Retirement Lifestyle Advocates
Weekly Market Update by Retirement Lifestyle Advocates
This week, I want to shed some light (and do some math) on the exponential growth of the United States government’s debt. More specifically, I’d like to discuss the cost of servicing the debt, which, by my calculations, has long passed the point of being able to effectively address the problem.
Interest costs on the debt now consume such a large portion of tax revenues that the trend cannot be reversed. We are now just waiting to witness first-hand the painful consequences of massive deficit spending for decades.
Nick Giambruno, writing for “International Man,” uses a great analogy to explain the concept of exponential growth. (Source: https://internationalman.com/articles/the-debt-spiral-crosses-the-point-of-no-return/). Here is an excerpt from his article:
There was once a mathematician who supposedly invented the game of chess and presented it to his king.
The king, impressed by the game, asked the mathematician to name his reward.
The mathematician asked for grains of wheat, using the chessboard to calculate the amount. He requested that a single grain of wheat be placed on the first square and doubled for every subsequent square.
This means two grains on the second square, four on the third, eight on the fourth, and so on, for all 64 squares on the chessboard.
Initially, the request seemed modest to the king, who agreed.
However, the reality of exponential growth became apparent as the process unfolded.
By the time the board was half-covered (at the 32nd square), the number of grains was already enormous, reaching over four billion. As the squares continued to be filled, the numbers grew astronomically larger.
By the 64th square, the total wheat needed for the entire board reached 18,446,744,073,709,551,615 grains—about 18.4 quintillion.
To put this into context, let’s convert this to a more understandable measure, such as metric tons. The average weight of a grain of wheat is about 50 milligrams or 0.00005 kilograms.
18,446,744,073,709,551,615 grains * 0.00005 kilograms/grain = 922 trillion kilograms.
Since there are 1,000 kilograms in a metric ton, this equals about 922 billion metric tons.
To compare this with global wheat production, let’s consider recent figures. According to the Food and Agriculture Organization of the United Nations, the world’s wheat production in a recent year was about 761 million metric tons.
The 922 billion metric tons required for the chessboard is about 1,211 TIMES the entire global wheat production.
This example illustrates the astonishingly large number that results from exponential growth, even when starting with something as small as a single grain of wheat.
There is another great analogy that demonstrates the concept of exponential growth that I have used in the past. To give credit where credit is due, I borrowed the analogy from past RLA Radio guest Dr. Chris Martenson, who used it in an interview.
Imagine for a moment that you are sitting in Yankee Stadium, and the stadium begins to be filled with water. Every minute that passes, the number of drops of water added to the stadium doubles. In the first minute, only one drop of water is added to the stadium; in the second minute, two drops are added, and so on. Initially, someone sitting in the stadium notices nothing.
However, in less than an hour, the stadium would be full of water, and there would be little time to react. Assuming the stadium is full in 50 minutes, it is half full in 49 minutes, one-quarter full in 48 minutes, one-eighth full in 47 minutes, and so on.
That is the nature of exponential growth.
Which brings me to interest on the US debt. Let’s set aside the fact that the Federal Reserve is going to once again embark on a series of interest rate cuts this month. To be conservative, we’ll use an interest rate of 4% in our calculations.
The current national debt is more than $35 trillion. It’s $35.4 trillion, to be exact. While there is still debt being financed at interest rates of less than 4%, much of that debt will need to be refinanced in the next year or so.
So, to keep our calculations simple, let’s assume 4% interest on $35 trillion in debt. That straightforward calculation means that interest costs to service the national debt are $1.4 trillion. While we aren’t at that level yet, we are headed there as interest costs on the debt now exceed $1 trillion per year!
Hedge fund manager Ray Dalio, with a reputation for getting things right, recently said this about the debt and interest costs:
“We are at a point in which we are borrowing money to pay debt service.
When you keep having debt growth faster than income growth, that means you have debt service encroaching on your spending, and you want to keep spending at the same time.
As that happens, there is a need to get more and more into debt. It accelerates.
We are at the point of that acceleration. We are near that inflection point.”
In his piece referenced above, Mr. Giambruno published a chart that was originally published by The Heritage Foundation. While the chart only illustrates debt accumulation through 2023 and not to the present, the illustration is sobering.
Here is the chart for reference.
As interest costs and debt continue to build exponentially, think about the chessboard and stadium analogies.
While we’re not there yet, the day is fast approaching when there will be two choices as far as debt is concerned. One, outright default, or two, more currency creation, which will create an inflationary default.
I’d bet heavily on the latter outcome.
Seems like that is the direction in which the Fed is now heading with interest rate cuts beginning again soon.
Got gold?
This week’s RLA radio program features an interview that I did with Mr. Karl Denninger.
The radio program is posted and available for you now by clicking on the "Podcast" tab at the top of this page. The weekly Headline Roundup newscast is also posted there. If you haven’t yet done so, check out the free resources available on the website.
-Ernest Hemmingway
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