Foreign ownership of American debt is a clear signal of the United States’ fiscal nightmare. Since January 2021, national debt has increasedby $7.3 trillion to $35.6 trillion.

However, foreign ownership of U.S. government debt has increased by only $1.2 trillion. Foreign demand for Treasury securities has slumped from 90% of net issuances in 2005 to 10% in the 2021-2024 period, according to the Congressional Budget Office.

It is also substantially below the average from 2019 to 2016, which was close to 50%.

Furthermore, the status of safe assets in U.S. treasuries has declined significantly. Between 2008 and 2009, foreign investor demand exceeded 100% of net issuances. It barely reached 80% in recent crises, including the 2020 pandemic.

Central banks and investors globally are increasingly less confident about the fiscal responsibility and solvency of the United States government. I remember when holding U.S. Treasury securities was an unquestioned strategy in any investment portfolio.

Now, investors and central banks perceive that the U.S. debt is not the safest asset, and the fiscal irresponsibility of the government will make it less attractive.

This is evidence of the gradual loss of the currency’s reserve value status, and the erosion of confidence has been steady and consistent, even with a stubborn Federal Reserve disguising the reckless indebtedness of the government and a global monetary system that still uses the U.S. dollar as a relatively safe collateral.

Three alarm bells

Central banks all over the world are adding gold to their reserves instead of more U.S. dollar-denominated sovereign debt. In the past five years, many global central banks, including the Chinese and Indian ones, have rebalanced their U.S. dollar reserve holdings in favor of gold.

For several years, while China reduced its U.S. debt holdings, Japan was purchasing more, offsetting the Chinese purchase slowdown. However, Japan has also reduced its portfolio of U.S. treasuries, trying to maintain the yen afloat.

In the past twenty years, every new dollar of government debt yielded less than 60 cents of nominal GDP

If we look at the fiscal multiplier of U.S. debt, it is simply atrocious. In the past twenty years, every new dollar of government debt yielded less than 60 cents of nominal GDP, according to the Bank of America.

With accumulated inflation of 20.4% in the past four years, an annual government deficit of $2 trillion in a record tax receipt year, and a rising interest expense bill that now surpasses the $1 trillion mark, the United States is signing the three alarm bells of debt sustainability: the economic, fiscal, and inflationary limits of debt accumulation.

Economic limit: less return on debt. Each dollar of new debt brings less than 60 cents of nominal GDP growth, and the bloated administration and constant deficit spending create a crowding out effect that harms small businesses and families, who suffer the rate hikes and credit limits while the Treasury has the temerity of forecasting $16 trillion of new debt between 2024 and 2034 even if there is no recession. Massive accumulation of debt brings secular stagnation.

Fiscal limits: despite record tax receipts, elevated deficits, and accelerating debt. The deficit will not fall below $1.9 trillion per annum and the bill of interest expenses will only rise in the 2023–26 period, according to the Treasury’s own estimates.

Even if rates remain low and financial repression keeps real interest rates in negative territory, interest expenses and deficits will be astronomical

High taxes are not a tool to reduce debt; they are an excuse to justify rising fiscal indiscipline. France has the world’s highest taxation system, as well as an unsustainable deficit and debt to GDP. If you want to copy France, be prepared for stagnation, high unemployment, and rising social discontent.

Governments always think they can increase taxes further, but the United States fiscal limit is also obvious when we look at revenues in growth periods. No amount of tax hikes will generate sufficient funds to eliminate the deficit, let alone reduce debt. Furthermore, tax hikes lead to reduced investment and stagnation. Copy France, get French decline.

Inflationary limit: Despite record domestic oil production and the presence of highly efficient and competitive industries, the rapid erosion of the currency’s purchasing power in four years has left Americans impoverished and struggling to make ends meet.

If you think that socialism and more government intervention will bring prosperity and fiscal sustainability, look again at France. Inflation is another warning signal when CPI remains above an annualized 2% and services, shelter, and non-replaceable goods and services rise at an annual 4-5%. This is the real-time destruction of the currency’s purchasing power.

Unlimited repressive power

You may have read a few times that a monetary sovereign government can issue all the debt it needs because it has unlimited capacity to raise taxes and print money.

When you read that, they are literally telling you that the government has unlimited repressive power to take away your money and make the currency worthless. Issuing public debt means printing currency and making you poorer.

Central banks and investors all over the world are losing confidence in the U.S. government debt

Central banks and investors all over the world are losing confidence in the U.S. government debt, which is also abandoning gradually the confidence in the currency.

When politicians promise more spending and taxes to the rich, Americans should be extremely concerned. You will get less bang for your buck while paying higher taxes. Always.

