The U.S. Treasury’s Coming Financial Apocalypse
By now, everyone in America is aware (or at least should be aware) that the U.S. national debt and interest expense on that debt are both exploding. Much has been written in the financial press warning that debt and deficits are going to be a real problem in America’s future. That future has arrived. And it could be catastrophic; in fact, apocalyptic.
According to the national debt clock, the U.S. Treasury has racked up over $32.7 trillion in debt and has an attended annual net interest expense attached to that debt of $657 billion. The debt is now over 120 percent of U.S. GDP, and the interest expense has almost doubled from four short years ago.
Recently, the Treasury Borrowing Advisory Committee published borrowing estimates for the current calendar third quarter (July–September) and for the final calendar quarter (October–December) of 2023. In a word, the numbers are stunning. The U.S. Treasury will borrow $1.85 trillion (1,850 billion) dollars in a short six-month span of time. Only in the middle of the 2020 COVID pandemic has that amount of borrowing ever been exceeded in history, and that was in response to a pandemic crisis. There is no such “crisis” today. The stunning U.S. Treasury borrowing now is “organic.”
The four horsemen of the U.S. Treasury’s Financial Apocalypse are pretty easy to spot. The line items in the U.S. budget are simple and clear: Medicare/Medicaid, Social Security, defense, and interest expense on the national debt. The first two are already over $1 trillion each and climbing. The third is almost $1 trillion and will easily exceed that number in the next few years. As for the fourth horse, it has just moved from a slow trot to a fast gallop. In tandem, these four line items are driving federal deficits permanently and significantly higher in the coming years. And yet, it is the interest expense on the national debt that easily has the potential to run the fastest. (READ MORE: After the US Credit Downgrade, Let’s Talk About a Radical Budget Change)
The U.S. Treasury has lost critical amounts of its most significant sources of offshore funding. OPEC, Japan, the European Union nations, and China are all gone completely or have reduced their funding contributions for U.S. deficits significantly. Given the recent weaponization of the U.S. dollar, there is very little chance any of these sources of international capital flows to the United States will be renewed.
As a direct result of the Treasury weaponizing the U.S. dollar (freezing access to foreign reserves held by Russia and Iran), funding for deficit spending by the U.S. federal government will become almost completely dependent on domestic funding sources. That means funding will fall to the U.S. banking system directly or indirectly. Directly as in creating regulatory incentives for U.S. banks to buy more Treasury securities and indirectly by using the Federal Reserve balance sheet to do the same. Once this path of financing is established and recognized by American financial markets, interest rates on all U.S. Treasury securities will rise.
Luke Gromen, founder and publisher of the macroeconomic report FFTT (Forest For The Trees), recently noted that “when Fitch (a bond rating agency) downgraded U.S. debt from AAA to AA+, the interest rate on the 10-year U.S. Treasury bond rose. The last time the United States had its debt downgraded that same interest rate fell.” In other words, Mr. Bond Market is paying close attention. If domestic funding sources are to fund the U.S. Treasury’s deficits, it is going to be an expensive exercise for the Treasury (as in a higher interest rate on the debt).
It should also be noted that future U.S. deficits are indefinitely locked in annually at approximately $2 trillion. And that is assuming no meaningful downturn in the U.S. economy. Anything that approaches a hard landing for the U.S. economy could easily see that annual deficit number double. In addition to the deficit, the entire $32.7 trillion of current outstanding U.S. Treasury debt will have to be rolled at maturity over the next 73 months (approximately six years). A very large percentage of that debt roll is in the very short end of the treasury market. Almost all of it has a current interest expense under 2.5 percent. The roll will set that expense at prevailing rates that will easily be above 5 percent in the short end of the treasury market. See the problem?
Sometime in the first quarter of 2024, the interest expense on the U.S. national debt is going to approach $1 trillion. Once that threshold is broken or is recognized as going to be broken, then the fourth horse of the U.S. Treasury’s Financial Apocalypse will easily break away and become the fastest horse of the four $1 trillion budget line items.
What will that mean? It will be no understatement to say that it will mark a huge historic turning point for American finance. In fact, it will perhaps mark a downright biblical event in U.S. history generally.
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