Bomb is Ticking

"Suspicion always haunts the guilty mind. The thief doth fear each bush an officer." - William Shakespeare, Henry VI, Part 3

The United States is currently facing a staggering debt of $175 trillion, a burden so immense that it is virtually impossible for any single election to alleviate the financial strain. The only viable solution to tackle such a colossal debt is through the printing of more money, a strategy that has been employed by nations throughout history.

Prominent figures such as Elon Musk, Ray Dalio , and others have expressed their concerns about the impending economic crisis, predicting that it will be far more severe than the 2008 financial crisis.

They argue that the government has been deliberately misleading the public about both the state of the economy and President Biden's mental acuity. As a result, the government is likely to resort to an extensive currency printing campaign to manage the debt.

However, it is crucial for individuals to analyze the data and form their own opinions about the situation. Allow me to elaborate:

Significant Bailouts

The Federal Reserve has issued a higher number of emergency loans in 2023 than it did during the 2008 financial crisis. This suggests that the banking system is currently in a precarious state, largely due to the actions of the US government.

The government initially sold a substantial number of bonds to financial institutions, only to subsequently devalue these bonds through unexpected interest rate hikes.

To illustrate this situation, look at the exhibit 1 provided by the Federal Reserve:

The blue section on the left represents the lending during the 2008 crisis, which is relatively small in comparison.

The bump from 2020 reflects the lending during the COVID-19 pandemic. The significant red and green sections on the right depict the 2023 banking crisis. It is evident from the graph that the scale of the 2023 crisis is much larger than that of 2008.

Let me explain important terms in brief. If you know them, you can skip ahead.

Explanation of Banking Terms

Primary credit is a lending program available to depository institutions that are in generally sound* financial condition. Primary credit is available in terms from overnight to 28 days. In extending primary credit, Reserve Banks must judge that the borrower is likely to remain eligible for primary credit for the term of the loan. i.e. basic credit.

Secondary credit is a lending program available to depository institutions that are not eligible for primary credit. It is extended on a very short-term basis, typically overnight, at a rate that is 50 basis points above the primary credit rate.

In contrast to primary credit, there are restrictions on the uses for secondary credit extensions. It is available to meet when its use is consistent with a timely return to a reliance on market sources of funding or the orderly resolution of a troubled institution. Secondary credit may not be used to fund an expansion of the borrower's assets.

Moreover, the secondary credit program entails a higher level of Reserve Bank administration and oversight than the primary credit program. i.e. add-on credit.

Other extensions represent the "bailouts" i.e. the value of loans made by Federal Reserve Banks that are not categorized elsewhere on this balance sheet. This line included emergency credit to Bear Stearns that was announced on March 16, 2008, and, before the credit extension was listed separately, the credit extended to AIG. i.e. credit.

Last but not the least, The Bank Term Funding Program (BTFP) is an initiative designed to provide emergency liquidity to U.S. depository institutions.

It was established in March 2023 in response to the sudden bank failures of Signature Bank and Silicon Valley Bank, which were the largest such collapses since the 2008 financial crisis.

The program aims to support depositors, such as American businesses and households, by making additional funding available to eligible institutions to help assure that banks have the ability to meet the needs of all their depositors. i.e. more credit.

Borrow like there's no tomorrow

US has been borrowing more money under President Biden's administration than it did during the COVID-19 pandemic. This is despite the fact that the pandemic was a unique and unprecedented crisis, whereas the current situation is not.

During the COVID-19 pandemic, the government borrowed money at extremely low interest rates, close to 0%. However, today, the US government is borrowing large sums of money at much higher interest rates of around 4-5%:

This is a risky and desperate move, akin to a person using high-interest credit cards to pay their bills.

USA has more interest than your interest in your loved ones.

The interest payments on the national debt have become the largest expense for the U.S. government. These payments now exceed the expenses on defense, social security, and all other government programs.