Chinese stocks soared last week after the central bank unveiled the largest stimulus plan since the pandemic.

The comprehensive stimulus plan includes a special sovereign bond issuance worth two trillion yuan ($284 billion) this year, while the central bank will cut reserve requirement ratios by 50 basis points, freeing up about 1 trillion yuan ($142 billion) for new credit, adding a property market support package with a 50 bps reduction on average interest rates for existing mortgages, and a cut in the minimum down payment requirement to 15% on all types of homes, according to Reuters.

This plan has been considered insufficient by some Western investment banks, citing the example of the Next Generation EU Plan as something to consider. Fascinating, considering the disastrous result of the EU plans since 2009.

Therefore, the Chinese economy does not need a European-style stimulus plan. It is already the second fastest-growing economy in the world after India.

It may be growing at a slower pace than expected, but that is mostly due to external factors like the German recession, trade barriers in the European Union and the United States and self-inflicted property market challenges that are a consequence of previous excessive stimulus plans.

Difficult balance

The measures announced last week could be interpreted as an admission of the risks of large-scale demand-side fiscal stimulus, constantly demanded by a financial market that seems to ignore the disaster that those government spending plans are inflicting on the United States and European economies.

The Chinese government seems aware of the negative side effects of succumbing to the temptations of replicating the European Union strategy of never-ending stimulus plans. These inevitably lead to stagnation.

This is why the package announced last week differs significantly from the Next Generation EU Fund or the U.S. Build Back Better.

The stimulus plan aims to both ease credit availability and prevent risk accumulation simultaneously

The Chinese central bank knows it will be difficult to restore the property market without sobering and healthy supply-side measures.

Therefore, the stimulus plan aims to both ease credit availability and prevent risk accumulation simultaneously. It is a difficult balance, but the Chinese central bank knows that the most dangerous policy would be to announce multi-billion-dollar demand-side policies that ended backfiring, debilitating the yuan, and increasing the national debt.

The Keynesian mistake

Western investment banks and economists are constantly demanding a bolder package from Chinese authorities. Why?

None of those specialists has to deal with the overcapacity and monetary consequences of what ends up being a reckless growth-for-growth-sake policy.

China must understand that the Keynesian policies’ siren call is the recipe for stagnation. Therefore, it must address the property market challenges with a different perspective to avoid falling into the Japan trap, especially when the demographic component of the economy is cooling off.

The Chinese technology, green energy, and high-added value sectors are growing at a spectacular pace. Do not let the overall GDP figure fool you.

Every seven years, China creates the equivalent of the entire European technology sector

Every seven years, China creates the equivalent of the entire European technology sector. Chinese authorities know that another misguided demand-side plan will bring higher inflation, a weaker yuan, and more overcapacity.

Spending unwisely may help bail out some equity investors in the West but one of those factors benefits the Chinese citizens.

When China looks at the future, it should consider the monetary and fiscal implications, but also the purchasing power of citizens’ wages and savings.

It needs to avoid the Keynesian mistake and strengthen its gold reserves to boost the currency reserve value while directing specific measures to support the population, avoiding the dangerous debt accumulation of the 2008-2018 period.

Relevant but not fatal challenges

China will be the first economy in decades to sail out of a property slump with no recession. This is proof of why the Chinese government should resist the temptation of spending its way out of an overcapacity problem.

Repeating past mistakes may be a hallmark of unwise decadent economies, and I would like to believe that the Chinese government will be wiser.

China is a rich country, and Keynesianism always impoverishes its citizens. That is a luxury that China cannot afford. Furthermore, if China is trying to strengthen the yuan as a world currency and reduce the U.S. dollar dependency, it must erase the demand-side government packages that some insist they should impose

The Chinese economy’s challenges are relevant but not fatal. It has already cleaned up almost all the risky real estate developers’ exposure and has been able to strengthen the balance sheet of the banking sector despite significant slumps in the value of some assets coming from the origination of risky loans in emerging economies as well as the previously mentioned large issuances of risky commercial paper of real estate developers.

No government spending plan is going to generate the kind of real-economic return, high-added value investment required by the Chinese economy to offset external risks created by slowing emerging market economic growth, especially the credit risks of credit origination in some African and Latin American economies that used Chinese credit to disguise their lack of fiscal and monetary responsibility.

With a strict supply-side growth strategy, China can grow faster and stronger. When some investment banks demand a large public spending plan, they are setting a trap that would send China into Japanese stagnation.

I know why European and U.S. Keynesian economists want China to repeat the mistakes of the past and the atrocious plans of the developed nations.

When these plans fail, they will inevitably argue that insufficient money was spent and that the same measures should be implemented again. The result of Keynesianism is stagnation, lower real wages, and impoverished citizens.

