“So far this fiscal year,” the Federal Deficit Tracker helpfully informs, “the federal government has run a cumulative deficit of $2.1 trillion, the difference between $2.6 trillion of revenue and $4.7 trillion of spending.” In 2020, the U.S. Treasury auctioned $19.6 trillion in new government debt. Some of this debt represented new spending while some may have replaced maturing treasuries that paid out (roughly one-sixth every year). Assuming conservatively that 2022 spending will roughly match 2020, the government will be forced to borrow approximately $20 trillion at market rates.
Now, assume for the sake of discussion that the Federal Reserve is serious about a long-term inflation target of two percent. Assume that the recent five percent inflation is both real and, left unchecked, a long-term condition. If the Federal Reserve wants to curb inflation, it will need to raise interest rates to get ahead of the five percent inflation. That means that the service on the new $20 trillion of treasuries issued in 2022 will go from between 1.5 percent and 2.5 percent to around seven percent.
Historically, a modest interest rate increase would not be sufficient to reverse inflation but let’s assume the Fed starts conservatively. The difference between paying two percent on $20 trillion and seven percent is an additional $1 trillion a year. If interest rates go up to just seven percent, the federal government will need some combination of spending cuts, increased taxes, and increased borrowing to pay the additional interest on the debt. If we eliminated our entire defense budget ($705 billion), we would still need an additional $300 billion just to pay the new interest obligations every year.
Everybody knows a day of reckoning is coming. Google searches for articles about “inflation” have surged. A number of prognosticators have begun to urge Americans to make heavy bets on inflation hedges such as bitcoin or gold. Institutional investors appear to be attempting to corner the market on residential homes. Will the Fed just let inflation rip or will it impose the kind of austerity that Greece went through? We really don’t know the answer.
Conventional wisdom holds that moving cash into gold, real estate, and cryptocurrency will protect wealth from hyperinflation. Maybe. But maybe not. Because the coming crisis might not just be an inflation problem. It might also be a huge liquidity problem as interest rates skyrocket.
Anything that depends on debt to support purchase prices, such as real estate, might move lower as buyers lose purchasing power in direct proportion to the rise in cost of borrowing money. You may regret that big fancy house if the housing market crashes again.
In my opinion, the biggest problem for the average American will be cash flow as Americans get crunched between higher taxes and higher costs. Without some cash set aside for emergencies, Americans facing sudden unexpected costs could be forced to borrow at higher interest rates or pay tax penalties to withdraw from retirement accounts.
So rather than borrowing against my house to buy some crypto, I’m thinking smaller. Instead of trying to catch the latest financial craze, I say work on your cash flow. Find a side hustle like a part-time job. If you can learn a trade such as welding or plumbing, that skill can help reduce the costs of owning a home. Then stay current on maintenance of your car, your house, and yourself. Oil changes and tire rotations might seem boring. But they reduce the likelihood of a sudden catastrophic expense.
But for my money, nothing beats good dental maintenance. Emergency dental work can be painfully expensive and is often not covered by insurance. Brushing with flouride toothpaste has one of the best cost-benefit ratios of any daily routine. Additionally, a little light exercise—including some safe exercises to strengthen your back—can delay or prevent a disruptive episode of back or joint pain.
Maintain your relationship with your spouse. A routine walk around your neighborhood with your spouse can shore up the emotional strength of a relationship that, if it fails, leads to catastrophic expenses. Deferred maintenance on your house, your car, and your relationship can be like another form of debt. The more you can fix, repair, and maintain now, the less you will have to replace when prices are soaring. Don’t you wish you had fixed your deck before lumber prices went through the roof?
Laugh if you will. But high-interest debt will destroy lives in the coming Great Crunch. The best way to ward off debt is to protect your cash flow. Make more money. Spend less money. Retire as much debt as you can. Keep up with your maintenance. It’s not investment advice but it might just get you through what’s coming.