From Forbes:

…A 2011 research paper from the Bank of International Settlements – a bank and research hub owned by 63 central banks from around the world, [found] when government debt-to-GDP exceeds 85%, future economic growth is reduced.

Now, the apathetic reader might shrug at this:

“So what? ‘Not as robust’ doesn’t sound like the end of the world. There’s still growth.”

Sure, but that’s missing the bigger picture.

***The jaw-dropping size of the federal debt-service snowball that’s now rolling down the hill

Our federal government owes the world $30.6 trillion dollars.

Unfortunately, when we’re speaking of numbers this astronomical, the enormity is nearly impossible to grasp. So, let’s add some context to give you an idea of just how mind-blowing this is.

Let’s say you have one million seconds.

How many days is that?

It’s about 11 days.

Meanwhile, one billion seconds would equal about 31 years.

And one trillion seconds?

That would equal 317 centuries…

Think of it this way…

If you turned the clock back 1 billion seconds, you’d be in 1991.

But if you turned it back 1 trillion seconds, you’d be ballpark 30,000 B.C.

Mind-boggling, right?

Well, that’s just one trillion…

Our government owes the world more than $30 trillion.

***Unfortunately, due to a pesky nuisance called “reality,” the government has to pay interest on this $30 trillion

And it’s quite a bill.

In 2022, federal interest payments will claim upwards of $400 billion, or about 7% of the national budget.

But as the Fed raises interest rates, it increases the size of the interest payments the government has to make.Any significant increase in short, medium or long-term interest rates can add hundreds of billions of dollars of interest to federal debt service.

Now, before we even get to the possibility of the Fed raising rates high enough to top inflation, our government is on an unsustainable path.

The Congressional Budget Office projects that annual interest costs will rise from almost $400 billion in 2022 to $1.2 trillion in 2032.

The Peter G. Peterson Foundation reports that this will take interest payments to 13% of entire U.S budget in 10 years (up from 7% today).

And again, this is without the Fed hiking rates to, say, 9% to kill off inflation.

But this 13%-of-the-federal-budget is nothing compared to what’s coming further down the road…

It’s projected that by 2052, net interest costs will make up nearly 40% of all federal revenues.

Source: Congressional Budget Office, Peter G. Peterson Foundation

Now, when our federal government has to spend 40% of its income purely on debt service… What’s going to happen to all the entitlement programs that were previously being funded with those dollars?

Will they be forced to shut down because of lack of funding?

Of course not!

Our politicians won’t cut them by a single penny. If they did, they’d be voted out of office by the masses who love free stuff. And, of course, the only thing that politicians hate more than fiscal responsibility is losing elections.

And sorry to beat the dead horse, but remember: This dire forecast doesn’t even include a fed funds rate that’s high enough to top today’s inflation rate!

If the Fed hiked rates in 1980-Volcker fashion, our economy would implode like a dark star collapsing in on itself. Our debt level is simply too enormous today.

So, what’s the answer?

Well, it’s a path that’s likely to resume late this year or almost certainly by next year…

Accommodative monetary policy.

In other words, the Fed will pivot back to its familiar position of “inflate or die.”

***The Fed doesn’t have a choice…so join in with its next liquidity-driven bull market

The Fed can’t allow short-term rates to climb high enough to kill inflation.

(The Fed is desperately hoping that resolved supply chains, as well as tough talk about bringing down inflation, will do the trick for it.)

So, it will take rates as high as it can, but eventually will be forced to reverse course.

We’ll likely see inflation come down some, but it’s not falling back into the 2% – 3% range anytime soon.

I imagine the Fed will find some way to justify a policy reversal so it maintains face.

Perhaps Powell will say something like: “Though our goal is and remains for inflation to return to our target 2% level, today’s level of [arbitrarily] 4.5% is a vast improvement over where inflation stood a few months ago. And in light of today’s softening economy, we feel this 4.5% inflation rate is low enough for a temporary policy shift to help support our nation’s businesses and workers.”

That “temporary policy shift” will be the Fed turning more accommodative to support the house of cards it’s created.

Of course, the stock market loves accommodative policy. So, look for the major indexes to resume a “juiced” bull market.

What I mean by “juiced” is a soaring stock market, but one that’s fueled by government stimulus. It will be a liquidity bull, not an organic bull.

To see what this looks like, below is a chart of the M2 Money Supply (a measure of money supply that includes cash, checking deposits, and easily-convertible near money) and the S&P 500.

The M2 Money Supply is the black line. Notice it surging in the wake of the pandemic (circled in blue), which immediately resulted in the monster surge in the S&P (dotted pointed line).

Source: StockCharts.com

What this is showing us is that the post-pandemic bull market was basically just liquidity from the Fed flooding into stocks. It wasn’t based on organic, economic growth.

But whether organic or liquidity-driven in the future, it won’t matter – when the Fed pivots back to stimulus, you’re still going to want your money in stocks in an effort to preserve the purchasing power of your wealth.

Inflate or die.

“Hold on, Jeff. You’ve sounded pretty bearish here in the Digest for a while. What about a stock-market crash? Isn’t today’s market still potentially very dangerous to your portfolio?”

That’s still my opinion. And for all I know, there’s another big leg-down in front of us sometime later this year. But I’m talking about what comes beyond that.

The survival of the U.S. economic house of cards is the ultimate, pinnacle requirement.

It will win out. It has to win out, or else everything else breaks.

It’s “inflate or die.”

And the side effect of “inflate or die” is an inflating stock market.

***So, at some point within the next 18 months or so, the pain will get too great

The Fed will be forced to pivot back to accommodative policy.

They’ll provide some justification – deteriorating employment numbers or economic data that’s softened to a desired level – something along those lines.

While that may be true, the bigger, underlying reason is that the federal government can’t absorb the cost of higher interest rates for a sustained period.

In any case, a pivot will come, ushering in a new bull.

Beyond now and then, who knows where the market goes? Maybe we’re already beyond the low. Maybe it’s another 25% down. We’ll navigate it with you.

But looking big-picture, the U.S. is in trouble. We’re a nation defined by gluttonous debt, financial irresponsibility, and expanding entitlements.

And because we’re past the point of being able to change this – which means the great charade must go on for survival – a bullish pivot from the Fed is coming.

The only questions are: “When?” and “How much will the Fed break between now and then?”

We’ll keep you updated.

Have a good evening,

Jeff Remsburg

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