As US fiscal deficits widen, the yield on longer duration US Treasury debt rises as the Fed doesn't provide any accommodation. With growing interest expenses and debt burden, what happens next?
Nov 13, 2023·edited Nov 14, 2023Liked by Amrita Roy
So sick of government mismanaging our tax dollars. Which party worse?
1. TAX & SPEND DEMS
2. BORROW & SPEND GOP
Answer: 2..! THE DAMN GOP BORROWERS
-- They lie shamelessly on their spending habits. Spend like drunk sailors when we’ve a GOP POTUS, then pretend they care about debt and deficits when POTUS is a Dem. WTF. They think we’re stupid. Are we?
-- They wouldn’t manage their household debt so irresponsibly. Ahem, they don’t need to because their corrupt “pay to play” shenanigans with corporate lobbyists (example: NRA) keep them in the black whilst they legislate in direct opposition to electorate’s interests. Apartheid rule in America.
-- They spend on top 2%, gaslighting us with their “trickle-down” BS. FYI dummies, it’s “trickle up” and “trickle out” that creates best societal outcomes - most people participating in healthy societal work/spend cycle, less criminality, better levels of education, happiness, healthiness.
***PRESCRIPTION for upcoming ‘24 cycle:
Need continued centrist bipartisan approach and knocking back of both L & R extremes to the far margins where they belong.
Fully with you that the US government is spending like drunken sailors. And it has done so for a while now,. A high level of government debt can be sustained as long as inflation and interest rates remain low. That is not the case now, however. Unfortunately, should government decide to lower medical and military spending, there will be unprecedented political and social chaos. If they decide to not pay their interest expenses (also part of spending), that will be disastrous for the US dollar. And if they want to raise their revenues through taxes, we know that will face equal pushback. Unfortunately, the gridlock will only get worse, before it gets better.
Thank you for responding. Yes, yes, sustaining debt in times of excessively low interest rates a low hurdle and dangerously provocative setting in furtherance of new bad behavior.
In the 2017-18, I recall Powell nudging rates higher - appropriately. Hmmm, our “king of debt and bankruptcies,” then-POTUS solely concerned with appearances and seemingly unaware of danger in handing massive debt to next gens, he leaned very hard on the Fed. He had zero interest in reserve build-up — ahem, for America’s next emergency. (??) It seemed all wrong. Late 2018 we watched Powell reverse himself, lowering rates after a barrage of name calling by POTUS. Why was this OK? Suddenly, year and change later, Covid was here.
The twin failures of highly irresponsible fiscal policy and a too-long accommodative Fed have brought us here. Is there a way out? Is it wrong to be wildly frustrated at the excesses of our “tax and borrow GOP” and “tax and spend Dems?”
We can’t continue on current path, feels as if we’re driving off a cliff. Is it possible to create best blend of (1) expand the middle, (2) keep unemployment low, (3) tax the wealthy more, (4) trim the spend, (5) expand GDP..?
Or have the tires left the ground - are we already soaring through the air? What do you see in the coming year?
You have said it correctly that the "The twin failures of highly irresponsible fiscal policy and a too-long accommodative Fed have brought us here." And no, it is not wrong to be frustrated at the excesses of the government.
Given the state of the world order today and US dollar being the reserve currency, a reversal of fiscal spending is not on the books, as it will create tremendous political instability and global chaos. The only thing that can offset the inflationary nature of government spending (which imo will never go down), is if we see a productivity surge through technological innovation that allows for higher efficiency and output. This is an optimistic scenario, but it is a possible route, and should this happen, the world order will continue status quo, as investors globally will continue to buy US Treasuries. In order for this to work out, we actually need to see private lending pick up that fuels the investment in the growth of these technologies.
The alternative scenario is a pessimistic one (at least in the intermediate term), where the US government continues to borrow and growth remains low. More and more institutions will start to diversify away from USTs to other safe haven such as gold. This lays the foundation that the world moves away from the dollar hegemony to currency that is actually scarce. This is net positive for humanity long term, but in order for this scenario to play out, it would require a change in world order, which could be trigerred by a war or some other catastrophic events. While short term, it will be terrible, the world order that is built on a currency that is scarce, divisible and fast will curb government excesses in the future.
There’s no such thing as too much masala chai! Although at some stage sooner rather than later there will be much too much US Government debt…so print more dollars or let the UST market go to hell in a handcart? You know what they’ll do don’t you?
I believe that the US government is get its mess under control... that's a joke.
You said it right unlike masala chai, there is something of too much government debt. And the government will continue to borrow and should there be further deterioration in credit quality, the Fed can always accommodate by devaluing the currency. Unfortunately, Fed performing QE, when foreign buyers are selling US Treasury bond and inflation is higher than average, will be a new world order for the US economy altogether.
