How Will the US Service its Colossal Debt?
Sean Brazney: Hello! This is Sean Brazney, Sales Director with Monex Deposit Company. I’m here today with Jeffrey Christian, Managing Partner and Founder of CPM Group, one of the many analysts they have there at CPM Group, but again privileged to have you with us today Jeffrey
Jeffrey Christian: It’s good to be with you guys.
Sean Brazney: You’re coming out of a conference up there I know. So, I know you’ve been sharing all kinds of data. We’re looking forward to get some of that out of you as well. One thing I want to really touch base with is U.S. debt. It seems to be growing so fast that it’s hard to really keep your finger on how big that number is, but I’d like to address how big has the U.S. debt gotten? Also, one of the questions we get when we ask callers as to why you’re interested in buying precious metals, we get a common answer back in that they’re thinking that the debt has gone too far, we’re not going to be able to service that debt, if we start to raise interest rates, we’re going to raise them so far that it will bankrupt the company and crash the… or the country, excuse me, and crash the dollar, and that there’s no way to service it and the rates can only go so far. I thought it would be a great opportunity to really get some good data from you on how do we really service that debt?
Jeffrey Christian: It’s a real issue and it’s a real problem. Right now, we have, as of the end of May, $30.4 trillion dollars in Federal debt. People will talk about the unfunded long-term liabilities of the government and they’ll add that to it, but that’s kind of a strawman that fearmongers throw up, because they never look at the long-term assets and income that the government is projected to have too, which is a big offset, but looking at the snapshot of the fiscal balance of the U.S. government right now gives you enough reasons to be very anxious, $30.4 trillion dollars in debt and yes, that’s up from less than $20 trillion dollars six years ago, and it’s less… I like to tell the anecdote that Ronald Reagan ran in 1980 saying that the U.S. budget deficit of $58 billion dollars under Jimmy Carter and the U.S. debt, which was approaching $1 trillion dollars, were unsustainable and he was wrong, because 40 years later, we have $30 trillion dollars’ worth of debt and like a $1.3 trillion dollar deficit. Now, these possibly are unsustainable, but… and there’s a great deal of very valid reasons to have a lot of anxiety about the fiscal balance in the government, but… you shouldn’t be fearful of it. The good news is that we could get out of this. The bad news is that we would need political will as we had in the 40’s, 50’s, 60’s, and even into the 70’s that we just have not seen in this country, either with our political leadership or our people, since at least the 1970’s to solve it. It’s a solvable deal.
One of the things to realize is that you’ve got $30.4 trillion dollars’ worth of debt to payoff, you don’t necessarily have to pay it all off to turn the tide of expectations and I’ll tell you what I mean. In the 1993, 1994, we probably had about $14 trillion dollars’ worth of debt by that time.
So, over 14 years, we’ve gone from $1 trillion to about $14 trillion, don’t hold me to the $14 trillion, but it was about that, and when Bill Clinton came in, he ran on a platform of saying, “I’m going to cut taxes” and his financial advisor, Bob Rubin, my old boss, said, “You can’t afford to do that. You have to pay attention to your deficits and your debt so that the next time we get into a recession... you won the election in ’92, because of the recession in ’91, you have to get our fiscal house in order so that the next time we have a recession the government has the capacity to deal with it financially.” So, Clinton raised taxes and he started charging fees for all sorts of things that the U.S. government used to give away for free. He actually turned a $325 billion dollar annual deficit and growing debt into about a $250 billion dollar surplus for four years and paid down about a trillion dollars of debt. So, at the end of his administration, we still had $13, $14, $15 trillion dollars’ worth of debt, but we had shown the world that we had the political capacity and the actuarial expertise to figure out how much we could raise taxes and charge fees for everything from entering national parks to build services for people’s yachts and start paying this down, and the dollar rose very sharply during that period of time, because people saw that the U.S. economy has this tremendous capacity to generate wealth, and if the government is sensitive as to how it does it, it could pay down its debt.
