There’s no easy to way to put it, but the United States is going broke.
Yes, you read that correctly. This is not hyperbole meant to frighten readers about the current U.S. financial situation, but merely a principled assessment based on the numbers.
For those of you who keep a watchful eye on the U.S. national debt, you may have been wondering how long this act can go on. With the U.S. debt-to-GDP ratio at the highest level in history—with the exception of post World War II—the answer is not much longer.
The United States Is Financially Broke and Possibly Past the Point of Repair
The United States has always been more than willing to increase the national debt to fight and win wars, but it seems as though the U.S. has all of the debt without the global dominance and no immediate plans to scale back and contain the nation’s debt problem. In fact, the nation’s debt continues to grow.
A Large Deficit
In a recent article from the Weekly Standard, James Grant of Grant’s Interest Rate Observer stated that while the national debt has been increased and decreased on a regular basis, not until today
has there been a deficit so great that it appears there is no turning back. Grant also stated that it took the United States 193 years to accumulate its first trillion dollars of federal debt and, with the
Trump administration approaching $1 trillion per year in spending, annual deficits could exceed the trillion dollar level as soon as next year.
So, when is the debt-to-GDP ratio too high and when should citizens become concerned about
potentially ending up like Greece?
Well, as of right now, the United States is roughly $21.9 trillion in debt with a $20 trillion economy. In a recent survey conducted by expert economists Ken Rogoff and Carmen Reinhart, they looked as far back as 800 years for individual countries and empires who have either gone broke or defaulted on their debt. The survey resulted in a conclusion that the danger zone of an economy is one with a debt-to-GDP ratio of 90% because that is when a dollar of debt yields less than a dollar of output, creating a drag on growth, and the country is met with a major turning point.
The current debt-to-GDP ratio in the United States is 106%. In other words, based on the numbers, the country is heading toward a sovereign debt crisis.
So, how does the country get out of this predicament?
A Viable Solution?
For starters, tax cuts won’t do it and neither will structural changes to the economy. The only real solution at this point is inflation. Now, some inflation measures have been on the uptick, but with nearly $4 trillion printed dollars in circulation there has been hardly any inflation at all—certainly not enough to satisfy the Fed. Most of that money was only given to the banks who then deposited that money at the Fed in order to gain interest. The money never truly made it out into the actual economy to produce inflation.
The most viable solution at this point would be for the Fed to vote on new policy and announce that effective immediately, the price of gold is $5,000 per ounce.
A rise in the price of gold from roughly $1,230 per ounce to $5,000 per ounce is a massive devaluation of the dollar when it’s measured in the quantity of gold that one dollar can buy. This solution would allow major U.S. bank gold dealers to conduct “open market operations” in gold.
This would make them a buyer if the price hits $4,950 per ounce or less and a seller if the price hits $5,050 per ounce or higher, allowing money to be printed when they buy and reduce the money supply when they sell via the banks. The Fed would also target the gold price rather than interest rates and potentially cause a generalized increase in the price level.
We know what you’re thinking…how could any of this be possible? Well, it has already happened twice in the U.S. in the past 80 years.
The first time was in 1933 when President Roosevelt ordered an increase in the gold price of nearly 75% (from $20.67 per ounce to $35.00 per ounce) to break the deflation of the Great Depression, allowing the U.S. economy to grow from 1934-36. The second time was in 1971 when President Nixon ended the conversion of dollars into gold by U.S. trading partners and gold went from $35 per ounce to $800 per ounce in less than nine years, nearly a 2,200% increase.
The point we’re making is that history has shown that raising the dollar price of gold is the quickest way to cause general inflation and if the markets don’t do it, the government can and it works. We can’t say that any of this is going to happen, or that it will it happen quickly. But if the current system in the U.S. doesn’t prove itself to be sustainable, we could very quickly be approaching a recession at some point. The Fed will have to reach even deeper into their bag of tricks to come up with a solution.
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