For now, yes. I would agree. But then again, the economy is a dynamic machine and it has never worked out according to the Fed's projections in the past. But so far, the Fed is still in business. But, I think over the next quarter, we should see the economy move according to Fed's short term projections.
Thank you Sully. I know you were among my first 50 subscribers when I started this newsletter. Thank you for showing your support and always asking such great questions. Happy Diwali to you too.
I would say that there is a 75% chance that either Scenario 1 or 2 plays out, where inflation remains higher than average and/or continues to surprise on the upside. Scenario 3, which is the most optimist scenario has a 25% chance of playing out. In order for Scenario 3 to manifest, we would need to see an outsized impact from productivity surge that offsets the ongoing inflationary effect of rising government debt. The timeframe I am thinking is over the next 3-5 years.
If it were any other nation in the world, it would be bankrupt. But since the US dollar is the world's reserve currency, which means it is used for the majority of international trade settlements and transactions, it bestows a unique power to the US, such that it can continue spending and borrowing, and investors all over the world and in the US (institutions, foreign central banks, retail investors, et.) buy the debt, because it is considered to the "risk-free" asset. In other words, the idea is that the US government will never default. Once that notion starts to change and get questioned, will US run into trouble. But there is still quite some time before the madness comes to a stop.
I have heard a few experts talk about this and that the dollar is actually fairly stable right now. Let’s pray and hope for a good future!🙏🤗✨ Thank you!
The problem is we need a new reserve currency and if you look at China almost every single metric US comes on top. We have the bread basket for food security, shipping lanes, and roads far more efficient than the rest of the world, also our energy independence.
Our Technology is far superior also our Navy controls and secures global shipping lanes and is 10 times bigger than the next Navy. Let's see someone else do this, securing global shipping lanes.
Then Demographics if you think we have a problem. China is an outright disaster over the next few decades.
My general point is I disregard Dailo's view that the US will likley have a collapse based on History as history never had anything close to the economic system we have today good or bad.
Everything is relative and another Country needs to excel on a multifront basis to even be considered a Country to replace the US dollar. I don’t see anything currently that says the US is going to get replaced at all. The strengthening of the Brics is one thing i’m watching closely here though.
Precised, accurate informations as always ❤️ you know what the say in Europe... USA has the hiccups and Europe has pneumonia.. I would add the Middle Europe the do way worse first time ... I included those countries cause of immigration and from Ukraine and the Noth Africa
Hi Amrita. You mention future inflation expectations declining based on productivity growth. Do you see any potential reasons for a sharp productivity gain in the U.S. economy?
Whether it is sharp or gradual, I don't yet know. But I do very much believe, that we are in the early stages of unleashing productivity gains from AI and it will definitely grow from here on. The question is a) given the private sector has to absorb government debt, how much incremental room does it allow for it to invest effectively in income producing investments/technologies? b) will the productivity gain from AI and other technologies be sufficient to offset the inflationary pressures related to government spending?
Amrita, Im leaving my answer on your note here... I couldn't leave it up there cause system didn't let me..
take care )
I'm sorry, I was sleepy and half-conscious, I don't have time for everything, I just can't do it) but I am grateful and obliged for the fact that you write so well in terms of knowledge, research and writing skills, I trust that what I read from you is 100% well thought out and you also include details that are important) that was about 5 am when i tried to get that fragment )))) that's why I scrapped it
Just so that I understand, what does it mean the U.S. credit rating has gone negative? It's still AAA, right? Does the 'negative' label imply a possible downgrade in the future?
There are 3 main ratings agency: Moody's Fitch and S&P. USA was amongst one of the elite countries up until August, when it had perfect AAA rating across aa 3. In August, Fitch downgraded US credit to AA+. So, while this is technically a "downgrade", it is still investment-grade. What happened on Friday last week, was that Moody's lowered their "outlook" on US credit to negative, did not touch the actual credit-rating (probably because of political pressures). I think the fact that USA credit got downgraded twice in a year definitely lays out the foundation for future downgrades, which will wreak havoc in the bond market. As long as fiscal deficits and inflation remain high, chances increase that US credit may continue to feel the heat.
So sick of government mismanaging our tax dollars. Which party worse?
1. TAX & SPEND DEMS
2. BORROW & SPEND GOP
Answer: 2..! THE DAMN GOP BORROWERS
-- They lie shamelessly on their spending habits. Spend like drunk sailors when we’ve a GOP POTUS, then pretend they care about debt and deficits when POTUS is a Dem. WTF. They think we’re stupid. Are we?
-- They wouldn’t manage their household debt so irresponsibly. Ahem, they don’t need to because their corrupt “pay to play” shenanigans with corporate lobbyists (example: NRA) keep them in the black whilst they legislate in direct opposition to electorate’s interests. Apartheid rule in America.
