The Government’s Reckless Spending Is Out of Control

It’s incredible how far Americans will go to wreck their finances. All for a little bit of extra fun on the weekend.

When I was getting my master’s in finance, I worked at a dealership that sold motorcycles, jet skis, snowmobiles, and other recreational vehicles. It was a way to pay the bills.

But every day, I came home feeling sick to my stomach.

I couldn’t believe the financial mistakes people were making. Mistakes that would cost them for years… in some cases even for the rest of their lives with bankruptcy.

My job was to send customers’ information to the loan department of local banks. The bank would then decide if they wanted to extend financing.

Almost every time, the banks said yes. But that financing often came with huge strings attached. That’s because these were high-risk borrowers.

More times than not, loan offers from the banks came back at 15% to 25% APR for a six-year loan. That meant borrowers would pay as much as $9,395 interest on a $10,000 loan.

That’s almost as much interest on the item as the item cost itself.

But they were promised a low monthly payment of a few hundred dollars. That sealed the deal for them.

I wanted to rip up the loan offer and send the customer home. It was madness.

I was young and naïve, so I even went to the store owner to voice my concerns. But he gave me the cold, hard truth…

If these people didn’t buy from us, he said, they’d drive a mile up the road and buy from the next dealership. In other words, it didn’t make sense for us to turn them away.

To give you an idea of how bad it was, one time a customer drove off on their new $20,000 motorcycle.

My boss looked at me and said, “That bike will be back in three months, and we’ll sell it to someone else.”

He knew the customer couldn’t afford the bike. But he couldn’t stop people from making huge financial mistakes. It wasn’t his place.

In theory, that should have been the banks’ job.

But the banks didn’t care. They were happy with all the bonuses they got for selling overpriced loans. They’d even deliver us pizza once a month for sending them business.

And the customers didn’t care, either. They only cared about that low monthly payment, and whether they could afford it today. Never mind tomorrow.

Every day for six months straight, I watched people commit financial suicide.

I’m telling you all this today not to rip on these poor souls… But because it highlights a massive problem in our economy – one that will erode the value of the money in your bank account.

The Buy Now, Pay Later Economy

For decades, our economy has been running on this same model: buy now, pay later.

It’s not just the average American who thinks this way. It’s the government too.

The government has gotten away with doing this for over a decade because we’ve lived in a world of almost 0% interest rates.

But now the bill is coming due. And it’s a huge one…

Take a look at the chart below. It shows the annual interest payments that the U.S. government will pay on its debt.

As you can see, surging interest rates have pushed interest payments to $1 trillion for the first time.

This year, 20% of government revenue collected from taxes will go toward paying interest on the debt.

That’s quite a jump from eight years ago when the government spent 12% of its budget on interest payments.

With interest rates rising, this number only gets bigger. The government could be looking at 5%-plus interest versus the less than 3% it pays now.

To make matters worse, 31% of all U.S. debt will mature within the next 12 months.

That means $7.6 trillion of debt will need to be reissued at market rates, which are much higher than they were just two years ago.

Take a look at the table below. It shows the going market rate for each maturity term.

In 2022, the annual interest paid on $7.6 trillion was $230 billion. At today’s 1-year rate, that $7.6 trillion will cost $388 billion per year in interest.

That’s almost a 70% increase in interest payments because of the higher interest rate environment.

And if you think there’s a chance that the government will tighten its belt and pay down some of this debt, don’t hold your breath.

Take a look at this next chart. It shows the U.S. deficit or surplus. The longer the red bar, the bigger the deficit.

As you can see, we’re on track for the third largest deficit in history. And we’re already at beyond any pre-COVID deficits. This only adds to the problem.

The U.S. government is now spending 44% of its gross domestic product (GDP) each year. The last time the government spent this much relative to GDP was during World War II.

The borrowing and reckless spending is out of control. And there’s no unwinding of this mess without destroying the value of the U.S. dollar.

The Final Collapse of the Dollar

Let me leave you with this last thought…

Remember how I told you many of the borrowers at the dealership were making terrible financial decision?

One gentleman who came into the store had a newborn baby. He was sleeping in his girlfriend’s basement and trying to make ends meet.

And yet he was convinced that taking out a $10,000 loan to buy a bike was a smart move.

When his girlfriend questioned the decision, without hesitation he said: “I’ll just declare bankruptcy when I can’t afford it.”

Well, the government right now is that guy with a newborn baby… living in his girlfriend’s basement and taking out a $10,000 loan for a new bike.

But unlike you and me, the government can’t just declare bankruptcy and start over.

If the government defaults on its debt, it erodes the confidence of the U.S. dollar, burns trust with other nations, and can even lead to war over unpaid debts.

So the government will just print its problems away instead. Just like it always does.

That will create more inflation, which reduces your purchasing power.

The market knows this is coming.

Just look at the performance of two assets that can’t be printed, bitcoin and gold. Both are surging as everyone is waking up to this massive problem.

Gold and bitcoin are up 10% and 108%, respectively, since the start of the year, while U.S. bonds are in the middle of their worst sell-off since 1787.

These markets are calling B.S. on the government. They know it can’t get out of this problem without printing even more money.

Most people will watch their purchasing power evaporate. But not you.

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The final collapse will reduce the purchasing power of the dollars in your wallet, checking account, and retirement savings.

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Regards,

Houston Molnar
Analyst, Palm Beach Daily