Ep. 161 - The US Debt Clock
Debt, Inflation, and Hyperbitcoinization ⏰
In this episode, Mattimore explores how the growing US debt burden is affecting financial markets, public policy measures, and individuals…
Topics Discussed:
Understanding the debt burden
Servicing interest on the debt
Who holds most federal debt
Elon’s tweets on Debt to GDP
Jack’s tweets on Hyperinflation
Food, Housing, Energy prices
3 options to deal with debt
Scylla and Charybdis
Purchasing power of USD
Future Scenarios:
Worst case scenario
Best case scenario
Most likely scenario
Thanks for tuning in 🔭
Episode 161 Transcript
Mattimore (00:13):
Welcome to Hence The Future podcast. I'm Mattimore Cronin. And today we're discussing the US debt clock.
Mattimore (00:19):
There's been a lot of confusion around US debt, how much it matters, how much I, as an individual, should care about how much debt the US holds, how that affects inflation. So I wanted to do an episode today where we just lay out the facts of how much debt the US has, how fast that debt is growing, and what the various options are that the US has to repay the debt and to reach some level of financial stability. And at the end, we'll get into the worst case scenario, the best case scenario, and the most likely future scenario.
Mattimore (00:52):
There's a really great website you can go to called usdebtclock.org, where you can see the total amount of debt as it's being accumulated by the US in real time.
Mattimore (01:01):
So you can see here that the US currently has $29 trillion in total debt. And each year the US collects about $4 trillion in tax revenue, but spends about $7 trillion in spending. So that gives us a budget deficit of about $3 trillion per year.
Mattimore (01:19):
And Elon Musk recently tweeted about this, which got quite a lot of attention on Twitter, where he tweeted that "US national debt is $29 trillion, or $229,000 per taxpayer. Even if we taxed all billionaires at 100%, it would only make a small dent in the total debt the US holds. So obviously, the rest must come from the general public. That is basic math. Spending is the real problem."
Mattimore (01:45):
Elon also points out that, "The federal debt to GDP ratio was only 56% in the year 2000. Now it's 126% and climbing fast."
Mattimore (01:55):
So why does this matter? Why should we care about the debt to GDP ratio for the United States?
Mattimore (02:03):
Well, we can see that the total amount of public debt has increased quite drastically. And especially once the pandemic hit, it's now been increasing at an even faster rate than it was before. Gross domestic product, GDP, basically the amount of economic output the US has each year, has been increasing. But it dropped significantly in the 2020 pandemic. And it has been increasing since then, but not nearly as fast as the amount of debt we're accumulating. So therefore, the debt to GDP ratio has increased sharply since the 2020 pandemic. It was like Elon said, only about 50% in the year 2000. Now it's at 125% in the year 2021. On top of that, we have this deficit, this $3 trillion hole each year, that's being added to the total debt burden. So it's not like things are just bad now, but they're getting better. They're bad now. And they're getting worse each year.
Mattimore (02:58):
Let's imagine the US as a household to make the situation easier to visualize. So imagine if you're a household and you earn $210,000 per year in income, but you're also indebted $290,000. That's not a great situation. And it's an even worse situation when you consider that each year you're going deeper and deeper into the red. So yeah, you might make $215,000 next year, but then you're going to be $300,000 in debt and then $400,000 in debt and then $500,000 in debt. This is not the type of financial situation you want to have as a household, nor is it the type of situation you want to have as a country. And this is one of the reasons why there have been fewer and fewer countries and corporations willing to buy US debt - because the US has not been seen as a very responsible financial actor recently.
Mattimore (03:58):
Another thing worth noting is that many economists see 130% debt to GDP ratio as the point of no return. Meaning, there's only been one case in history where a country has gone above 130% debt to GDP and has still survived. And that is Japan. The US hit 130% debt to GDP during the pandemic. But if we hit it again, that may be the true point of no return. And we'll have to see what would happen if we get above that level in the future.
Mattimore (04:29):
Jack Dorsey also tweeted about hyperinflation, which is quite related to this debt to GDP ratio. And he tweeted, "Hyperinflation is going to change everything. It's happening."
Mattimore (04:42):
And a lot of people were snarky about Jack's tweet. And they said, "Oh, well, is it really hyperinflation? Technically it has to be 50% inflation month over month. We haven't had that yet."
