As you know, the Federal Open Market Committee (FOMC) voted to raise interest rates by another 25 basis points yesterday. The 8th increase in as many meetings since Jerome Powell and company admitted that this round of inflation is anything but “transitory”.

The 25 point announcement was expected. Some traders started speculating that the lower point increase was a sign the Fed will begin to pivot.

You’ll recall, we outlined yesterday why the lowest level of disposable income across even higher earners in the economy give plenty of motivation for the Fed to, in fact, turn the Titanic around to avoid the proverbial debt iceberg. In his post announcement press conference, Powell laid out his plan for continuing rate hikes throughout the year. No “pivot” in sight.

“But here’s the thing,” our friend and multiple Wiggin Session alum, James Altucher, wrote this morning, “the stock market doesn’t believe the Fed!”

On Powell’s remarks, the Dow jumped nearly 500 points, where it has stood for most of the day today. The dollar index, a measure of the dollar’s strength against a basket of first world currencies, went into freefall for the remainder of the trading day yesterday. The index rallied this morning until about 10:15 but has since fallen back.

“Stocks climb a wall of worry,” the old timers used to say. And it’s worth repeating, the stock market is not the economy. Given the deplorable numbers measuring the health of the American consumer, you can expect the next earnings season to look as ugly as the last. News of retailers and Big Tech shedding employees will dominate the headlines again.

On Wednesday, the newly elected House Speaker, California Republican Kevin McCarthy, met with President Biden to trade political capital while avoiding a default on the U.S. debt.

“It’s no secret that Rep. McCarthy,” Altucher writes, “had to make a lot of deals that some might consider shady or backroom in nature to secure the speakership. It’s also common knowledge that the divide between Republicans and Democrats has never been wider.” Altucher:

Regarding the debt limit, the United States hit its limit on January 19, 2023, and as you know, this means debates regarding the need to adjust spending and revenues are just around the corner.

Last year, the old Congress raised the debt ceiling to $31.381 trillion. But Treasury Secretary, Janet Yellen, has informed Congress that the U.S. has reached that limit. And to prevent a default on its obligations, the Treasury must begin using special measures like pausing new investments in specific government employee retirement plans.

The Treasury’s special measures will give Congress some time, but given that all the horse trading goes on behind closed doors in the Capitol, when the speaker and president reach a detente is anyone’s guess.

The untenable– and annoying– situation prompted this week’s Wiggin Session guest, Adam Baratta of Brentwood Capital, to ask: Are we on the verge of a “Debt Spiral”? You’ll see his reasoning in the essay below.

Enjoy,
Addison

An Essay by Adam Baratta

What’s in a ‘Debt Spiral’ anyway?

Have you ever wondered about the origin of certain words and phrases? I find learning the source of idioms can be informative and add new meaning.

Did you know that the phrase “meet a deadline” stems from the American Civil War? It refers to the line that was drawn 20 feet from the inside wall of the stockade where Federal prisoners were kept. Anyone who crossed the line was shot. The boundary became known as a deadline.

Did you realize that the phrase “the writing is on the wall” means that something unpleasant is going to happen and comes from the Bible? It refers to God’s punishment of King Belshazzar. God sent his hand to write the words “mene mene tekel upharsin” on the palace wall. When the King was unable to interpret it he called for Daniel to do so. Belshazzar couldn’t see the obvious warning that was apparent to others because he was too engrossed in his own sinful behavior.

Were you aware that the phrase “costs an arm and a leg” means that something is expensive and comes from the 18th century? It refers to the cost of a portrait painting based on how many limbs were to be painted. The cheapest option was to have only your head and shoulders painted. The price increased as the portrait became larger and included more limbs. Portraits that included arms and legs were the most expensive.¹

Now let’s apply these idioms to today’s world.

Congress has missed the debt ceiling deadline. Except nobody’s died, at least not yet.

The debt ceiling is a legal limit set by the US government on the amount of debt that can be issued by the Treasury Department.² There have been several instances where the deadline for raising the debt ceiling has been missed, resulting in the government being unable to borrow more money to pay its bills. The last time the debt ceiling was not raised before the deadline was in the summer of 2011, and led to a standoff between the Democratic-controlled Senate and the Republican-controlled House of Representatives. The impasse resulted in the first-ever credit rating downgrade for the United States and a stock market drop. Eventually, a deal was reached and the debt ceiling was raised, avoiding a potential default on the national debt.

Nobody is worried about defaulting on our national debt. It’s a nuclear bomb too inconceivable to consider. What gets lost though, and what too few notice until it’s too late, is that our debt now costs an arm and a leg.

As interest rates go higher into a rapidly rising total debt it becomes more expensive every day. The costs to service our national debt have exploded 40% higher in the last two years and now cost $736 billion.³ Our annual costs could hit $1 trillion by ‘24 if interest rates don’t go down from here.

Congress, like King Belshazzar, is too engrossed in their own sinful behavior to recognize the obvious warning. Our debt has hit an asymptote. It’s now too late to stop. To make matters worse, the Federal Reserve has too much egg on their face because of their “transitory” inflation call, and why they are not likely to lower interest anywhere soon enough to avoid a recession.

This means the writing is on the wall.

See what we mean about idioms? They tell us what we need to know and why we would like to introduce a new phrase, “debt spiral.”

