The US government has a weird opportunity with the national debt right now

By the time an army of 80,000 Russian troops invaded Ottoman territory in June 1853 at the outbreak of the Crimean War, the imperial finances of the Ottoman Empire were already a complete disaster.

The Ottoman Empire had once been the most dominant superpower in the world. But that had been centuries prior in the 1400s. By the mid-1800s, the Ottoman Empire had fallen far behind European powers like Britain and Prussia, and its economy was in such bad shape that it became known as the “Sick Man of Europe”.

Then the Crimean War broke out– one of the most pointless and easily avoidable conflicts in history– and suddenly the Ottoman Empire found itself with no money to fight.

That’s when British bankers entered the scene… led by Baron Lionel de Rothschild, who orchestrated a £3 million sovereign bond for the Ottoman Empire.

The bonds yielded 7.5% initially… which was considered a fairly high rate of interest. But it wouldn’t be long before the Ottoman government had spent all the money and needed to borrow more funds.

Even when the Crimean War finally came to an end in 1856 with Russia’s defeat, the Ottoman government kept borrowing. They had become addicted to debt, and fresh bond offerings were announced in 1858, 1860, 1862, 1863, and 1865.

By 1875, the Ottoman public debt was so large that debt service consumed two-thirds of tax revenue. A few years later, they had their own version of a government shutdown… because the Ottoman Empire had no money to pay the salaries of its soldiers and bureaucrats.

Finally, in 1881, the Ottoman government capitulated. They signed a treaty known as the Muharrem Decree which established the “Ottoman Public Debt Agency” (OPDA), an organization controlled by the Empire’s foreign lenders that would have supreme executive control of imperial assets and taxes.

The agency hired thousands of tax collectors who shook down Ottoman businesses and citizens… then turned over all the money to European creditors.

This is an all-too familiar tale that has been retold in different flavors throughout human history: a once dominant superpower spends irresponsibly and eventually becomes trapped under the burden of excessive debt.

With a $33 trillion national debt and $50+ trillion more in unfunded Social Security obligations, the United States is on a collision course with this same destiny.

I’ve written before that this fate is avoidable. It is technically possible for the United States to grow its way out of debt– if the federal government would only get its outrageous spending habit under control, and then prioritize economic productivity above all else.

The Treasury Department estimates that, when the current fiscal year closes at the end of this month, they will end up with a $2 trillion annual deficit. And they’re already projecting another $2 trillion deficit for the next fiscal year.

And those deficits are despite a record $4.5 trillion in projected tax revenue!

Bear in mind that, as recently as 2019, just four years ago, $4.5 trillion would have been more than enough to fund 100% of government expenditures… and even leave a bit of money left over to pay down some of the national debt.

And it’s not like the federal government was skimping four year ago. There was still plenty of room to make budget cuts.

Yet they’ve managed to expand the bureaucracy so much that, today, $4.5 trillion is nowhere near enough money to fund government operations. Not even close.

All they have to do to solve this deficit problem is go back to the level of government spending from four years ago. It shouldn’t be that hard.

Second, they have to prioritize economic productivity. This is critical. If the economy were to grow by 3% each year (after adjusting for inflation) instead of 1% to 2% each year, then the national debt would easily melt away over the next 20 years.

Today the national debt is more than 120% of US GDP– the highest level EVER, including during World War 2 when America was fighting Nazi Germany.

But if spending were to get under control, and economic growth average 3% again (similar to the 1980s and 1990s), America’s debt-to-GDP ratio would fall to less than 50% over the next two decades. The national debt would be a non-issue.

Again, this shouldn’t be that hard. Stop passing idiotic regulations. Stop punishing critical businesses. Stop undermining capitalism.

But this is not the sensible trajectory that America is presently on. Instead, the people in charge seem to be accelerating to the bottom as quickly as they can.

Even when the credit rating agency Fitch issued a dire warning about deteriorating US government finances, the White House responded with genuine confusion. They simply couldn’t understand why anyone would think there’s a problem.

These people are clueless. So it’s naive to assume that they’re going to fix anything.

I recently wrote about former Texas governor John Connally (who was in the vehicle next to John F. Kennedy when the President was assassinated in 1963).

Connally eventually became Treasury Secretary under Richard Nixon just as the US dollar was taken off the gold standard. And I wrote about how, with the dollar plummeting in value, Connally famously told European finance ministers that “the dollar is our currency, but it’s your problem.

Frankly, the same could be said about the US national debt right now.

Back when the Ottoman Empire defaulted in the late 1800s, its imperial debt was huge relative to Ottoman tax revenue and the Ottoman economy. But it was actually quite small relative to global GDP at the time– less than 1%.

So even when the Ottoman Empire defaulted, it didn’t cause a global crisis.

That’s not the case with the United States. At $33 trillion, the national debt is nearly a THIRD of global GDP. Plus, the dollar is still the world’s most dominant reserve currency. This means that nearly every sovereign government and central bank on the planet has exposure to the US dollar and US government debt.

A default on the national debt, therefore, would be catastrophic to the global economy and financial system.

In a weird way, America has a unique opportunity to tell the world right now, “It’s our debt, but it’s your problem.”

On its current trajectory, a US government default is inevitable… whether that means defaulting on foreign creditors, defaulting on promises to taxpayers (like Social Security), or defaulting on the obligation to maintain a sound currency– inflation.

(Remember that Social Security will need a multi-trillion bailout within the next 10 years, so that’s probably the upper time limit.)

If US leadership ignores this obvious fate, the rest of the world will spend the next decade devising an alternative financial system and reducing their exposure to US dollars.

In fact, this is already happening. And in ten years’ time, America could be left powerless, much like the Ottoman Empire in the late 1800s.

So if they were really clever, the US government could use the threat of default to call for a reset of the global financial system, now, while America is still relatively strong and in a position to demand favorable terms.

Unfortunately these people are not clever. They’re not forward thinking. And they’re not sensible.

So, most likely, we should probably expect them to continue driving the national debt higher until it becomes a global crisis over the next 5-10 years.

This is reason enough to have a Plan B.

Remember, we’re not talking about theoretical risks or hypothetical problems. We’re talking about major issues that exist right now. And the government makes them worse by the day.

The primary long-term risk over the next decade is the US dollar. Chances are very strong that there could be a debt default, sustained inflation, and/or a loss of reserve status.

Diversification is key. And that includes personal diversification (like having a second residency or passport), as well as financial diversification– especially high quality real assets.

More on this soon.

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