Mattimore (04:52):
But I think people that get into the technical definitions are missing the point, because even if you have inflation of 10% a year or 20% a year, that is probably going to become runaway inflation, meaning eventually the currency will be totally worthless. So whether we have the technical definition of 50% month over month hyperinflation, or whether it's simply a double digit runaway inflation scenario, I don't think it matters much one way or the other. Jack is pointing to the fact that we are pretty much at the point of no return. And it's also something that's worth noting is that Jack is the CEO of Square, in addition to being the CEO of Twitter. And so he has a lot of information at his disposal about how much different companies are spending, how much they're charging customers at all those point of sale Square card readers. And so he has a lot of data that the average person does not have access to.
Mattimore (05:47):
Now, let's look at how hyperinflation is actually affecting regular people. There are some very obvious ways it's affecting people. One is the price of food. Global food prices have been skyrocketing since the last several years.
Mattimore (06:02):
Food, obviously, is something everyone has to spend money on, no matter how wealthy or poor you are, you have to spend money on food. And when we look at other commodities, we've seen massive increases. So heating oil up 128%. Gasoline is up 123%. Energy costs have more than doubled in the last year. And then you look at coffee, aluminum, cotton, copper. A lot of commodities are up about 50% year over year. Same thing with corn, wheat, soybeans. We are seeing massive increases in the basic things that households spend money on.
Mattimore (06:39):
We're also seeing the median sales price for homes go up pretty significantly in the last few years. So just to compare, around the year 2010, we had a median home price of around $200,000 to $240,000. Now the median home price is around $400,000. So we had about a doubling of the US home price in just the last decade. That that is pretty extreme.
Mattimore (07:04):
To summarize our situation right now as it relates to pricing and inflation... Stocks are at all time highs. Home prices are at all time highs. Crypto market caps are at all time highs. Wages are at all time highs. Job openings are at all times highs. And inflation is the highest in 30 years. And at the same time, while this is occurring, the federal government is saying we need to hold interest rates at about 0%, which obviously fuels inflation. So this brings us to the question, what is the US doing? Why doesn't the US either tighten their amount of spending so that we don't have this debt each year growing in size with the deficit. And also why doesn't the US just simply increase interest rates so that we don't have such rampant spending that increases prices for regular people?
Mattimore (08:00):
Well, there's really three options that the US has regarding the debt.
Mattimore (08:03):
The first option is a hard default. This would be simply saying, hey, we're not going to pay any any of our debt. We know you guys thought we were going to pay you back, but we're just not going to pay you back anymore. Anyone who holds treasury bills, for instance, is not going to get their interest payments that they receive every quarter, every month, or every year. Foreign countries that hold US debt, they're not going to get paid back. Regular Americans who hold US debt, they're not going to get paid back. This is never going to happen because this would be the end of the US economy as we know it. So we know for sure, this is just not an option that the US is even really considering at this point.
Mattimore (08:43):
The second option regarding US debt is austerity measures. We saw this in Greece. We've seen this in other countries in Eastern Europe in the past. And this would be tightening spending relative to revenue so that we actually start to operate at a net profit rather than a net loss. And so you could imagine maybe we cut military spending. Maybe we cut some Medicare, Medicaid. Maybe we cut some other areas of spending and we keep revenue the same. Maybe we even raise taxes so that we end up at least digging ourselves out of a hole a little bit year over year. Unfortunately, this is political suicide in any democracy. Any politician who proposes to increase taxes and cut social security or military spending is very quickly going to find themselves out of a job. And in any democracy, typically what happens is you might have austerity measures for a few months, or maybe a few years in the second term of a president, for instance, but then you're going to have a changing of the guard. And the new politicians that are voted into power are not going to support these austerity measures. And so they're going to reverse. So while austerity may seem like the most common sense solution for the US in regards to debt, and certainly if you're a household and you had this amount of debt, this would be the most common sense solution. It's just not feasible with the current political situation.
Mattimore (10:06):
The third option is a "soft default," which is printing lots of money to devalue the currency so it's easier to pay back debts. This is actually what's happening right now.
Mattimore (10:19):
If you think about it, if you own a million dollars, but then you can just print a million dollars. Well, then that's easy. You just print a million dollars. You give the new million dollars to the person who you're in debt to, and then you've paid back your debt, and that's fine. But for everyone who holds dollars in the world, now their dollars are worth a little bit less. This affects to devalue the currency, though without a drastic collapse that's going to happen overnight.
