The American Debt Crisis

Nobody really wants to talk about America’s debt crisis. Especially the politicians who got us into this mess. Their vision extends to the next election and no further.

But if you are aware of where we are headed, you can prepare. And right now the dollar’s value is headed for a big, hairy crack-up thanks to its unpayable debt. We believe on ample historical precedent that the debt crisis means higher gold prices.

So in simple terms, here’s what’s going on.

The U.S. 10-year Treasury rate is a key interest rate in global finance. It is the benchmark rate for residential real estate loans, auto loans, and corporate bonds.As we write this the yield, the interest rate paid on the 10-year U.S. Treasury note, is over 4.6 percent.

It has been climbing like crazy since the Iran war started when it was below 4 percent.

The 30-year Treasury bond yield is going up fast, too. Its yield is now 5.145 percent. That is 50 basis points (or a full one-half percent) higher just since the Iran war started.

It appears to be headed higher still.In a Bank of America survey, 62 percent of global fund managers expect the 30-year rate to hit 6%.That would be the highest level since 1999.

Treasury rates are the price Washington pays to borrow money.This year it must refinance almost $10 trillion of its debt.

When a U.S. Treasury instrument reaches maturity, the government must have money to pay the bond holder.But the Treasury does not have the money.It is not operating in the black, it is spewing red ink everywhere, with almost $40 trillion in debt.

So how does it pay bond holders when the bonds mature?It must sell new bonds to redeem the bonds that are due.This refinancing is a problem because the older Treasury instruments have lower yields.A large share of the outstanding debt was issued during the ultra-low-rate years from roughly 2020–2022, so the average rate on the Treasury debt portfolio is 3.36 percent.It will be refinanced at higher rates.Which compounds Washington’s debt problem.

Remember what we said about the political class?That their vision extends no further than the next election.That is why they are allowing the national debt to climb by another $2 trillion this year.

Rising rates should be a warning. It indicates an expectation of higher inflation. As inflation increases, so too will interest rates. Investors will demand that government bonds bear an interest rate premium above the rate of inflation, to offset the loss of purchasing power. A vicious cycle results: higher inflation means higher interest rates which mean higher inflation…

The United State is painted into a corner. It will not control its debt. It will have to “print money,” debauching the dollar, and paying its debt in nominal terms, but in much, much less valuable dollars.

As more and more people catch on, the will move to gold and silver for protection.The great economist Ludwig von Mises describes this coming crisis as a “crack-up boom.”

Next week we will tell you more about what to expect.