According to a recent article, America is facing a dire financial situation described as a “fiscal death spiral.” The article presents three potential options to address this crisis: reducing spending, implementing burdensome taxes, or resorting to excessive money printing. Charles Hugh Smith, echoing Ray Dalio’s similar prediction, believes that this fiscal spiral could lead to severe financial collapses and chaos, as the unsustainable Ponzi scheme unravels. My article from a few days ago explores this topic further. The fiscal death spiral is seen as the most probable catalyst for the impending disorder, primarily due to the uncontrollable trends we are currently witnessing.
The deficit, which represents the gap between spending and tax revenues, needs to be financed somehow. With rapidly increasing expenditures and a mounting $32 trillion national debt that continues to compound, we are borrowing money to service old debts at the highest rates seen in the past two decades. Consequently, the deficit for this year is projected to reach $700 billion, surpassing last year’s figures. However, this is just the beginning, as a recession would lead to a significant decline in tax revenue. Historical data shows that during the dot-com recession, revenue dropped by 12%, while the 2008 crisis witnessed a plunge of 16%. This would further add $600 to $700 billion to the deficit. Combining these factors, we could potentially find ourselves facing a deficit of $2 to $2.5 trillion. To put this into perspective, that was the entire federal budget in 2008. In other words, if the government had ceased tax collection in 2008, we would still be left with the deficit we have today.
The question remains: Who would absorb such an enormous debt? Some of it may be taken up through business loans or municipal bonds, although this would deepen the recession by starving businesses of investment funds and worsening the financial situation of struggling cities. However, most of the debt would likely go unabsorbed unless interest rates on government bonds were significantly increased, draining resources from other sectors and further compounding the deficits. Alternatively, the Federal Reserve could resort to creating trillions of dollars out of thin air and buying up the deficit, but this would result in a spike in inflation.
Given these options, the article explores the possibilities of cutting spending, increasing taxes, or relying on inflation. However, Washington seems unlikely to prioritize spending cuts, as they have a tendency to favor excessive expenditures. As for taxes, the wealthy often employ extensive lobbying and accounting strategies to evade substantial tax burdens. This leaves the middle class as the primary target, representing roughly 40% of the nation’s income. If the middle class were to shoulder the burden, their taxes would need to be roughly doubled, resulting in marginal rates of 40% to 50%. However, such a proposal would likely lead to political backlash and render any supporting politician unemployed.
Consequently, the Federal Reserve and its money printing capabilities seem to be the last resort. If they resort to printing money to cover the deficit, as seen during the COVID-19 pandemic, inflation may not immediately skyrocket due to two factors: recessions lower prices as unsold goods accumulate, and financial panics have a deflationary effect as savings vehicles like bonds and loans collapse, reducing the circulation of dollars. Nevertheless, regardless of short-term inflation levels, the article argues that the country is trapped in an inflationary death spiral. The authorities will continue to delay the consequences for as long as possible, eventually squeezing the middle class until they reach a breaking point. In the end, this fiscal spiral will likely conclude in the same manner as previous ones: by printing exorbitant amounts of money. We will continue to monitor this situation closely. Thank you, and we look forward to the next update.