Mattimore (10:48):
And you can see how the US really is keeping interest rates almost at zero. We ticked them up a little bit to about 2% in 2019, but they were at zero since the 2008 crisis. And they've been at zero again since the 2020 pandemic.
Mattimore (11:07):
You can also see the interest payments that the us has to make on the debt. So without even starting to pay back the principal of the $29 trillion debt burden it has, just the amount of interest we have to pay each quarter, is about $500 million. So even just paying back the interest is quite a burden on the US.
Mattimore (11:28):
This brings me to a point that I think is really important for anyone to know, especially if you are very critical of the Fed and the way the government is handling things. And that is that the US is currently stuck between Scylla and Charybdis. Scylla and Charybdis is from the Odyssey, trom Homer's epic poem about Odysseus coming back from the Trojan war to his homeland Ithaca. And, as he's going through the Strait of Messina, there is a really dangerous situation that he has to navigate. If he goes towards the whirlpool called Charybdis, every person onboard his ship will die. Odysseus will die. None of his men will make it home. And that will mean total destruction for he and his crew. Whereas if he goes towards Scylla, the seven headed serpent sea monster, the monster will eat probably half of his men, but at least his ship and the other half of his men will make it through.
Mattimore (12:19):
This is the situation the US is in right now in regards to the national debt. One question you might have, and I've had this question, is "Why doesn't the us just raise interest rates? If you raise interest rates, there won't be so much unnecessary spending. And therefore, prices won't increase as a faster rate. In other words, we won't have as high of inflation if we raise interest rates."
Mattimore (12:42):
Well, the reason that we're not raising interest rates is because we would have to pay so much as a country just to service the interest on the debt if interest rates were to go up. So imagine right now, what that would mean for the federal budget.
Mattimore (12:54):
If we increased interest rates by 1%, just to service the interest on the national debt would be more than we pay for Medicaid. It'd be more than $500 million per quarter.
Mattimore (13:09):
And if we raise interest rates by 2%, that would be more than the US spends on Medicare just to service the interest on the debt.
Mattimore (13:16):
And if the US raises interest rates to 3%, it would be even more that we'd spend to service the interest on the debt than both the defense budget and social security retirement.
Mattimore (13:28):
So we really are caught between Scylla and Charybdis. And I would say Charybdis is the whirlpool that kills everyone. It's raising interest rates abruptly, because that would collapse the US economy abruptly. Whereas Scylla is inflating away the value of the US dollar. That's what the US has decided to do.
Mattimore (13:48):
And when you look at the purchasing power of the US dollar, we can see it's gone pretty much close to zero already. So I think it's an interesting question to ask yourself, if you were in charge of the US government and the federal reserve, what would you do regarding the US debt? Would you increase interest rates, which would increase the amount that you'd have to pay to service just the interest on the debt. And it would also lower economic activity. There'd likely be fewer people willing to spend money in the economy. So GDP may fall as a result, and that could lead to a runaway collapse of the total us economic momentum. Or would you choose Scylla, and continue to inflate away the US dollar so that it's easier to pay back debts? You're not doing anything too drastic, but gradually, everyone who holds US dollars is losing purchasing power. Which would you choose?
Mattimore (14:40):
Now, this brings us to the future scenarios.
Mattimore (14:43):
Let's start with the worst case scenario.
Mattimore (14:57):
The worst case scenario is something that the world economic forum posted on social media in 2015, which is that, "You'll own nothing and you'll be happy by the year 2030." This is something that I'm very concerned about when you think about what the macro trends are driving us toward. And the basic idea is that right now, the US is printing a ton of money. They're devaluing the currency, and they're buying assets with that money. They're buying treasury bills, they're buying mortgage backed securities. And in other words, they're pumping those asset prices. They're pumping the stock market. They're pumping housing prices. Indirectly, they're pumping crypto prices. And now the US is attempting to tax unrealized capital gains on those assets. So if you're someone who's trying to have a safe haven from inflation, and you hold assets, well, now the US government is trying to tax the unrealized gains on those assets, which I would consider legalized theft if it were to pass.
Mattimore (15:56):
This is the worst case scenario, that you have BlackRock buying up all these single family homes. Home ownership becomes unattainable for most people. You also have big tech companies merging with big government so that we have mass surveillance.
