The Debt Spiral
It appears that we are in the early stages of a sovereign debt spiral. This obviously does not happen overnight. Instead, it is the result of decades worth of borrowing from the future.
Borrowing from the future is kicking the can down the road – and it works just fine until you get to the end of the road.
In this analogy, the end of the road equals interest rates at the zero-bound with sovereign debt at all-time highs. This is a brutal combination. And is where we find ourselves today.
The get-out-of-jail free card of slashing rates when things start to break is no longer an option because there is nowhere left to slash to once we get to zero.
We are stuck between a rock and a hard place. The Federal Reserve must raise rates to combat inflation, but raising rates makes it increasingly more painful to service the existing debt – and to take on the future debt required to prevent the system from collapsing.
As indicated by Wall Street Silver below, the compounding interest on the debt reveals the potential spiral. The United States paid $853 billion in interest on the $31 trillion 2022 budget. That is more than the entire defense budget for 2023.
Here’s another chart that shows how quickly the net interest expense grows:
Even the mainstream outlets are starting to cover the painfully obvious math:
Expect the creation of new financial jargon to artificially lengthen the road and delay the inevitable. Expect more monetary debasement.
Barring a white-swan productivity breakthrough, the debt spiral is basic math.
Fortunately, an engineering solution exists — and that is something to be optimistic about.
Podcasts I’m Listening To
Mark Nelson – Nuclear Power: Change the Memes, Change the Future | Infinite Loops
Face History So You Can Learn From It. The Horrors of Unit 731 | Jocko Podcast
Developing A Rational Approach to Supplementation for Health & Performance | Huberman Lab Podcast