American Catastrophe, Part 1: The Inevitable U.S. Sovereign Debt Crisis

Most Americans and for that matter most humans in general suffer from what is known as Normalcy Bias. This is the human mind’s focus on the past as a set reality for the future, not as a forecast but a hard reality that is expected to continue indefinitely. The problem of course occurs when the future materializes and not only does not meet expectations, but comes on like an unstoppable tsunami into a human being's small world. Such radical shifts are often caused by wars, plagues, natural disasters, but also man-made financial disasters, most infamously the Great Depression that bankrupted and left millions destitute, paving the road to World War II.

This phenomenon can be seen in several case studies: the Japanese super earthquake of 2011 and the giant thirty-meter tsunami it sparked and people’s reactions to it being one. In one Japanese town, the only car to get out was driven by a Russian tourist, who seeing the giant traffic jam on the roads, decided to drive through the fields and took his family out of harm’s way. The rest of the people, as orderly Japanese trained from birth in how society should function and expecting that it should stay the same regardless of the situation, were swept away to their deaths by the hundreds.

Photo credit: U.S. National Debt collage

Uploaded to iStock by user Allkindza July 2011

The 2008 economic crash, or the Great Recession, is another prime example. This author warned many people that a crash was coming and to liquidate their assets into cash or better gold and not stay in stocks or even worse, speculative real estate. Raw land, particularly, large areas of fields, forests and such near various sized cities and towns, were prime lots to own and to speculate on during America’s 2000s building boom, pushed by a giant Fed-fueled property bubble and rampant liar loans or NINJA (no income or job, no problem) mortgage fraud, mortgages underwriting cheaply constructed houses at low rates that couldn't possibly last-- especially with the parallel price spikes for those over built houses. Even as the housing crash The Big Short contrarians predicted came, hardly anyone I knew listened to a Cassandra like myself, preferring to believe that everything would be “normal” as they had been taught. The truth was the opposite, nothing in the U.S. would be normal for the middle class again after 9/11 and the Global Financial Crisis.

Photo credit: U.S. Debt Danger

Uploaded to iStock by user wildpixel April 2024

And so, we find ourselves in 2024, and again, most Americans and for that part, European and Asian institutional investors who invest in America, as well as nations who keep their national reserves in the States, are living in a gigantic reality bubble. This, as America not only faces total economic collapse by the 100th anniversary of the Depression, but has already entered into two of the key phases as identified in 2008 by the Russian author of Reinventing Collapse: The Soviet Example and American Prospects, Dmitry Orlov: sovereign debt crisis and infrastructure collapse. Two other phases are pending and more than likely show up before the end of 2025, especially if an accelerated collapse can be hung around the neck of a second Trump Administration: hyperinflation and economic depression. I will cover each of these topics in future articles.

So, on to our main story of the day: Sovereign Debt Crisis.

What is a Sovereign Debt Crisis? In short, it is the inability of a sovereign state to service its national debt. What is Sovereign Debt? Sovereign Debt is the debt, in the form of Treasury Bills or other government obligations, that a government creates to raise money for key infrastructure projects, financing wars, paying a growing government payroll, or other fiscal outlays.

Debt in of itself is not a pure evil, it can be an effective financial tool, when managed correctly and effectively, especially with stable interest rates. For example, the State needs to desperately increase business development, so it takes on debt with which it builds roads and infrastructure for a business park that then spurs private investment and settlement in the area. This in turn, the increased taxes and population pays for the debt. We've seen governments like China successfully apply this formula, especially when the debt is primarily long-term bonds owned by state-owned banks--a key difference between Beijing and Washington's debt outlooks.

So everything is wonderful, right? Some Modern Monetary Theorists (MMT) even say that like the banker in the board game of Monopoly, Uncle Sam as issuer of the World Reserve Currency can never suffer a sovereign debt crisis. Wrong--humans being human, this is wishful thinking, the world has existed without reserve currencies before. With much of the population defaulting to barter--including in 1920s Weimar Germany and 1990s Ukraine with the world's oldest profession running rampant--thick rolls of cash or pockets full of silver prevail on the streets, with only gold bullion or bulk commodity settlement accepted at the sovereign level.