Mattimore (16:17):
On a personal level, the worst case scenario is that you don't prepare. You don't worry about inflation. You don't worry about investing in Bitcoin or other assets to hedge against inflation. But instead you wake up one day and you see your purchasing power has evaporated. You still have the same amount of dollars in your bank account, but this is no longer enough to pay for food, energy, and housing, which are the three biggest areas that have been affected by inflation, and the three biggest line items in any household budget.
Mattimore (16:46):
This would trigger a great reset, which the US government is already preparing for. Every US citizen would get a central bank digital currency wallet, which would cut out the bank middlemen so you'd have an account directly with the federal reserve. There'd likely also be some form of universal basic income. We already saw this in the 2020 pandemic where they gave out $1,200 stimulus checks. This could be something that's given out, not only as a one-time payment, but on a monthly basis. And I think one dystopian scenario (in general I believe there's a lot of good that can come from UBI) is that the US would only given out to citizens that are seen as being "good citizens" as measured by a warped scoring method. Meaning, people who don't speak out against the government, who pay their bills on time, who don't invest in digital assets that are not approved by the US, these would be the "good citizens." And this would be a full way to surveil citizens and control citizens financial activity, and perhaps even their access to the internet. This would be similar to what the Chinese communist party has already implemented in China with their social credit score. Already, the CCP can essentially turn off any Chinese citizen's ability to engage with the economy, travel abroad, or access information online.
Mattimore (18:04):
Now, let's talk about the best case scenario.
Mattimore (18:13):
The best case scenario is that, as hyperinflation goes parabolic, so does hyper Bitcoinization. In other words, as the purchasing power of the US dollar approaches zero, the purchasing power of a Bitcoin approaches infinity. And so there would be a push and a pull, and this would allow for some stability and even an improvement in the underlying system as the transition takes hold. And because the US dollar is the world's reserve currency, I think it's quite likely that the US dollar will be the last fiat currency standing. Therefore, even if the US is pretty late to the game in regards to adopting Bitcoin as legal tender, and really promoting Bitcoin among its citizens, the US still has a serious competitive advantage over other nations that do not hold the world's reserve currency. So as long as the US eventually embraces Bitcoin, it will be in a much better position than the vast majority of sovereign nations, because we have a much greater ability to buy Bitcoin in order to bring about a US Bitcoin standard.
Mattimore (19:17):
What would that look like? Well, when El Salvador introduced the Bitcoin standard for their citizens, they gave every El Salvador citizen $30 worth of Bitcoin in the Chivo wallet that El Salvador government created. You can imagine if the US did this, they could have their own US wallet that every citizen can download. And then probably even more than $30 worth of Bitcoin would be given out to citizens. It might be something like $300 worth of Bitcoin per month for the first 6 months or 12 months, or maybe even as an ongoing system. So I think the US is in a pretty good position right now, as long as we eventually embrace Bitcoin. And also because Bitcoin is priced in US dollars, there is an argument that Bitcoin will help the US dollar to survive beyond other fiat currencies.
Mattimore (20:09):
In some ways, my hope is that think both systems serve to keep each other in check. The Bitcoin system will prevent the total collapse of the US and global economy, and will provide a safe haven for any investor who wants to maintain and grow his or her purchasing power over time. And the fiat system will also prevent the total collapse of more old school investors and people who aren't as tech savvy, who aren't as into the crypto space. And who, therefore, may otherwise get totally left behind as a late adopter who's not the type of person that would ever buy Bitcoin, no matter how much it makes sense to do. So hopefully the US, the legacy fiat financial system, the federal reserve, will look out for the more old school investors as we make this transition.
Mattimore (21:01):
One way I've heard this put is that the fed is "trying to save grandma." Some would say that Gary Gensler wants to save grandma from having all of her purchasing power destroyed. So that may be why they've slow roll the total adoption of Bitcoin. If tomorrow the US announced we are adopting the Bitcoin standard, and we're fully embracing Bitcoin, and that US dollars are old news. Well, then every country in the world that holds dollars as their main currency, which many countries do, would all of a sudden be in crisis mode. And they would try to get Bitcoin as quickly as they could. And there would be absolute chaos. So I can see why Gary Gensler, the SEC, and the federal reserve are slow rolling the adoption of Bitcoin, because they don't want to do anything too drastic unless they absolutely have to, both for their own careers and for the stability of the macro economy.
