Why The US Is In Trouble

 Imagine this…

You have a $5m mortgage on a house worth $3m and no other assets.

That’s the good news.

Here’s the bad news…

Your annual income is -$200,000 (minus) because your mortgage repayments far exceed your income.

This is what the US economy looks like right now. It’s on its knees!

Here’s the problem…

Since the pandemic broke, US government debt has doubled to $34 trillion.

Worse, it has a deficit (expenses greater than income) of $2 trillion and it can’t service its own accelerating debt repayments.

Consequently, it needs to raise some cash, and how!

To achieve this, the US Federal Reserve (central bank) will have to create and sell a heap of government bonds to service its debt.

(Bonds are like term deposits only they’re bought and sold on an open market like stocks. Central banks can literally create these out of thin air and sell them. Hence the term, money printing.)

The problem is, institutions worldwide (corporates, superfunds, etc) are already heavily invested in bonds and don’t need or want anymore.

However, the US government desperately needs the money to finance its growing pile of debt otherwise it defaults.

And this is where things get nasty.

To raise the necessary cash, the US central bank must implement its own vicious cycle…

First up, to make the new bonds attractive they have to offer them at higher interest rates.

However, as they push their own rates higher, it also increases their own repayments.

And as their repayments increase, they must sell more bonds at higher rates to raise more money and around they go.

It’s the worst vicious cycle of all.

Inflation is no longer the biggest threat to interest rates or financial markets, it’s government deficits like the US.

So, now you’re probably wondering why most economists keep suggesting we’ll get a rate cut.

Two reasons:

Firstly, most within the commentariat have this linear belief that rates should come down because inflation is drifting down.

Not true. Rates go down when unemployment goes up to ward off a recession, not when inflation goes down.

Secondly, if you look and listen closely, every economist who believes we’ll get a rate cut belongs to a bank.

They’re conflicted with their own interests.

Banks make their money by lending it out and the last thing they want is to scare off customers. They need to keep writing loans, even bad loans!

But even if we get a spike in unemployment, it may not be enough for a rate cut.

Since the pandemic broke, world economies have been artificially propped up with excessive government stimuli and now they’ve got the debt and deficits to prove it.

The chickens are finally coming home to roost.

The problem is, they’re the size of emus!

Have a great weekend!

Adam

Back paddock – what’s once in a year and twice in a week?

The letter ‘e’.