Could America default on its debt?

Could America default on its debt?

This seems crazy and something that is probably impossible.

But what if it’s not?

Let me explain my thinking.

America has printed trillions of dollars in the last year. It started with the CARES Act because of Covid and continued into Biden’s presidency with his infrastructure bill. They’ve printed 6 trillions dollars in the last year.

While this has been happening, the US Federal Reserve has continued quantitative easing. Quantitative easing has let the US government artificially prop up the stock market.

How?

QE is a monetary policy where the central bank of a government buys government bonds or other financial assets in order to increase the money supply.

This has also been paired with fiscal policy in which interest rates are at zero. Could they go negative?

They might have to.

Here’s the conundrum there in.

Right now the US debt is 140% of GDP.

This means there is more money in America than products they produce in their economy.

As you can see in the graph, the last time this happened during the war years in 1945.

I learned all of this from Ray Dalio. He has a book coming out called the changing world order that’s available for free on his LinkedIn.

As he has mentioned, there are 3 interesting predicaments America is facing right now (can watch a summary here).

1. End of a long-term debt cycle. Since the Bretton woods agreement in 1945 during the period of American exceptionalism, interest rates have continued to fall to where they’re now zero.

2. Rising inequality. Inequality hasn’t been this bad in the 1930s.

3. Rise of a superpower – the rise of China to challenge America’s place as the world leader.

All of these things have happened before in history, and by understanding it, we can get a better understanding of what’s happening.

It means America is running out of time for its status of global reserve currency.

Because the US federal government has printed so much money, inflation is here.

Look at commodity prices. Lumber, copper, oil, etc. are significantly rising.

In order to curb inflation, the government will have to raise interest rates.

If they raise interest rates, they don’t produce enough GDP in their own country of corresponding value to pay back the debt holders.

As Stanley Druckenmiller said in a recent interview, if America has to hike interest rates, the debt becomes 30% of the GDP.

So where do they go?

What does America do?

Does it let its currency hyperinflate like Weimer Germany? Or does it curb inflation by raising interest rates and not being able to pay back its debt?

It could default on its debt like Argentina, Russia, Venezuela and many others countries. But that would be catastrophic for the world in the short term.

Where does that leave the world on the global reserve currency?

It’s likely to be some central bank digital stablecoin with all the governments pitching in to provide ideas. The IMF started discussing it earlier in 2021 because they know where it’s headed.

Economists read history and commit their lives to studying this stuff. They’re not foolish enough to think America can hold its place at the top forever.

China, Russia and all of America’s enemies can’t wait because once trade is done without US dollars, America loses its power in the world.

Remember, those who own the world reserve currency have massive political and economic power in the world.

America is losing. China is winning.

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With the upcoming market crash I’ve talked about extensively (check out the business section on my blog), could the US government have to bail out the banks?

Depending on how bad this gets and how long the Internet holds its shares, some of the US prime brokers could be ruined.

Once one bank falls, everything will be thrown into chaos.

Does the government provide a bailout?

Politically it’s suicide.

Practically it likely has to be done because America’s banks are the world’s banks.

Then what?

If we look at history, this usually leads to periods of turmoil either within a country or around the world.

When inequality is as high as it’s been since the 1930s, people at the bottom will rebel. Revolutions are coming (another topic I wrote about here).

One thing that can be done is to punish the bankers severely. The banks should be heavily regulated, those responsible for taking risks should be put in prison forever and America should lead the world by example by punishing those who caused this.

Another positive would be massive increases in taxes of the ultra rich to make up for the deficit.

Is that likely to happen?

Nope.

Not when money rules the world and America’s political system is governed by lobbyists, super PACS and legal bribes.

Politicians don’t run America, money runs America. Never forget that.

We’ll see what happens.

History shows us that global reserve currencies don’t exist forever.

The question is when is America going to lose its reserve status?

Who knows, but it’s coming.