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July 2023: Too Much Government Debt

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As you know, the economy is getting closer to a recession each month, brought on by many factors, a few of those factors listed below, to name a few. The financial risks listed below point to higher long-term inflation; thus, Gratke Wealth, LLC continues to recommend holding inflation hedges, as a part of a proactive, diversified investment portfolio for these times.

Today, however, we will mainly discuss the quantum sums of debt issued by the U.S. Government.

Debt: How much is too much?

First, let's note how much annual interest expense the U.S. Government (aka, taxpayers) are paying to borrow nearly 33 trillion dollars. We are now months, if not weeks (hence the timing of this newsletter), from where the U.S. Government will pay over $1 trillion PER YEAR to borrow money. When one compares this interest expense to the federal government's annual revenue (aka, tax receipts), one can see that this is UNSUSTAINABLE. Something will break.

Well, the ’something will break' has already begun.. U.K. pensions were in near-default last September 2022, note the headline below, and the U.S. banking crisis started in March 2023, just to name a few big financial problems within the past twelve months, due to higher interest rates.



U.S. Interest Expense approaching $1 trillion annually. 

The exponential growth in interest payments on the US Debt; is unsustainable.

Depending upon the political party, the sacred cow of the U.S. federal budget is defense spending. The Annual interest expense spent to borrow an ever-increasing sum of debt now surpasses the approximate $800 billion annual expenditure on the defense budget.

Since the 2020 pandemic, spending, debt, and interest payments on the debt have gone near vertical, parabolic. Unsustainable.

The US now has the highest Debt/GDP in US history, 120%, and this is during peacetime, generally speaking, sound economy, per the pundits.

What happens when we get into a nasty recession? More money printing, more inflation.

Speaking of unsustainable growth in debt levels…

It took the U.S. government over 220 years to grow debt from zero to $21 trillion. The U.S. doubled that amount, $21 trillion, in just the past four years. Word-unsustainable. 

I've shown this graph (below) many times before, the debt of the federal government relative to the annual output of the U.S. Economy, as measured by GDP (Gross Domestic Product). Think of this as a household's debt-to-income ratio.

The takeaway during most of our working lives, U.S. Debt/GDP was hovering around 40% to 60%. Today we are at 120%. How much more room is on the 'corporate credit card' for future cash advances, to borrow a metaphor.

Below is a similar debt/GDP calculation but with a projection of that ratio into the future. The below graph also shows the current and projected U.S. government deficit.

Since the suspension of the debt ceiling on  June 3, 2023, the U.S. Congress has increased the national debt by nearly $1 trillion in just 22 business days, or 34 calendar days. The debt ceiling will not be reinstated until 2025, after the 2024 general elections.

Since the suspension of the debt ceiling on  June 3, 2023, the U.S. Congress has increased the national debt by nearly $1 trillion in just 22 business days, or 34 calendar days. The debt ceiling will not be reinstated until 2025, after the 2024 general elections.

What is a ‘Deficit,’ you may ask?

It is simply the amount of spending above and beyond annual income. If we look at a household by example, it would look something like this.

Household Annual Income:      $100,000
Household Annual Spending: -$150,000
Deficit:                                         -$50,000

In the above example, our household ‘deficit spends’ $50,000 per year, or $50,000 more than annual income. 

Now let’s do the U.S. government. This spending is where the ‘fun’ begins. I should add that a government typically will only ‘deficit spend’ during economic stress, such as a major recession. But here’s the deal, the U.S. government is deficit spending during supposed good economic times with near-historic low unemployment. What gives?

U.S. Annual Income (aka Federal Tax receipts/income taxes etc.):

2023 total federal revenue is estimated at $4.71 trillion.


2023 total federal expenditures are estimated at $6.37 trillion.

Houston… we have a problem.

Income: $4.71 trillion
Spending: $6.37
Deficit: -$1.66 trillion 

This -$1.66 trillion deficit is the amount that must go on the 'corporate credit card.' Yes, that's my sarcastic way of saying the U.S. government has to borrow that spending over long periods to cover today's deficits. Who doesn't take out a 30-year mortgage to fund their vacations?

