Even if an economic situation is not formally called a “bankruptcy,” that does not change the reality.
Every time the Government of the United States has faced an existential financial crisis in its history, it has chosen to change the rules rather than fully honor its promises — usually by replacing gold or silver with paper.
From the War of 1812, when interest payments were missed, to Lincoln’s Greenbacks, the gold clause nullification by Roosevelt in 1933, the end of silver redemption in 1968, and the closing of the gold window by Nixon in 1971, Washington has gone bankrupt five times in the past — often changing the terms of payment instead of openly admitting failure.
There is no doubt that these credit events were forms of (selective) default.
To claim otherwise would be like trying to unilaterally change the terms of one’s mortgage or credit card in U.S. dollars, so that one could pay one’s obligations in Argentine pesos or Zimbabwe dollars — and then pretend nothing happened.
Changing the rules of the game
The U.S. Government is essentially telling its creditors the same thing that Darth Vader once said:
“I am altering the deal. Pray I don’t alter it any further.”
As in Star Wars, the message is clear — Washington will change the rules whenever it needs to.
Creditors may get paid, but not in the way they were promised, and certainly not in the way they expected.
Today, the U.S. Government once again finds itself in an existential economic trap.
National debt is out of control, federal spending keeps growing, and interest payments on the debt have already exceeded $1 trillion per year.
At this pace, interest costs could soon surpass Social Security spending as the largest item in the federal budget.
The biggest expenditures are entitlement programs such as Social Security and Medicare.
No politician will cut them — on the contrary, they will continue to rise.
Tens of millions of Baby Boomers, nearly one-quarter of the population, are entering retirement.
Cutting benefits is political suicide.
Defense spending, already enormous, is also untouchable.
With the most unstable geopolitical environment since World War II, military spending will not decrease — it is increasing.
Welfare programs are likewise “untouchable.”
Why it is impossible to cut public spending
The only way to meaningfully reduce spending would be to cut entitlements, dismantle the welfare state, close hundreds of foreign military bases, and repay a large portion of the national debt to reduce interest costs.
That would require a leader willing to reinstate a republic with restrictions on political rights and suspension of the Constitution’s authority.
However, that is an entirely unrealistic fantasy.
It would be foolish to bet that such a thing could happen.
Conclusion: Washington cannot even slow the rate of spending growth, let alone reduce it.
Spending has nowhere to go — except up.
And tax revenues will not save the situation either.
Not even from tax revenue…
Even if tax rates reached 100%, it would not be enough to stop the growth of debt.
According to Forbes, there are about 806 billionaires in the United States with a total net worth of approximately $5.8 trillion.
Even if Washington could confiscate 100% of billionaire wealth, it would only cover one year of expenses — and would do nothing to stop the relentless growth of debt and deficits.
That means that interest costs will continue to explode.
They have already surpassed the defense budget and are on track to soon exceed all defense spending.
At that point, interest payments could consume the majority of federal tax revenue.
The old accounting tricks and fiat currency games will not be able to hide the reality much longer.
In short, the soaring interest bill is now a direct threat to the solvency of the U.S. Government.
There is no doubt that Washington will soon once again be unable to meet its obligations.
The question, then: What will the sixth bankruptcy look like?
The sixth bankruptcy will not be a dramatic one-day event like in 1933 or 1971.
It will be a slow-motion process — a steady devaluation of the dollar to cover a debt that cannot be serviced.
And as before, Washington and its media allies will never admit that it is a default.
Unlike the past, the United States no longer has obligations linked to gold or silver.
Everything is denominated in fiat currency, which the Federal Reserve can print without limit.
The mechanics are different, but the result will be the same: creditors will be repaid with money of far less value than what they were promised.
After the 1971 default, which severed the last link between the dollar and gold, the implicit promise was that Washington would be a responsible steward of its fiat currency.
The illusion of Fed independence
At the core of that promise lay the illusion that the Federal Reserve would act independently from political pressure.
The idea was simple: without at least the appearance of independence, investors would see the Fed for what it truly is — a financing arm for spendthrift politicians — and confidence in the dollar would collapse.
That illusion is now collapsing.
The government must continually issue increasing amounts of debt, while keeping interest rates low to control the explosive cost of servicing that debt.
Here is where the Federal Reserve enters the picture.
Cornered, Washington will force the Fed to lower interest rates, buy Treasuries (bonds), and initiate successive waves of quantitative easing.
These measures will devalue the dollar while destroying the illusion of Fed independence.
That is why I believe the collapse of the Fed’s credibility as an independent institution will define the sixth bankruptcy.
One of the clearest signs is Trump’s pressure to consolidate power over the Fed.
Let’s be clear: central banks have never truly been “independent.”
They exist to extract wealth from the public through inflation and redirect it to politically connected elites.
The independence of the Fed has always been an illusion — and now it is rapidly vanishing.
Trump is simply doing what any leader in his position would do.
No one believes that the Central Bank of China is independent of Xi Jinping.
If any nation faced a similar crisis, its central bank would obey government demands.
I believe that Trump will achieve what he wants with the Fed.
The Fed will bow to his demands, devaluing the dollar to keep the debt burden under control.
He will either force Powell to comply or replace him, filling the Fed with loyalists.
The result will be money printing on a scale never seen before.
Trump’s efforts are already beginning to pay off.
At Jackson Hole, Powell admitted that
“the shifting balance of risks may warrant adjusting our policy stance,”
implying that rate cuts are coming.
And indeed, they have.
The third mandate of the Fed, according to Miran
On September 17, the Fed cut interest rates by 25 basis points and hinted at further cuts.
Moreover, Stephen Miran, Trump’s most recent nominee for the Federal Reserve Board, is promoting the idea of what he calls the “third mandate” of the Fed.
Traditionally, the Fed has two mandates: price stability and maximum employment.
Miran’s proposed third mandate would require the Fed to “moderate long-term interest rates.”
In reality, this means that the Fed would openly finance the federal government by creating new dollars to buy long-term debt, artificially keeping yields low.
In other words, the so-called third mandate is a clear admission that the Fed is no longer independent.
It would become a political tool for financing government spending.
Without such support, the massive government spending would flood the market with Treasuries, driving interest rates sharply higher.
But with the Fed intervening, Washington can continue to borrow while keeping rates low — at least for a while.
The price, however, is the devaluation of the dollar.
Eventually, that devaluation will force investors to demand higher yields, further worsening the problem.
I believe it is only a matter of time before the Fed completely submits, dissolving the illusion of independence once and for all.
www.bankingnews.gr
Σχόλια αναγνωστών