Politicians who see running chronic large deficits as an easy win and someone else's problem down the line continue issuing more and more debt. As they go down their pork barrel Wish List, the projects become more and more dubious if not outright wasteful and corrupt. Instead of a sure win of infrastructure that will serve useful purposes over decades, the more fringe the project the better chances the funds will be misspent or simply stolen. And there will be no generation of new wealth to pay them off.

Today Americans find themselves staring down the barrel of this very dread scenario.

In order to finance the American spending spree, to include $7 trillion in borrowing for protracted wars in Iraq and Afghanistan, the US government did what it always does, but at much higher rates: kick the can down the road by borrowing against the future. It did this by issuing Treasuries. Luckily, or maybe not, for the US government, the 2000s and 2010s saw record low short term interest rates, first after the Dotcom bubble burst and post 9/11 wars needed cheap money. Then came the Pandemic money printing blowout, where over a quarter of all U.S. dollars in existence were created since 2020. Some of these rates were at or near zero percent, especially during the Scam-demic--itself having all the hallmarks of a manufactured crisis taking advantage of easily inculcated quadruple jabbed and masked mass formation psychosis.

So in effect, the US government pocketed the free money in the form of Treasuries even after foreign sovereigns in the Gulf States and China stopped buying following the Global Financial Crisis/Great Recession. But the Fed and other Western central banks including the Bank of Japan kept snatching up the T-notes. Knowing that a dollar today is worth more than a dollar tomorrow and with almost zero percent interest rates, the proverbial pig went hog wild, wallowing in its own feces.

But, as with most things, all “good” things come to an end, and the end came quickly with short term interest rates returning to their historical averages in the 5%-5.5% range. The flood of cheap money contributing to soaring food and residential real estate prices prompted the Fed to finally fight the inflation monster it and the Treasury conceived and birthed. In 2021 Treasury Secretary Janet Yellen had placed most of the US debt into short-term instruments to take advantage of the cheap Fed money, and those mostly came due in 2023 and 2024. The reissued debt T-bills are now maturing and having to be financed at much higher rates.

This in and of itself would not be tragic, if the US government had not created so much debt in recent years.

If one looks closely, the US government created over $20 trillion in debt since 2010, more than doubling that monstrous post-Dubya and early Obama Administration debt. The only way the U.S. government can service the interest on the national debt is to either cut spending or create more debt. Cutting spending is a no-no, especially considering just how much spending must be cut touching sacred entitlement programs as well as the bloated national security spending on a U.S. military with over 800 bases worldwide and the alphabet soup intelligence agencies. Last year the U.S. government was already spending $658 billion on interest, up 38% from the $476 billion of 2022. That translated to 2.4% of GDP in 2023 dollars. This number is set to grow to $951 billion by the start of fiscal year 2025--starting October 1, 2024, or 3.2% of GDP. There is no way in any year that the spending junkies in Washington are going to cut the $658 billion--and the 2024 amount is even higher--so the alternative to is to create more debt to service the debt already outstanding.

But wait, you say, doesn’t this new debt also have an attached interest rate and does it not also need to be serviced? Why, yes it does. So, the service burden grows and more and more debt is created to service the ever growing pile of debt. The python of the Globalist American Empire (GAE) consumes its tail and ultimately dies from indigestion of its own entrails.

It's at this moment that the average investor as well as institutional 'bond vigilantes' would step in--if the U.S. were like any other government suffering from fiscal incontinence, such as say recent governments of Argentina. But the U.S. is still regarded by far too many Americans as well as Europeans and East Asians conditioned by a lifetime of vassalhood as 'Too Big to Fail' or TBTF. While most have continued to look upon the US as a “safe” investment, it is not. And there is tremendous inertial and peer pressure in the financial services industry as well as from booking bank reserves in USTs to regard the U.S. Treasury as a 'risk free asset', when it most assuredly is NOT. But just as the presidential debates have forced Joe Biden supporters who denied reality to face the facts that the man's brain is deep in dementia, and Biden is barely kept on his feet by a cocktail of Adderall and other "performance enhancing" drugs...so too, does the accelerating growth of US debt force all investors to confront the fact that US “risk free asset" the toxic UST poses a grave threat to the financial stability of the country and the world economy.