-- They spend on top 2%, gaslighting us with their “trickle-down” BS. FYI dummies, it’s “trickle up” and “trickle out” that creates best societal outcomes - most people participating in healthy societal work/spend cycle, less criminality, better levels of education, happiness, healthiness.
***PRESCRIPTION for upcoming ‘24 cycle:
Need continued centrist bipartisan approach and knocking back of both L & R extremes to the far margins where they belong.
BLUENAMI..!!!!
Fully with you that the US government is spending like drunken sailors. And it has done so for a while now,. A high level of government debt can be sustained as long as inflation and interest rates remain low. That is not the case now, however. Unfortunately, should government decide to lower medical and military spending, there will be unprecedented political and social chaos. If they decide to not pay their interest expenses (also part of spending), that will be disastrous for the US dollar. And if they want to raise their revenues through taxes, we know that will face equal pushback. Unfortunately, the gridlock will only get worse, before it gets better.
Hi Amrita,
Thank you for responding. Yes, yes, sustaining debt in times of excessively low interest rates a low hurdle and dangerously provocative setting in furtherance of new bad behavior.
In the 2017-18, I recall Powell nudging rates higher - appropriately. Hmmm, our “king of debt and bankruptcies,” then-POTUS solely concerned with appearances and seemingly unaware of danger in handing massive debt to next gens, he leaned very hard on the Fed. He had zero interest in reserve build-up — ahem, for America’s next emergency. (??) It seemed all wrong. Late 2018 we watched Powell reverse himself, lowering rates after a barrage of name calling by POTUS. Why was this OK? Suddenly, year and change later, Covid was here.
The twin failures of highly irresponsible fiscal policy and a too-long accommodative Fed have brought us here. Is there a way out? Is it wrong to be wildly frustrated at the excesses of our “tax and borrow GOP” and “tax and spend Dems?”
We can’t continue on current path, feels as if we’re driving off a cliff. Is it possible to create best blend of (1) expand the middle, (2) keep unemployment low, (3) tax the wealthy more, (4) trim the spend, (5) expand GDP..?
Or have the tires left the ground - are we already soaring through the air? What do you see in the coming year?
You have said it correctly that the "The twin failures of highly irresponsible fiscal policy and a too-long accommodative Fed have brought us here." And no, it is not wrong to be frustrated at the excesses of the government.
Given the state of the world order today and US dollar being the reserve currency, a reversal of fiscal spending is not on the books, as it will create tremendous political instability and global chaos. The only thing that can offset the inflationary nature of government spending (which imo will never go down), is if we see a productivity surge through technological innovation that allows for higher efficiency and output. This is an optimistic scenario, but it is a possible route, and should this happen, the world order will continue status quo, as investors globally will continue to buy US Treasuries. In order for this to work out, we actually need to see private lending pick up that fuels the investment in the growth of these technologies.
The alternative scenario is a pessimistic one (at least in the intermediate term), where the US government continues to borrow and growth remains low. More and more institutions will start to diversify away from USTs to other safe haven such as gold. This lays the foundation that the world moves away from the dollar hegemony to currency that is actually scarce. This is net positive for humanity long term, but in order for this scenario to play out, it would require a change in world order, which could be trigerred by a war or some other catastrophic events. While short term, it will be terrible, the world order that is built on a currency that is scarce, divisible and fast will curb government excesses in the future.
Amen
Congrats on getting Substack Featured! Well deserved!!!
Thank you very much. Onwards and upwards to both of us!!
There’s no such thing as too much masala chai! Although at some stage sooner rather than later there will be much too much US Government debt…so print more dollars or let the UST market go to hell in a handcart? You know what they’ll do don’t you?
I believe that the US government is get its mess under control... that's a joke.
You said it right unlike masala chai, there is something of too much government debt. And the government will continue to borrow and should there be further deterioration in credit quality, the Fed can always accommodate by devaluing the currency. Unfortunately, Fed performing QE, when foreign buyers are selling US Treasury bond and inflation is higher than average, will be a new world order for the US economy altogether.
Though Nixon devalued the dollar in 1972. The new world order train is already up to speed.
100%
I think inflation has plateaued and is moving as per the Fed’s projection, at least for now.
For now, yes. I would agree. But then again, the economy is a dynamic machine and it has never worked out according to the Fed's projections in the past. But so far, the Fed is still in business. But, I think over the next quarter, we should see the economy move according to Fed's short term projections.
Congratulations Amrita. I've been following your work for some time and I think this is well deserved. And Happy Dewali!
Thank you Sully. I know you were among my first 50 subscribers when I started this newsletter. Thank you for showing your support and always asking such great questions. Happy Diwali to you too.
Great article Amrita :-)
Thanks Michael!!
