For the weekend read, Gary Alexander, Senior Writer at Navellier & Associates, offers the following commentary:
It is humbling to realize that it took our Republic 205 years to pay off its first trillion dollars in accumulated federal debt.. At the end of the 1981 fiscal year, on September 30, 1981, the Reagan White House announced that the US national debt had crossed $1 trillion for the first time.
At the time, I was working in the shadows of the Capitol, in Alexandria, Virginia, as a consulting editor for the Personal Finance newsletter and editor of Alexandria House books for KCI Publications. During our editorial meetings, we debated whether the Republic could survive debt as huge as $1 trillion.
Seth Klarman at Harvard: How to Stay Ahead of the Herd
Earlier this year, Seth Klarman, the value investor and manager of the $30 billion Baupost hedge fund, took part in a rare interview in partnership with Harvard Business School. During the interview, the value investor touched on many topics, including how he finds undervalued companies and where he sees opportunities in the markets today. Do not read further
Q2 2022 Hedge Fund Letters, Talks & More
That month also marked 10 years away from the gold standard after President Nixon closed the gold window on August 15, 1971. In my October 1981 edition of “Alexander’s Monthly Economic Newsletter” (AMEN), I quoted Lewis Lehrman’s litany of financial follies in the meantime. September decade 1971-1981:
Needless to say we were outraged by this huge level of public debtjust like about 2,000 participants at the 8e (November 18-22) 1981 Investment Conference in New Orleans – my first of 40 consecutive appearances.
Little did I know that the rate of federal debt accumulation would accelerate rapidly over the next 40 years.
- After 205 for the first trillion, it only took 15 years to reach $5 trillion in total debt, in 1996.
- It took another 12 years to add the next $5 trillion, reaching $10 trillion in debt in 2008.
- It only took 4 years to add the next $5 trillion, reaching $15 trillion in 2012 during Obama’s first term.
- It took five years to add the next $5 trillion: On September 7, 2017, the federal debt topped $20 trillion. The CBO’s projected debt would hit $25 trillion by 2027, but we hit $25 trillion in 2020.
We’ve seen a $10 trillion increase in just four years, from September 30, 2017 to September 30, 2021. The Congressional Budget Office predicted that we would only earn $5 billion by 2027, not $10 billion by 2021.
The main culprit for the 2020-21 gain was a flood of new money caused by federal spending. During the pandemic, Congress passed more than $5 trillion in additional spending bills, beyond normal spending:
This level of spending was grossly excessive. Beyond the second quarter of 2020, there was no recession requiring a “recovery”. The economy was booming at the end of 2020 and throughout 2021. Much of that money went to states that were in surplus and didn’t need the money. Paycheck ‘protection’ or relief went to tens of millions of families who kept paid jobs and didn’t need the money, working from home with savings from no travel and limited travel and shopping or restaurants. (My three children were all gainfully employed in high-paying jobs during the pandemic, but all three received federal “aid.”)
This injection of new money is the main source of inflation in 2022. The war in Ukraine has further pushed up food and fuel prices, but the trend was already well established before Russian tanks first arrived in Ukraine on February 24, 2022. The Fed dropped all monetary restrictions, which fueled inflation.
As this graph shows, our debt started to multiply after 2001, then more rapidly after 2008. Since 2008, the Fed has kept interest rates near zero for 10 of the 14 years, fearful of taking a lot of risk. Something destroyed our trust and our hope. The Fed launched several rounds of quantitative easing, as if America could not survive without free monetary injections at zero rates. There is a certain feeling that we are a fragile nation and that we cannot risk anything like normal interest rates at 3% or more, or normal (slow) accumulation of money.
In some ways, it seems, the terrorists have won, scaring America from traveling, scaring us from being the bold nation we once were. Our leaders pampered us with low rates, free money and checks we don’t needprotecting us from a disease that has barely touched young Americans of school and working age.
At America’s 246e anniversary, we have to wonder if we can reach 250 with such a fearful national attitude.
The best news I can tell you is that the debt burden is much worse in an overextended China.with a debt-to-GDP ratio of 300%, as well as Japan and most of Europe, so the United States is perhaps the debtor least likely to go bankrupt.