In every financial crisis since its inception in 1913, the Federal Reserve has bailed out America’s lending institutions…
With each crisis since then, the scope of the Fed’s intervention has expanded into new territory.
As a result of the 2008 mortgage meltdown, the central bank changed its mission from only buying Treasurys to purchasing mortgage-backed securities as well…
Its new quantitative-easing (“QE”) programs – providing virtually endless amounts of cheap money – created $4 trillion in new currency over the subsequent decade… to indirectly monetize ballooning government deficits.
Then, during the 2020 COVID meltdown, the Fed expanded into buying corporate bonds for the first time. It also launched a record QE program to subsidize $10 trillion in government spending, creating $5 trillion in new currency in just over two years.
The real problem, of course, is that these bailouts are financed with currency conjured from thin air – there is nothing intrinsically backing this money. In the past, foreign governments subsidized America’s endless bailouts by providing steady demand for U.S. currency and Treasury bonds.
But now, the world is waking up to the downside of becoming the lender of last resort to an insolvent borrower.
Today, the biggest credit risk of all lies with the U.S. federal government, and the currency it stands behind – the U.S. dollar…
The following chart measures the amount of nondefense-related government spending increases after the start of recessions.
As we can see, from the start of the short downturn brought on by the pandemic, spending increased by almost 35%. That’s 5 times the 7% increase during the 2008 to 2009 financial crisis. And it’s more than double the 15% bump in 2001…
In the next crisis, the Fed’s intervention will once again venture into uncharted territory.
When policymakers inevitably bail out America’s banking system, it will push America’s debt burden past the point of no return. This will lead to a bailout of the federal government, as the central bank is forced to become the buyer of last resort of U.S. government debt.
U.S. federal debt recently hit a staggering $33 trillion. That’s up an incredible $10 trillion in the last four years alone, and a more than 200% increase since the 2008 financial crisis.
And the debt bonanza shows no sign of ending. In 2023, the U.S. federal government is on track to run a $2 trillion budget deficit, or 8% of GDP. Take a look…
America’s largest creditors see the same data presented here. They’re coming to the rational conclusion that the country’s debts can never be repaid under the current conditions. We know this because these creditors are no longer providing the same support they once did for America’s finances.
For example, in the last few years, many of America’s largest creditors have become net sellers of U.S. Treasury securities. This includes China, which Apollo Global Management estimates has sold $300 billion of its Treasury stockpile since 2021 – likely a contributing factor to the record rout in Treasury prices.
This exodus – compounded by the Fed’s monetary tightening campaign – means that financing costs for the U.S. government are exploding. In 2022, the U.S. government spent a record $475 billion on interest alone, or roughly 10% of total U.S. tax receipts.
But the situation is about to become far worse.
Nearly one-third of the outstanding U.S. debt is set to mature over the next 12 months. By 2026, half of America’s $33 trillion debt burden must be refinanced. And that spells more trouble…
Since this debt was last financed, interest rates on Treasury securities have more than tripled, from around 1.5% to 5% today. Now, with $33 trillion in debt rolling over at 3 times more expensive financing costs, this mounting interest burden will consume an ever-greater share of the federal budget.
America’s spiraling debt and interest burden are approaching the event horizon – where no amount of tax increases or wealth confiscation will bring in enough revenue to repay the debts in any feasible way.
And as the world turns from buyers to sellers of U.S. Treasury securities, the Fed will become the ultimate buyer of last resort – financing America’s runaway deficits with even more printed money.
This will be America’s final bailout – one that will lead to the loss of faith in the value of the rapidly devaluing U.S. dollar. Once the Federal Reserve crosses the monetary Rubicon of endlessly financing U.S. deficits with printed money, the curtains will close on America’s status as the holder of the global reserve currency.
The following chart shows that the average lifespan for global reserve currencies is roughly 100 years. The dollar’s reign is just over the century mark now…
When endless currency devaluation destroys the wages of America’s lower and middle class, people will lash out…
Once the citizenry wakes up to the fact that endless government spending and money printing have made it impossible to put food on the table or a roof over their head, all bets are off. Crime, theft, and even violent revolution are on the table in this final act of what I see ahead… an event I’ve been warning about since I first documented America’s looming disaster in the film The End of America.
The most important thing you can do right now is upgrade your portfolio. Take a close look at every holding and ask one simple question: Are you comfortable holding this security through a financial panic? If the answer is not a resounding yes, the decision should be easy: Sell and raise cash.
For the first time in 15 years, short-term Treasury securities offer a real yield above inflation. Investors are no longer penalized for playing defense.
That cash will become worth its weight in gold when this crisis erupts, and world-class businesses trade down to fire-sale prices.
Regards,
Porter Stansberry
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Source: Daily Wealth