Hey guys, it's Sasha. Yesterday Janet Yellen wrote a letter to the US Congress in which she said that the U.S government will be bankrupt in two weeks. If the debt limit is not increased, the U.S treasury will be unable to satisfy the government's obligations and pay the bills. potentially as soon as June 1st Technically, the US government would already have been bankrupt back in January.

But on January 17th, the U.S Treasury enacted something called Extraordinary Measures so that they could continue paying their bills even though they didn't actually have the money to do it. The way the US government normally pays their bills without having any money is by printing more money by dishing out new bonds. People go and buy the bonds. they have money to spend on other things.

It's a strategy that has been so successful that the US now owes 31.4 trillion dollars worth in debt. In fiscal year 2022, the US Federal government spent 6.2 trillion dollars while only collecting 4.9 trillion dollars in Revenue Basically tax, The difference aka the deficit was one 0.3 trillion dollars. So for every dollar collected in taxes, the US government borrowed an extra 28 cents on top, and the total debt power of the United States is now the equivalent of 6.4 years worth of Revenue. So if the United States earned a salary of a hundred thousand dollars, they would owe 640 000 on their credit cards.

And the problem is that the credit cards are now maxed and they have been maxed since January. There was no more that you can put on them. So what do you do if every single credit card that you have is maxed and you have no money in your bank account, but you have to pay bills on Monday? Well, this is where the Extraordinary Measures come in. These measures include the suspension of payments into the Civil Service Retirement and Disability Fund, as well as stopping paying into the Postal Service Retiree Health Benefits Fund.

It also includes a suspension of payments into the Government Securities Investment Fund, which is the defined contribution retirement fund for Federal and Employees. So, because the US government has completely run out of money, when federal employees go and pay into their defined contribution pension from their salary, the US government has basically been taking that money and appropriating it instead of putting it into their pension. This money will eventually have to be paid back into the pension fund because as it stands, it's basically been stolen by the US government. Remember, this is a defined contribution pension scheme so the situation is pretty desperate and after five months of the government stealing money from federal employees from their pension pots, from a disability fund and from the Postal Service Health Plan and dishing it out as grants to people buying new Teslas, they have finally run out of money.

This time for real. And according to Janet Yellen, there are no more places where they can steal more money from. So the US government has to raise the debt ceiling. There are two main problems with increasing the US debt ceiling.

The first problem is that politicians do not give a about fiscal management or actually trying to fix the economy do the right thing. Politicians only give a about one thing and one thing only getting re-elected and it is a heck of a lot easier to get re-elected Have all the perks of being paid for by the taxpayer on the back of promises of increasing spending, of increasing welfare, of increasing benefits, and lowering taxes. All you have to do is borrow a bit of money to pay for all of that and kick the can down the road for the next guy to worry about. The second problem with Us debt seating is that the people who decide under that seating are not Finance professionals.

They are not people who have extensive business experience or financial management experts. It's the guys in the US Congress where the majority don't have the faintest idea about Finance have no relevant expertise and no relevant experience. So instead of debating the best fiscal approach, they begin acting like four-year-old kids in the playground. Instead of analyzing the budget, trying to understand where genuine savings can be made instead of maybe you know, subsidizing people buying brand new Teslas and maybe coming up with a reasonable path to not running a huge deficit.

Instead of doing the thing that you know the government should be doing, the US government is busy pointing fingers at each other and saying, but basically it wasn't me, it was Janet. Instead of working together on an actual solution, the two sides of the house begin doing Shady backroom deals. We'll vote for increasing the debt limit if you scratch our backs and pass these completely unrelated laws over here and give us these extra perks. And of course, nobody wants to discuss these things in a timely manner because time pressure means that both sides will have to make concessions.

It's like a first year college student who was given a two month long assignment remembers that he has to hand it in the night before. So pause an all-nighter and the end result is woefully inadequate. There is no practical benefits to leaving the sort sort of thing to the last moment, In fact, is actually a pretty bad thing because U.S treasury is maturing in the short term spike in borrowing costs because people don't want to buy bonds if the US government defaults and doesn't pay the interest on those. Bonds In her letter, Janet Yellen says that if Congress fails to increase the debt limit, it would cause severe hardship to American families, harm the United States Global Leadership position and raise questions about the ability of the US to defend National Security interests.

I Guess if the border patrol Army stopped getting paid, they might not be quite as Keen to put their lives on the line to defend the country. Now the media is of course very excited by all the shenanigans because the United States going bankrupt makes for great headlines, but we all know that as happens every single time, the White House the Congress the Senate will around hold a million pointless meetings and at the last minute will agree on increasing the debt limit because that's what they always do politically. they can't really afford not to. They will definitely make a big song and dance about it.

They'll make threats at each other and make public statements and speeches, but they will do a deal. The reason that Janet Yellen wrote the letter yesterday I think is to give them a date because before now there wasn't one and now the deadline is June 1st The slight issue with having used Extraordinary Measures since January is that the increase this time around has to be relatively more substantial than before because the US government has already stolen all of that money from the retirement and health plans of their employees. so they kind of have to put it back. Or at least they can't steal any more of that money and everyone is panicking because the rate at which the US is borrowing is exploding and showing no signs of ever being properly managed.