As of this lovely Sunday June 30, 2024, the US national debt is growing at an already astonishing rate of $1 trillion every 100 days. You can confirm this rate of exponential growth at the US National Debt Clock site for yourself. The U.S. national debt is already higher than it was compared to GDP at the end of World War II in the present 'peacetime' of hot proxy war with Russia--a war that Uncle Sam is decisively losing by attrition of his Ukrainian proxies. The main front in the Donbass is slowly crumbling but we have yet to see a defeat of overt NATO combatants on the battlefield all the way to the northern Dnieper and the cities of Kharkov and Odessa.

The overall rate of quarterly and soon monthly debt growth is only accelerating and will continue to accelerate straight into oblivion--with 'high demand for dollars' from countries that increasingly cannot afford to service their own USD denominated debts before defaulting maintaining the delusional climb into what ExitStrategy.World's co-founder V the Guerrilla Economist calls 'monetary hypoxia' in the stratosphere. Like an airliner that has depressurized explosively at altitude, the plane can keep flying for a while, but most of the passengers and crew are falling unconscious from lack of oxygen and left unpiloted, the aircraft will inevitably run out of fuel and crash. Eventually the sovereign nations that are exiting stage right for the BRICS+ will realize and find ways to no longer need USD for trade. This trend is not unrelated to investors inevitably starting to question how safe is servicing the US national debt. Especially if by some odd chance the deep state permits Donald Trump to win this November 2024 election.

A second go-around Trump would be a convenient target to take on blame for a looming debt disaster that hitherto had been downplayed or dismissed by the same shameless presstitutes like MSNBC's Joe Scarborough who told us Joe Biden's cognition was as sharp as ever. But even if the zombie-like Biden is dragged by his handlers over the finish line with massive mail-in ballot fraud or a replacement is miraculously found at the Democratic National Convention in Chicago, the financial end game is going to be the same. We'd just be quibbling over the details of the precise timing. The smartly offshored hedge fund billionaires and their bond vigilante traders with their wolf pack howls can be heard echoing through the forest. As with a staggering, injured elk in the wilds of Alaska, the wolfpack cannot be kept at bay forever from the wounded beast that is the U.S. government.

To use Ernest Hemingway's famous quip through one of his characters that bankruptcy happens slowly then suddenly, investors will start to demand higher interest rates for the risk of taking on more Treasuries. Which means even more debt will be needed to service those higher interest rates and the idolized Fed itself will come under pressure to raise rates--at the very moment much of Wall Street and the cratering commercial real estate industry will be screaming for more cheap money to stop stocks and properties from plummeting in price.

The feedback loop in this accelerated collapse scenario becomes self-feeding and will continue spinning in this doom cycle right up till the final act, when rates skyrocket so high, that the government can no longer create debt and sell it to the “suckers” er “investors”. As has been known to Zerohedge and other alt-financial media readers, many of the remaining large Treasury buyers already have proven to be simply cutouts for the Fed itself, shuffling USTs into all sorts of odd hedge fund cubby holes domiciled from Caribbean outposts in the Caymans and British Virgin Islands all the way to the Isle of Man and Switzerland.

We have seen this happen before in European countries, during the so-called PIIGS crisis of 2011 in Italy and Greece--but those countries had the rest of the EU to bail them out. And the people writing about the PIIGS most smugly and assuredly imagined such crises could never happen to Uncle Sam--the U.S. government and the UST markets are TBTF, just like the Wall Street megabanks were in 2008. Due to its sheer size, there is no one who can bail out the US, even if they wanted to do it. That means you must have an exit strategy, and having one to continue your life and business abroad is going to be much better than trying to stick it out when Great Depression 2.0 and associated desperation and crime washes like the 2011 Japanese tsunami over your hometown.

As for the politicians and the dying legacy media--don't worry about them. They'll blame (who else?) Donald Trump for accepting defeat in a war they started. Blaming Russia for defeating NATO in Ukraine and supposedly stoking dissent in the post-Western world won't keep all the angry peasants with pitchforks away from their perfumed offices.

Imagine U.S. interest rates jumping to 10 or 15% -- a level still lower than those reached at the height of the Volcker Fed's high-rate policies to tame inflation in the early 1980s. By that point, the US would be spending well in excess of $3 trillion per year to service that interest rate and selling new debt instruments would be almost impossible.

This than leads us into the next phase: hyperinflation, but that is a story for another day.