Few commentators are aware that the dynamics leading to an inevitable collapse of credit are increasing. When these dynamics begin to unfurl, there is bound to be a global rush out of fiat credit into gold. This is why prescient central banks have been accumulating bullion.
This week, the more observant among us will have detected a fork in the road of credit creation. Major nations are now officially in recession, suggesting that interest rates should be reduced according to the Keynesian playbook. But inflation is showing signs of rising again, mandating the opposite. These are a rerun of the conditions which discredited Keynesianism in the 1970s, leading to a common description of something that was to statist economists impossible: stagflation.
The only reason that the US is not in an official recession is the massive amounts of government spending in excess of tax revenue: in other words, it is printing its way out of recession. Inevitably, this will continually undermine the dollar’s purchasing power even further, an effect which feeds into the inflation pipeline. Any hopes of a sustainable reduction in interest rates can be dismissed on these grounds alone.
The US is not the only nation with this problem. Intractable budget deficits abound in the UK, Japan, and Europe as well. According to the Institute of International Finance, global government debt has increased from $33 trillion in 2008, to $71 trillion before the covid crisis three years ago, to $90 trillion today. With interest rates and borrowing costs having also risen inexorably, global government debt has gone parabolic.
Not only are the politicians trapped by the wrong mind-set when it comes to acting with fiscal responsibility, but they continually add to the problem. It seems that there is no one in America’s political class willing to seriously consider where their destructive fiscal policies are taking them. And with presidential favourite Donald Trump likely to prioritise tax cuts over cutting public spending if he is elected President, the deficit problem is likely to get even worse.
Nor can we ignore the mechanics of a debt trap. Interest payments in the first quarter of this fiscal year were running at an annualised rate of over a trillion dollars, making up nearly half the deficit — and rising. According to the Congressional Budget Office’s forecast, net interest on government debt held by the public will total $870 billion and average 3.1% this fiscal year. This must include debt being refinanced which with this year’s budget deficit is approaching one-third of the $34 trillion outstanding. Clearly, the CBO’s figures which were released earlier this month are already out of date.
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