Thank you for the concise set of scenarios. How would you handicap the probabilities of the three outcomes?
I would say that there is a 75% chance that either Scenario 1 or 2 plays out, where inflation remains higher than average and/or continues to surprise on the upside. Scenario 3, which is the most optimist scenario has a 25% chance of playing out. In order for Scenario 3 to manifest, we would need to see an outsized impact from productivity surge that offsets the ongoing inflationary effect of rising government debt. The timeframe I am thinking is over the next 3-5 years.
I’m surprised the USA isn’t bankrupt. 🤔
If it were any other nation in the world, it would be bankrupt. But since the US dollar is the world's reserve currency, which means it is used for the majority of international trade settlements and transactions, it bestows a unique power to the US, such that it can continue spending and borrowing, and investors all over the world and in the US (institutions, foreign central banks, retail investors, et.) buy the debt, because it is considered to the "risk-free" asset. In other words, the idea is that the US government will never default. Once that notion starts to change and get questioned, will US run into trouble. But there is still quite some time before the madness comes to a stop.
I have heard a few experts talk about this and that the dollar is actually fairly stable right now. Let’s pray and hope for a good future!🙏🤗✨ Thank you!
It is and I believe will continue to be unless our politics continues down this dismal path for decades
The problem is we need a new reserve currency and if you look at China almost every single metric US comes on top. We have the bread basket for food security, shipping lanes, and roads far more efficient than the rest of the world, also our energy independence.
Our Technology is far superior also our Navy controls and secures global shipping lanes and is 10 times bigger than the next Navy. Let's see someone else do this, securing global shipping lanes.
Then Demographics if you think we have a problem. China is an outright disaster over the next few decades.
My general point is I disregard Dailo's view that the US will likley have a collapse based on History as history never had anything close to the economic system we have today good or bad.
Everything is relative and another Country needs to excel on a multifront basis to even be considered a Country to replace the US dollar. I don’t see anything currently that says the US is going to get replaced at all. The strengthening of the Brics is one thing i’m watching closely here though.
Watch out for the EURO. Its steady gaining prominence and got next, maybe as THE reserve currency.
No, I dont think so.
Precised, accurate informations as always ❤️ you know what the say in Europe... USA has the hiccups and Europe has pneumonia.. I would add the Middle Europe the do way worse first time ... I included those countries cause of immigration and from Ukraine and the Noth Africa
You said it well. I gotta remember this "usa has hiccups and europe has pneumonia". very accurate and catchy.
unfortunately .... yes, Europe has been preparing so they say, but Eastern Europe i doubt it...
Hi Amrita. You mention future inflation expectations declining based on productivity growth. Do you see any potential reasons for a sharp productivity gain in the U.S. economy?
Whether it is sharp or gradual, I don't yet know. But I do very much believe, that we are in the early stages of unleashing productivity gains from AI and it will definitely grow from here on. The question is a) given the private sector has to absorb government debt, how much incremental room does it allow for it to invest effectively in income producing investments/technologies? b) will the productivity gain from AI and other technologies be sufficient to offset the inflationary pressures related to government spending?
Thank you for this guidance.
I am glad you found it useful.
Congrats on being a featured publication. 🥳🤩 It sounds like you had a lovely Diwali 🪔. I’m glad you had time to rest and recharge.
Thanks Elaine.
Amrita, Im leaving my answer on your note here... I couldn't leave it up there cause system didn't let me..
take care )
I'm sorry, I was sleepy and half-conscious, I don't have time for everything, I just can't do it) but I am grateful and obliged for the fact that you write so well in terms of knowledge, research and writing skills, I trust that what I read from you is 100% well thought out and you also include details that are important) that was about 5 am when i tried to get that fragment )))) that's why I scrapped it
I need to read all ))
Thank you Hannah for your kindest words. Happy to answer any question you may have.
Welcome back Amrita!
Just so that I understand, what does it mean the U.S. credit rating has gone negative? It's still AAA, right? Does the 'negative' label imply a possible downgrade in the future?
There are 3 main ratings agency: Moody's Fitch and S&P. USA was amongst one of the elite countries up until August, when it had perfect AAA rating across aa 3. In August, Fitch downgraded US credit to AA+. So, while this is technically a "downgrade", it is still investment-grade. What happened on Friday last week, was that Moody's lowered their "outlook" on US credit to negative, did not touch the actual credit-rating (probably because of political pressures). I think the fact that USA credit got downgraded twice in a year definitely lays out the foundation for future downgrades, which will wreak havoc in the bond market. As long as fiscal deficits and inflation remain high, chances increase that US credit may continue to feel the heat.
Welcome back
Thank you Paul.
Do you recommend getting Duolingo?
To learn a new language or buy the stock?
I have no small ideas only weird fun ideas.