The US is going toward a debt crisis at full speed.
Interest rates remain high, tariffs are still on the table, and the House has just passed a large tax cut.
Result? Bond yields are rallying.
This is going to be disastrous.
Let me explain: 🧵
1/ The bond market is cracking.
US government debt is currently $36 trillion and it needs to refinance $9 trillion this year.
This comes at a time when interest rates are already high and inflationary pressures are mounting.
Result? Investors don't buy US debt without high coupon.
This creates a demand shock for the US debt. $USD Index(USDindex.FOREX)$
2/ The supply of bonds is currently way higher than the demand.
It plays out exactly as Ray Dalio explains:
- Gold at all time highs.
- Bitcoin at all time highs.
- Interest rates are rallying.
30-year fixed mortgage went above 7.4% last week, near highest level in a century.
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3/ It all comes at a very bad point.
Normally, when the demand falls short, the Fed increases the money supply by buying the government debt.
This is called quantitative easing.
This breeds some inflation, which is then addressed by increasing the interest rates.
This following rate increases generally push the economy into a sudden but short lived recessions:
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4/ It's all different this time.
The demand shock comes at a time when:
- Interest rates are already high.
- Inflation is still above long-term target.
- The Fed is still tightening its balance sheet.
This means one thing:
Fed should either end tightening or let the yields rise...
Both are disastrous.
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5/ If the Fed buys the government debt, inflation will skyrocket.
All the pain people have endured since 2022 will be for nothing and all the gains will be lost.
Fed will have to further increase rates to tame inflation which will push the US into a longer lasting recession.
6/ If it doesn't buy it, yields will keep surging.
Inevitably, the US will have to print more money to pay higher coupons, which will again be inflationary and the same cycle will repeat.
This is basically a dead end.
On top of all these, consider tariffs and tax-cuts..
7/ Tariffs will be highly inflationary.
Fed Chair already explained this in his press conference.
He said tariffs are likely to generate a rise in inflation, a slowdown in economic growth and an increase in unemployment.
8/ Add the tax cuts on top of that...
This bill is predicted to increase the budget deficit by as much as $600 billion.
This means that the deficit will swell by as much as $6 trillion in the next 10 years only because of this bill.
This isn't sustainable.
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9/ This only ends up in a breakdown of the global monetary order.
It could be like 1971, it could be like 2008.
10/ In sum:
- US debt is already excessive.
- Policies aren't helping.
- Fed is between a rock and a hard place.
This is why yields are rallying.
You should be careful where you hold your money in, diversify adequately and avoid assets of which price depends on fiat.
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