So, we’re sitting here now with twice as much debt, $30 trillion dollars, and we need to do something with it and ever since the 1980’s, Fed Chairman after Fed Chairman has gone to the Congress twice a year for the Humphrey Hawkins talks and says the Fed deals with monetary policy. We can stanch the financial bleeding during a recession, but we cannot and we can sort of try to control the demand side by raising interest rates, or sucking money out of the economy by not… buying bonds, but we have very little control over the supply side of the economy… of the real economy, and we have no control over fiscal policy. Since Paul Volcker in the early 1980’s, Fed Chairman after Fed Chairman has gone to the Congress and said you have to get your fiscal house in order, and instead of getting the house in order it’s gotten worse and worse and worse and that is a problem.
Now, if the Fed were to raise interest rates really sharply, there’s a fear that it could bankrupt the government. The reality is that it probably wouldn’t bankrupt the government for several reasons. First off, the Fed whose major client is the U.S. government, would not bankrupt its client. It wants that client to go and it’s very sensitive to it. Second thing is that it can raise interest rates a long way before it got that bad. The third thing is that the Fed is the buyer of last resorts for U.S. Treasuries and is perhaps the largest buyer and holder of U.S. Treasuries rights now. So, as such, it has invested interests in making sure that the U.S. Treasury doesn’t go bankrupt and it also has the capacity to continue to finance deficits and growing debt. So, there’s a lot of reasons to be anxious, but the fear that is pervasive in some parts of the gold and silver markets is ill founded on a lack of understanding of the way fiscal and monetary policies are and have been operating really for the last 40 years.
Sean Brazney: What great, great data, when it comes to economic growth and looking out into the future. I am hearing a lot, not only out there online, but as well as with investors and callers that are calling in and stagflation is starting to come into the conversation quite a bit, that we may be headed for not the kind of growth that we hope for and need. Do you see a lot of risk for that moving forward?
Jeffrey Christian: I’m hearing the same thing that you’re hearing and again it goes to that whole issue… you should be anxious. If you’re not anxious, you’re not paying attention to what’s going on around you, but you shouldn’t be fearful. There are a lot of pundits in the mainstream media that really don’t understand what they’re talking about and there are a lot of fearmongers who are trying to sell gold and silver based on this idea that the world’s going to collapse, the dollar is going to collapse, the Treasury is going to collapse, and there’s a wide spectrum of economic and financial activities between where we are today and such a catastrophic issue. If you look at just recently, Jamie Dimon said, “There’s a hurricane coming and I’m not sure if it’s a run of the mill hurricane or a Superstorm Sandy, but people should be preparing for it.” Now, I have friends in Florida and when we were younger and a hurricane was coming, they would have a beach party with beer and steamed shrimp. They’ve survived dozens of hurricanes. It’s not the end of the world, but the next day you start seeing some people talking about oh…Jamie Dimon says the economy is going to collapse. No, he’s talking about a storm coming, like the ones that we saw in :2020, and 2007 to 2009 and 2001, and 1999, and 1987, and 1980. He was talking about a recessionary condition and potential financial market problems that could be severe, depending on how everything shakes out. He wasn’t talking about the collapse of the system and that’s the right approach to it and you should be looking at your assets. It’s very funny, because people are asking me what they should do today and I tell them, you should be reducing your debt, you should be buying gold and silver, you should be building up cash reserves, and you should look at your stock and bond investments and get rid of the weaker portions of it, and then I say, “This is the same advice we were giving our clients in 2005, 2006, in advance of 2008, and 2009, and 2010, and 2011.” That’s what you should be doing.
Sean Brazney: Great segue for me right here, Jeffrey with another reason to call Monex and get the most recent report by CPM, “Precious Metals For More Than Just Inflation”. You can get details like we’ve talked about today and much more extremely valuable info. Thank you for your time today Jeffrey.