Well, sarcasm aside, you get the picture. The U.S. is spending with emergency measures, which is odd, as we are constantly reassured all is fine. Again, what’s up with all this?


Slamming into A Wall of Worry

Below, we can see that nearly 50% of the U.S. government’s $32 trillion debt matures in the next three years. This debt must be refinanced after interest rates have risen over five percentage points over the past twelve months.

What will be the interest expense after this debt is refinanced? Much higher, we will assume.

The US debt is the only Western nation with short-term maturities. Again, nearly 40% of the US debt matures in the next two years.

Alex, What is Fiscal Dominance for 500? 


What is the endgame here? 

1.) Fiscal dominance is one of the ‘endgames’ for countries with too much debt; countries that CANNOT pay their debts via annual sources of revenue but instead must borrow money to pay the annual interest expense; forget about paying down the principal on that debt.

This behavior, of course, leads to, historically, massive inflation levels. I leave it at that for now, on the discussion on inflation.

2.a) A Nation’s Currency: The other problem for countries with too much debt is that their currency plummets as foreign investors lose confidence in that spend-thrift nation’s currency.

Below is the $DXY ‘dixie’ index, a basket of over 80 currencies measured against the U.S. dollar. We can see the dollar’s decline from late 2022 through mid-2023.

2.b) Diversifying away from the U.S. Dollar for International Trade.

I won’t talk too much here, perhaps a newsletter for a different day, but perhaps you’ve read about the ‘BRICS nations’? BRICS is an acronym that stands for:


On August 15, 2023, the BRICS nations will hold a conference to discuss world trade using fewer U.S. Dollars as the primary currency for international trade.

Currently, world trade uses The U.S. Dollar for over 70% to 80% of all global transactions. There are many reasons for this BRICS summit. Still, the sanctions imposed on Russia when they invaded Ukraine catalyzed the BRICS nations to consider a new global trading currency, especially for hard assets, also known as commodities.

This topic, the U.S. dollar dominance, is one of the most hotly talked about conversations in global finance today. Time will only tell whether BRICS nations will be prosperous. However, the BRICS nations hold the commodities needed for 'The West' to achieve net-zero decarbonization goals. It's an awkward position for the west-Sounds inflationary to us.


Summary: Summing it all up:

For us at Gratke Wealth, LLC, higher inflation is a given. There are undoubtedly many bad outcomes for a grossly indebted society, more than the scope of this e-newsletter. Mainly though, we see much higher inflation on the horizon.

Sure, we may get some deflation near-term with a nasty recession, something we have discussed before. We don't rule that out. Frankly, we expect it. However, longer term, inflation is the only way governments can pay down their debts via a devalued currency. That is the playbook of centuries past. 

Note below a 2014 article, the United Kingdom patting itself on the back, paying off debts issued over 100 years ago. After 100 years of inflation, the original purchasing power was estimated at only 2%.

As Michael Oliver of Momentum Structural Analysis says about inflation, "It's a degradation in the money unit.” Yes, indeed, that's a 'feature,' not a 'glitch' for an overly indebted government, create inflation, pay your future debts with a debased currency.

Note the parallel, gold doing what it does best, protecting against long-term inflation. I think we all know how 'debt part' of the chart is going to go, up. We would expect gold to follow along as it has for decades. 

Remember, inflation does not go up in a straight line.

2014 UK Headline.

As debt grows, countries will be forced to create more inflation to repay future obligations via a devalued currency. To use the phrase, 'Check Please,' as nations wrestle with how to pay their debts.

Inflation is on everyone’s mind.. as Harvard University poll illustrates.

Addendum: The Over-Valued Stock Market

Lasty, just in case one wonders if tech stocks are over-valued, they are.

Why have 500 companies in a stock index when you only need seven?

We have discussed this before: at the end of every over-valued stock market cycle, only a few grossly over-valued stocks drive indices higher. This behavior is no different than any other market-peaking process. Be aware. This action, again, is why we do not like passively managed index investing at this point in the economic cycle.

The fewest stocks driving the markets higher- A 60-year high in concentration. #DoesNotEndWell

As always, I am glad to discuss and review. 

David C. Gratke
Gratke Wealth, LLC
Portland, OR USA

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