99% of GDP and, according to the CBO, will steadily increase over the next 30 years. In the near term, the CBO expects debt as a percentage of GDP to exceed the record peak of the Second World War by 2029. This mounting debt, the CBO writes, “would slow economic growth, push up interest payments to foreign holders of U.S. debt, and pose significant risks to the fiscal and economic outlook; it could also cause lawmakers to feel more constrained in their policy choices.” The report goes on to add that the likelihood of a financial crisis is increasing as a result of growing debt, something which would cause interest rates to spike and, if paired with higher inflation, “could erode confidence in the U.S. dollar as the dominant international reserve currency.” The outlook from the U.S. Government Accountability office (GAO) isn’t much better. A report released last month said the government is facing an “unsustainable” fiscal path that poses a “serious” threat to economic, security, and social issues if unaddressed. #debt #foreclosures #realestate #rates #thefed #banks #money #inflation #america #republicans #democrats #politis #trump #biden #investing #quant #money #economy

The US debt has reached an amazing $35 trillion (123% of GDP) and by the end of the year, it could quite possibly exceed $36 trillion. At this rate, by 2030 it has a high chance of surpassing $50 trillion. Hearing such news, we all start to think, are our savings in USD at risk and what might happen to the US economy in the future? First, it should be noted that the USA is far from being the leader in this competition. For example, Germany's debt is 147% of GDP, Switzerland - 243%, France - 244%, the United Kingdom - 276%, the Netherlands - 373%, Ireland - 577%, etc. The most interesting is Luxembourg's external debt is 4300% of GDP, and Palau's - 6000% of GDP. But let's get back to the USA. Do you know who is the largest holder of US debt? It is the Federal Reserve. They account for 40% of the total debt. Foreign holders of US debt account for only ~25% of its volume. The largest of them are Japan with $1.2 trillion (4% of the total volume) and China with $0.971 trillion (or 3.1% of the total volume). As a result, the main holders of US debt are the USA itself. Moreover, it is nominated in USD, the emission of which is under US control. In general, it is too early to worry about the entire US economy. However… let’s wait for November 5th )) #us #usdebt

US debt isn’t just America’s problem anymore. 👀 ICYMI, US debt is at crazy-high levels. And the global economy is super-tied to US debt stability. Why? Because international investors and countries hold trillions in US assets, making them just as invested in its stability as the US itself. 🥵 The Pictet Group Research Institute recently released a report on this topic. It’s a MUST read. Here are some takeaways from the piece: 1️⃣ Too Big to Fail: The US dollar has been the world’s go-to currency for decades. This lets the US run high debt with backing from international investors. But if the US debt picture cracks, it could rattle economies everywhere.    2️⃣ Interest Payments: By 2028, over 60% of the US deficit will go to interest alone. If the US has to borrow just to pay off interest, we might see a massive selloff in Treasuries that could shake global markets. 3️⃣ World-Wide Stakes: The current global system props up US debt as “safe,” but things are changing. With more countries exploring alternatives and capital needs shifting, the “all-in” on US assets may not last forever. Bottom line? The US’s debt load matters to everyone, and global markets feel the impact. 🤕 This balance has kept things steady for years, but it may not hold forever. What do you think? Can the US keep this up? Is US debt really the quintessential risk-free asset? Let me know in the comments below! 👇 PS. 🔔 Subscribe to my profile & ♻️ share with your network.

The U.S. debt situation indeed presents an intriguing landscape, reflecting shifts in economic behaviors and investor profiles in recent years. The increased participation of individual investors in the bond market, in contrast to the reducing shares of public agencies and the Federal Reserve, suggests a democratization of debt ownership but also brings in new vulnerabilities due to these investors' sensitivity to interest rate changes. This can lead to greater market volatility, as individual investors may react more abruptly to rate shifts or economic news. On the international front, the fluctuation in foreign ownership from a peak of 35% to the current 29% highlights how international perceptions of U.S. economic stability and policy environment influence capital flows. This reduction might indicate concerns about the U.S. debt levels or expectations of better returns in other global markets. https://lnkd.in/e7J2DWUe

US debt and the gold argument A statement by the CEO of a storied fund house on the unsustainability of US debt has generated a lot of reaction from the markets. He said that the 33 trillion USD debt which the US is running leads to multiple scenarios. Firstly the fight against inflation becomes difficult as one cant keep the rates high because the debt servicing becomes problematic. Second, if you cut too quickly the inflation becomes entrenched. Basically the high level of debt requires a high cost of servicing which entails issuing more debt making it a vicious spiral. The taxes to service that dont grow in lockstep as they depend on the GDP growth which in turn depends on multitude of factors. The Keynesian remedy that issue debt and bring growth finally hits the fundamental barrier. The private sector in such times is of little help as it makes the investments which are procyclical in nature compared to the govt which invests heavily in the counter cyclical scenarios. So a scenario where more debt cant be issued has to be followed by a period of austerity where govt spends less resulting in a drop in overall consumption which in turn leads to a pervasive gloomy outlook of the economic future which in turn results in cut backs in private capex. The readers would note here the peculiarity that economic activity is very much a momentum play, good leads to good and bad leads to bad. Govts with their fiscal might are required to course correct whenever the momentum is shifting. Now we will come back that why the US case is unique and the debt unsustainability argument is moderately flawed. US unlike other nations is beyond the good bad cycle conundrum. Holding its debt is not a discretionary call but a necessity borne out of the basic feature of the current monetary system. The current system which came into being post WWII in the Brettonwoods, requires the world trade to be denominated in USD. So every two nations which transact either have a dollar deficit or dollar surplus. As the cross currency markets are not sufficiently developed, every transaction has to go through the dollar route involving a debit or credit in the US based nostro accounts. This provides the sustainability to the US debt. It also helps that the US is the biggest consumer of all generating almost 65% of its GDP through consumption. So the other nations have an incentive to sell its wares there too. As a consumer US has no competition but on the argument that US dollar and US treasuries are the only store of value, they have competition in other commodities. The primary candidates here would be oil and gold. Here too with the dominance of tech and military, oil is a defacto US domain. Gold however presents a different allure and investors try to hedge against US fiscal profligacy by buying gold taking the gold price up. This is the argument which author James Rickard makes in his highly recommended 2011 book, Currency Wars, The making of the next global crisis.

The US is sitting on the biggest pile of public debt in its history, and economists are getting nervous about it. The federal debt balance hit $34 trillion this year, with the government on pace to rack up another $1 trillion in debt every 100 days, per an estimate from Bank of America. The #USTreasury sold $22 trillion in government bonds last year, but Treasury auctions recently have seen weak demand, suggesting that investors could soon have difficulty absorbing the huge rush of new bond issuance. The US spent $429 billion last year on interest payments alone, according to Treasury data. That's 240% of what the government spent on transportation, commerce, and housing combined. Robust economic growth can make debt more sustainable, but the debt is growing way faster than the economy - the national debt balance rose 86% over the last decade, while GDP grew by 63%, according to Fed data. Economists are uncertain of when exactly the national debt will become a true problem for the US. #FinancialMarkets #FinancialRisks #USDollar #USDebt #SovereignDebt #GovernmentDebt #DebtMarket #BondMarket #FixedIncome #BondTrading #USEconomy https://lnkd.in/gUK_VuAt