As of 2024, the majority of tax dollars and printed money are being used to pay bondholders. Despite these payments, anyone who invested in U.S. Treasuries or other bonds has suffered significant losses over the past few years.

This situation reflects the consequences of the government's strategy of spending now and worrying about the costs later. As the graph illustrates, the time to pay for these expenses has arrived.

Just in case you want to see how ridiculously outdated our understanding of inflation is, refer this for more clarity on above chart as to how inflation is calculated.

So, what this means is there's a striking dollar devaluation.

If you'd compare USD/INR and see that rupee is depreciating, and therefore dollar is appreciating, this is a wrong way of looking at US inflation. You should see dollar and inflation in isolation for accuracy data.

So yes, the value of the U.S. dollar has significantly decreased over the past four years. It has lost at least 25% of its purchasing power. This is something that many people have noticed in their daily lives due to inflation.

However, economist Larry Summers estimates that the actual decrease in purchasing power is even more severe, with annual inflation rates reaching as high as 18%. This calculation includes the impact of the sharp increase in loan payments caused by interest rate hikes. Over the span of four years, this would result in a loss of value that is much greater than 25%.

Who left the doors open?

China, which is the biggest foreign investor in U.S. government debt, has been rapidly selling off its U.S. Treasury bonds. This is a significant development because China's large stake in U.S. debt gives it considerable influence over the U.S. economy.

Just as a venture capitalist's investment in a tech company can affect the valuation of that company, China's investment in U.S. debt can influence the value of the U.S. dollar and U.S. interest rates.

By selling off its U.S. debt, China is signaling that it is losing confidence in the U.S. economy, which could lead to higher interest rates and a weaker dollar:

But this is not limited to China, but the entire BRICS has been doing the same thing of being independent. It was USA of 1950s which had good time when every one else didn't. And now the story appears to have flipped 180.

The De-dollarization trend has been powerful ever since BRICS:

Historically, the U.S. dollar has been considered a store of value, and many countries have chosen to hold U.S. Treasuries as part of their foreign exchange reserves. However, the recent actions of China and other countries suggest a shift away from U.S. Treasuries.

Instead, they are turning to gold as a store of value. This is significant because gold is a tangible asset that is not tied to any particular government or currency. By buying gold, these countries are diversifying their reserves and reducing their dependence on the U.S. dollar.

This could have implications for the global financial system and the role of the U.S. dollar in international trade and finance! It's already visible when CYN is more traded than USD so far:

If you want to see how BRICS+ is big, refer following Exhibit 9:

By the way, the dollar can still be used as a sanctions weapon, but its effectiveness is diminishing. Countries are increasingly finding ways to circumvent the U.S. financial system and dollar-based sanctions.

The recent sanctions on Russia, for example, have led to unintended consequences, with Europe suffering more than Russia due to its dependence on Russian oil and gas. Russia, on the other hand, has been able to find alternative customers - like us, India! Allowing it to maintain its economic strength.

According to the World Bank, Russia has even surpassed Japan to become the fourth largest global economy in terms of GDP by purchasing power parity (PPP):

Small numbers make the balance sheet look so smol?

The true debt of the United States, when taking into account all the entitlements such as Social Security and Medicare, is indeed a staggering $175.3 trillion. This number is not only immense, but it's also growing at a rapid pace.

To put this into perspective, the current U.S. debt held by the public is about $31.46 trillion, which is already a cause for concern. However, when you add in the obligations from entitlement programs, the total debt burden skyrockets to $175.3 trillion:

This massive discrepancy is due to the fact that the official federal balance sheet excludes Social Security and Medicare obligations, even though these benefits have similar legal status to the retirement benefits accrued by federal civilian employees and veterans.

This eye-watering figure highlights the severity of the debt crisis facing the United States. It's a ticking time bomb that will force extremely tough political and policy choices in the coming decades.

The sheer size of this debt, which is more than five times the country's gross domestic product (GDP), is a stark reminder of the urgent need for fiscal responsibility and reform.

Thank you.