We promise it’s one that we are all going to be hearing more and more about. Ninety years from now, the phrase debt spiral will be common vernacular.

The first thing that comes to mind for many when they hear the word spiral is a tightly thrown football. The tighter the spiral, the more aerodynamic and accurate the pass. Others may think of the spiral pattern engraved into the barrel of a handgun. The spiral groove causes the bullet to spin with rotational energy and allows the projectile to travel a greater distance with more precision.

Spirals indicate aerodynamic speed, control, and accuracy.

What is a debt spiral?

A debt spiral means that our debt, like a bullet, or a football toss with tremendous spin, is about to travel faster and is more likely to hit and kill the target. What, you may wonder, is the target? The global monetary system.

The main problem associated with a high level of the national debt is that it can increase the government’s interest payments, which can crowd out other important public spending such as infrastructure, education, and healthcare.

Additionally, a high level of debt can also lead to inflation and currency depreciation, which can further erode the purchasing power of citizens, particularly for those on fixed incomes.

Debt spirals occur when a country or an individual takes on too much debt, and the interest payments on that debt become too high to be sustained by the current level of income or economic growth. This makes it difficult to pay off the debt and causes a decline in the value of assets, which then leads to a vicious cycle of taking on more and more debt.

Once a debt spiral starts, it’s nearly impossible to stop. More money must be borrowed to pay off the costs of the existing debt.

We all know that Congress has missed the deadline to raise the debt limit. What few seem to have accepted is that, despite the extreme measures being employed by Janet Yellen and the Treasury Department to keep paying our bills which creates the appearance that everything is okay, the fact of the matter is that we are already dead.

Our debt bullet has spiraled. It’s picked up too much speed to stop or redirect. It’s headed for the bullseye of a monetary reset.

The image below was presented in the New York Times in August 2011 and was based on the book, This Time Is Different by Ken Rogoff and Carmen Reinhart. The book is about the history of financial crises and explains how a vicious circle of sinking confidence, rising borrowing costs, and rising debt burdens become debt spirals that pose grave dangers to the global economy.

I had the great pleasure of privately interviewing Ken Rogoff in front of our team at our Advantage Gold offices a few years ago. That interview took place as I was researching The Great Devaluation. Keep in mind, this was pre-pandemic and at a time when our national debt was only $22 trillion.

Much to my personal skepticism, Ken believed then that our debt growth was actually sustainable. His reasoning was that interest rates would remain at very low levels for a long time. This would keep our costs to service our debts within an affordable range.

Ken’s answers to my next questions informed much of my thinking.

I asked Ken what would happen if interest rates were to rise significantly. He said that “we would be faced with bad options of austerity or higher levels of inflation.” When I asked him which he felt was more likely, he said, “Developed nations always inflate.”

Ken Rogoff was in Davos at the World Economic Forum in early January. He was a featured speaker on a panel debating whether or not we had already hit a global debt spiral. Ken set the scene by explaining that the situation in emerging markets was “dire.”

He then went on to say:

“The $300 trillion question is what is going to happen to interest rates and to inflation? …I believe we are entering a world where inflation adjusted interest rates are going to be higher over the next decade…Does that mean there is going to be a debt spiral? No…Advanced economies don’t default, they inflate … Just having one thing go wrong in advanced economies won’t necessarily cause a debt spiral. You run into a problem when you are caught with your pants down. That’s when you run into trouble. If we have a deep recession, or a significant recession, and interest rates stay high, that’s when you really start to worry, not just about the debt of individual firms, but the country’s debt as well.” ⁴

Ken had said these same words to me in our offices in 2019.

“Advanced economies don’t default, they inflate.”

We should all heed Ken’s warning. Once we recognize that “inflating away the debt” is the only plan, we can let go of our fears and begin to take action with appropriate investment strategies. Once I became convinced of this truism, validated by Ken Rogoff, I began aggressively accumulating more and more physical gold.

I agree with Ken’s comments at Davos. We are headed for a long period of extended inflation.

While Ken was not prepared to say last week that the United States had reached a debt spiral, we should all pay attention to what he did say: “A debt spiral happens when you have a recession and interest rates stay high.”

Did you know that more than 2/3rds of economists at the 23 largest financial institutions are betting that we will have a recession in ‘23? ⁵

Higher rates + recession = another idiom, “down the toilet.”

When something goes down the toilet it is wasted or spoiled. Paying $736 billion to cover the costs to service our nation’s debt is literally throwing money down the toilet.

Did you know that the hemisphere in which you live determines the direction of the spiral in the toilet bowl when flushed? That’s right. The power of the gravitational pull determines the directional flow of the water.

Unfortunately, it doesn’t matter which hemisphere you live in, global debt is too high. The monetary system is spiraling down the toilet. We are in the midst of The Great Devaluation. Perhaps it’s time to buy gold and enjoy the ride.

That is unless we are somehow “saved by the bell.”

The phrase, “saved by the bell,” originates from the 18th century when people were so fearful of being buried alive they would be buried with a string attached to a bell on the surface. If, after being buried, the “deceased” came around, they could ring the bell to alert people.⁶

So, maybe we should buy gold, and also a string and a bell, just in case?

Best,
Adam Baratta
Editor-in-Chief
Brentwood Research

P.S. “Punxsutawney Phil”, the groundhog in question today, did in fact see his shadow this morning, which, lore has it, means we’ll have 6 more weeks of winter.