China needs to strengthen its middle class, not erase it. China does not need a European-style stimulus plan and should stick to strict supply-side prudent measures because that will be the only way to support the yuan’s purchasing power and make the middle class thrive.

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The Federal Reserve’s decision to cut rates by 50 bps is inconsistent with the FOMC assessment of a “solid” labor market, modest growth, and “no sign of a recession or downturn.”

If there was no sign of a recession, why cut rates when headline and core inflation remain significantly above the Fed’s target?

Furthermore, rate cuts incentivize debt and could drive energy prices higher as leveraged bets and margin calls become cheaper to finance. We must keep in mind that the energy component was the driving force behind lower annualized inflation.

Only if the Fed’s objective is to bail out the Treasury can we justify a 50-basis point rate cut, given that the annual inflation for shelter and services is above 5% and unemployment stands at 4.2%.

Despite the Fed’s concerns about a slowdown in employment, rate cuts are unlikely to significantly alter the labor market trend, as businesses are unlikely to incur additional debt for hiring, especially given the record levels of consumer credit card debt.

Additionally, the Fed knows that this rate cut will have a limited impact on mortgages and credit supply.

Rate cuts are not a signal of a healthy economy

We have seen two instances when the Federal Reserve has started a rate cut cycle with a 50-basis point cut, in 2007 and 2001. Both times, the rate-cut cycle preceded a recession and a significant rise in unemployment.

It makes sense because rate cuts are not a signal of a healthy economy, but rather the manifestation of a weak one.

Fed rate cuts are there to bail out the government and allow it to borrow at a low cost. The Fed knows that the transmission mechanism of rate cuts into the real economy is slow or imperceptible when employment, consumption, and investment have already started to show a slowdown.

The Fed was alarmed when they saw the two-year government bond yield reach five percent as the deficit climbed to $2 trillion and public debt surpassed $35 trillion.

The rate cut is a disguised bailout for a government that spends $1 trillion in interest expenses

The Fed is supposed to focus on unemployment and price stability, but they cannot ignore the fiscal nightmare that the government is creating. The rate cut is a disguised bailout for a government that spends $1 trillion in interest expenses.

It does not matter. Rate cuts may disguise fiscal irresponsibility in the short term but cannot stop the deficit madness. Those who say that debt does not matter as long as interest expenses are manageable should keep in mind that Japan dedicates almost 25% of its budget to interest expenses despite exceedingly low bond yields.

When sovereign bond yields disguise the solvency and responsibility of the debt issuer, the result is not a crash but secular stagnation. The sovereign bond bubble bursts as the currency’s purchasing power is destroyed, eroding real wages and deposit savings.

Labor market

To justify the rate cut, the Fed has taken advantage of a poor labor market and the recent massive downward revision of 818,000 jobs. However, Jerome Powell reiterated that he saw a “solid” labor market.

They are either lying about the reason to cut rates or about the strength of the job figures, or both.

Markets are adequately discounting the current level of unprecedented fiscal irresponsibility, which will become even worse if Kamala Harris wins the elections

As a result, market participants ignore the alleged prudent messages of the Federal Reserve because the Treasury is telling them another story. In the Treasury’s own estimates, debt will rise by $16 trillion by 2034.

Investors understand that a fiscally irresponsible government, which will continue to incur unsustainable deficits, has cornered the Federal Reserve. Therefore, the only solution ahead is Japanese-style financial repression and secular stagnation.

Powell does not see a recession. I understand why. It is easy to disguise what is already a private sector recession by bloating GDP and job figures with debt, public sector expenditure, and employment.

However, the consumer confidence index, which is well below 2021 and 2019 levels, the Russell 2000 earnings and sales, the business confidence index, and the record levels of credit card debt all speak of a private sector weakness that is more than just a recession because it has been suffering for four years in an alleged growth economy.

The Fed does not have many choices

I must say that the Federal Reserve does not have many choices. Its independence has been compromised many times, especially since 2021, and now it seems that the governors have given up and simply accepted the fact that the Treasury will increase its imbalances in periods of growth and contraction.

The Federal Reserve has only modestly reduced its balance sheet. It still accounts for 25.6% of the U.S. GDP, or $7.1 trillion. In 2008, it was $1 trillion.

With persistent core inflation, elevated deficits, and high public debt, the United States is slowly going down Japan’s way

Chairman Powell announced “higher for longer” rates and decisive policy normalization at the beginning of 2024, abandoning the path of balance sheet reduction.

However, he ended the “higher for longer” policy eighteen months after announcing it. All this coincided with an acceleration in government debt accumulation.