Mattimore (21:55):
Now, let's talk about something that Luke tweeted. He's one of my favorite Bitcoin personalities on Twitter. And he tweeted this awesome chart that shows the devaluation of the dollar combined with the price growth of Bitcoin. And it's kind of amazing that we have this perfect on-ramp to financial stability at the very moment when we need it. So I really cannot thank Satoshi enough for creating the Bitcoin white paper, which happened about 13 years ago today almost exactly.
Mattimore (22:24):
Now I'm going to play this one quick video about hyperbitcoinization that I saw recently –
Brian Harrington (22:31):
"Good morning. Happy Monday. Here's 60 seconds on hyperbitcoinization. Every single Monday that some people wake up thinking about sats, and some people wake up thinking about fiat currency, is the process of hyperbitcoinization. Every single Monday, there's more people than last Monday, waking up thinking about the new currency and working for the new currency this week compared to last week. That is the process of hyperbitcoinization. The fact that apps are already here to stop using fiat or significantly reduce the amount of fiat that you're using... We already have the transitionary checking accounts. We already have the transitionary savings accounts. We already have the transitionary retirement investing accounts. There's people that are waking up this morning, heading off to their jobs, getting on their computers, thinking about a different currency than the one they grew up on. That is hyperbitcoinization. It's happening right now. Today. And the apps are available today for you to stop using or use fiat less."
Mattimore (23:27):
Now let's bring it home with the most likely scenario.
Mattimore (23:38):
The most likely scenario in my mind is that the US government is not going to do anything drastic until they must. That means they're not going to implement austerity measures. They're not going to taper QE. They're not going to ban Bitcoin, and they're not going to totally embrace Bitcoin as legal tender until they have to, until there's some trigger where doing nothing is seen as more dangerous than doing something.
Mattimore (24:01):
Therefore, the US is going to continue its soft default by printing lots of money while also keeping interest rates low. In other words, the US is still is going to navigate between Scylla and Charybdis to avoid any drastic crisis.
Mattimore (24:18):
But eventually, Malcolm Gladwell's tipping point will be reached and everyone will use Bitcoin. This is something that's really easy to understand in hindsight, but hard to understand while it's happening. If you look back to smartphones, for example, there was a time when no one had smartphones, and then almost instantly everyone had smartphones.
Mattimore (24:38):
You probably don't even remember this transition because it happened so quickly. Same thing from no one using the internet to everyone using the internet, or no one using email to everyone using email. We are going to see, I believe sometime in the next six months, maybe 12 months at the most, a transition from almost no one using Bitcoin to everyone using Bitcoin as their primary means of saving purchasing power.
Mattimore (25:02):
The question is, what will trigger this tipping point? In my mind, there's two different triggers that could happen. One is a trigger where there is a crisis, likely a major market crash. You can imagine if the stock market crashes, the housing market crashes, or if there's a hyperinflation event, and everyone increases their prices drastically all at once. This would be a situation where the government, "wouldn't want to let a good crisis go to waste."
Mattimore (25:33):
If there were some major economic crash and people did not have the ability to pay for what they needed to on a day-to-day basis, this is when there would be some major action, either an embrace of Bitcoin or the introduction of a central bank digital currency, or both. This is when some major trigger would effectuate some major change.
Mattimore (25:53):
Another tipping point could be FOMO. Even if there isn't a major crash in the economy, there could be another country that decides they want to be the first G7 country to make a major move on Bitcoin. El Salvador already made a move, but what if Canada, or France, or Japan announced they were gong to start aggressively buying Bitcoin to transition to a Bitcoin Standard? Once the Bitcoin standard becomes realized in one G7 country, this would likely trigger FOMO in the United States. And that would likely result in the fed aggressively buying Bitcoin and embracing Bitcoin as the new foundation of the western global economy.
Mattimore (26:28):
So my final word of advice on the US debt clock is to simply be aware of it. Don't be someone who only thinks about debt and inflation once it's already reached the point of no return. It's important to prepare for these events beforehand. And the best way to prepare for inflation is to buy Bitcoin. You don't have to buy a whole Bitcoin. You can just buy a thousand sats, 10,000 sats, a hundred thousand sats.
Mattimore (26:49):
At Bitcoin's current prices, $150, or 0.00243157 Bitcoin gets you your mathematical share of Bitcoin if it were evenly distributed among the world. So basically, if you own just 0.01 Bitcoin, you will be wealthy compared to the rest of the world.
Mattimore (27:08):
Thanks for tuning in. I hope you enjoyed today's episode. And I'll see you next time.