Imagine if you're earning a hundred thousand dollars a year and you have six hundred and forty thousand dollars in credit card debt and instead of thinking how you could maybe stop spending quite as much money so that you could start actually paying those credit cards back, and instead of focusing on trying to maybe figure out how you could earn two hundred thousand dollars so that you would have a bit of extra money to pay the dead back, instead you stop paying into your pension, you stop paying your health insurance, and you sit at the kitchen table with your wife discussing which new credit card you should apply for. It sounds Bonkers Except the same exact argument could have been made back in 1990, when the U.S debt pile was 90 percent smaller. So the big question is, how long can the US government keep borrowing money before it becomes an actual problem and the country spirals into a financial meltdown? The debt has increased 10 times in the last 33 years, so could it, for example, increase another 10 times in the next 20? Where is the line Beyond Which The debt is completely unsustainable. You can see that in the last update from the Congressional Budget Office, the US government expects to earn 4.8 trillion dollars in Revenue in 2023, a bit less than they did in 2022, and they expect to spend over 6.3 trillion dollars, a fair bit more than they did last year.

So far from trying to manage things, trying to solve the problem, the inability to manage the budget is only getting worse At the same time. The US government is projecting that the revenue will increase to 7.1 trillion dollars in 2033, which is an average growth rate of over four percent per year for the next 10 years straight. Which is extremely unlikely because it is far far above the typical rate of growth of the economy. So, as well as being grossly incompetent in managing finances right now, the very same people in Congress are completely incompetent in making any reasonable forecasts for the future.

Anyway, the big issue is this line down here called net Interest. According to this document that was updated just now this month, the US government will be spending 663 billion dollars on interest payments in 2023 and 745 billion dollars in 2024.. This is pretty bad because according to this data, 15 of all the money that the US government earns in all kinds of taxes is spent on paying just the interest on the debt, not paying any of the debt back. Just the interest alone is one dollar in every seven that the US government makes.

But a quick look at the Saint Louis Fed data on current expenditures shows that on an annualized basis, the US government is already paying way more. You can see that this chart explodes on the right just because the FED has been increasing rates to 5.25 and the cost of debt to the US government is now going through the roof. In Q1, the annualized amount of interest payments was 929 billion dollars. And remember that the FED has said that they were categorically not reduce rates this year.

No way there probably will reduce rates later this year with the tail between the legs, because they'll have no option but to say face, they won't do any decreases of the next two meetings in June and July and the next meeting after that is at the end of September. So this run rate of 929 billion dollars in interest payments isn't going anywhere in Q2 or Q3. In fact, the problem with the way that Us Data structured is that even while the rates are flat, the interest payments on the debt will keep increasing. Because bonds are issued over long, fixed periods of time, you can have two-year bonds, you can have a few months, you can have five year bonds, you can have 10-year bonds, and these bonds have fixed coupon rates.

So when the government sells the bond, they fix the interest that they all have to pay over the next two, five, ten years. whatever. And when that Bond comes to maturity, it has to be repaid and full. and you US Government doesn't have any money to actually pay back the value of the bond because they are in a Perpetual state of debt.

So in order to pay back the original Bond, they have to go and issue a new Bond And the old Bond was maybe sitting there at one percent or two percent interest or whatever because from way back when when everything was great and people were trading jpegs of monkeys wearing funny hats but treasuries in the market now are paying more like 3.5 to 4. So every month the old cheaper bonds are being replaced by the new, more expensive bonds. and if investors are concerned that the US government will default and not pay the interest, that makes things a whole lot worse because that means that investors will want to earn more interest to cover the risk of the US government going bankrupt. and there is a decent likelihood that instead of paying 600 or 700 billion dollars that Congress came up with, the actual bill will climb to 1.3 trillion dollars.

We're already seeing it in the date. Just take roughly four percent of the 31 trillion debt pile and you'll get there. So the US debt might become more like 27 of all the tax that the US government earns more than one in every four dollars. And the question is, how high could this number go? Because a lot of people will compare this number to a household budget and say it is already completely insane, The 27 of all the money the US government earns is now going to be spent on just the interest payments alone.

That's nuts. But on the other hand, the US government budget does not work in the same way as a regular household. Even though we like to liken it to something that we kind of understand in our daily lives is just not the same thing. In theory, the total sum of debt payments could climb a lot higher, could theoretically go above 100 of the total tax revenue.

It sounds absurd I know, but the current situation would sound absurd. 50 years ago, the US government is already running a 34 deficit, and theoretically there is no real reason why you couldn't go a heck of a lot higher to 100. and Beyond The United States has a relatively unique position where eventually all of the debt that theyo is in the currency that they also happen to control US Dollars. And the theory is that on average, over time, the US economy can grow faster than inflation and can outpace the growth in the interest payments on the debt.

The only precursor here is that the US dollar has to remain a global Reserve currency and a lot of newspapers and YouTubers are busy saying that the US dollar is about to be replaced by the Indian rupee or the Russian Ruble or maybe Dogecoin. The truth is, in the short and medium term, the US dollar is going exactly nowhere. not only because the U.S completely dominates the global economy, because the U.S also dominates Global geopolitics. and while every Empire eventually Falls the process does not happen overnight, the Dynamics of the US debt situation are ridiculous.

and the thought of the U.S debt interest payments overtaking Social Security and health as the number one expenditure item for the US government seems bananas right now, but practically it would probably not change as much as people think, because even as it stands today, the debt is already fast becoming just a random number on a piece of paper. And in the long term, there are definite issues around the US dollar as a currency's valuation, the ability of the US to compete globally, blah blah blah. But is this a problem that is likely to blow things up this year, next year, or the year after? Well, the answer is probably not.