With persistent core inflation, elevated deficits, and high public debt, the United States is slowly going down Japan’s way. This could lead to an unfavorable state of stagnation.

In a recent interview with CNN, Kamala Harris said that Bidenomics is working and that she is “proud of bringing inflation down.”

However, the Bureau of Labor Statistics published the latest CPI at 2.9%, despite annual inflation being 1.4% when she took office. Inflation is a disguised tax and accumulated inflation since January 2021, when the Biden-Harris administration started, has increased more than 20%.

Of course, Democrats blame inflation on the war, the pandemic, and the science-fantasy concept of “supply chain disruptions.” No one believed it, because most commodities have declined and supply tensions disappeared back to normality, but prices continued to rise.

As a result, Harris invented the concept of greedy grocery stores and evil corporations to blame for inflation and justify price controls. Is it not ironic? She blames grocery stores and corporations for inflation, but when price inflation drops, she proudly takes credit.

The reality is that the Kamala Harris plan, like all interventionist governments, creates and strives for inflation. Inflation is a hidden tax. Governments love it and perpetuate it by printing money through deficit spending and imposing regulations that harm trade, competition, and technological creative destruction. Big government is big inflation.

Inflation is the way in which the government tricks citizens into believing that administrations can provide for anything. It disguises the accumulated debt, quietly transfers wealth from the private sector to the government and condemns citizens to being dependent hostages of government subsidies. It is the only way in which they can continue to spend a constantly depreciated currency and present themselves as the solution. Furthermore, it is the perfect excuse to blame businesses and anyone else who sells in the currency that the government creates.

Kamala Harris will do nothing to cut inflation because she wants inflation to disguise the monster deficit and debt accumulation. In the latest figures, the deficit has soared to $1.5 trillion in the first ten months of the fiscal year. Public debt has soared to $35 trillion, and in the administration’s own forecasts, they will add a $16.3 trillion deficit from 2025 to 2034. It is worse. The previously mentioned figure does not include the $2 trillion in additional debt coming from Kamala’s economic plan.

Harris is aware that her proposals to impose an unrealized capital gains tax, an economic aberration, and other tax hikes will not generate the $2 trillion in additional taxes she seeks. So, she needs the Fed to monetize as much as possible, eroding the US dollar’s purchasing power and making all Americans poorer in the process, only to blame corporations and grocery stores later. Furthermore, it is a way to present the government as the solution to the problem they create, promising the lunacy of price controls and enormous subsidies in a constantly depreciated currency.

It is a perfect plan to nationalize the economy in the style of Peronist socialism in Argentina.

Increase spending, deficits, and debt, making the size of government larger on the way in. Monetize as much debt as possible and cut rates to make it easier for the bankrupt government to borrow. When deficits balloon and inflation soars, increase taxes to the private sector and hike rates, which increases further the size of government in the economy. And you blame corporations?

Governments do not reduce prices. Governments create and perpetuate inflation by printing currency that loses value every year.

Corporations, landlords, and grocery stores do not create or increase inflation; they reduce it through competition and efficiency. Even if all corporations, grocery stores, and landlords were evil and stupid at the same time, they would not make aggregate prices rise and consolidate a constant trend of increases. For the same quantity of money, even a monopoly would not be able to increase aggregate prices. The only one that can make aggregate prices rise, consolidate, and continue increasing, although at a slower pace, is the government issuing and printing more currency than the private sector demands.

By admitting that the deficit will soar by $16.3 trillion in ten years in a budget that expects record revenues, no recession, and continued employment growth, the Harris team is conceding that they will strive for inflation to dilute the currency in which that debt is issued… and make you poorer.

Interventionists argue that the government does not have a budget constraint, only an inflation constraint, and can always tax the excess money in the system. Beautiful. This implies an increase in the size of the government during periods of economic expansion and further government expansion during periods of perceived normalcy. The government receives an enormous transfer of wealth from the productive sector, resulting in the creation of a dependent citizen class.

High taxes are not a tool to reduce debt. High debt and high taxes are tools to confiscate the productive sector’s wealth and create a subclass of dependent citizens.

Socialism redistributes middle-class wealth to bureaucrats, not rich to poor.

Massive government spending, constantly increasing taxes, and printing money. A plan to reduce the economy to serfdom.

Harris’ economic plan is not aiming to reduce inflation but to perpetuate it. Indeed, this economic policy mirrors Argentina’s 21st-century socialism, and it threatens the US dollar’s status as the world’s reserve currency. The government does not determine the level of confidence in a currency. When confidence in a currency declines, it does so quickly. Saying it will not happen in the US because it has not occurred yet is the equivalent of driving at 200mph and saying, “We have not killed ourselves yet; accelerate.”