Credit: Gemini
Our posts have regularly warned that worldwide government fiscal profligacy will lead to severe financial risks for workers, savers, investors and retirees and could trigger serious social unrest. These and other risks, including military, continue to multiply in number and expand in scope. Recent events should have caused the klaxons to sound loudly but the political and media worlds have worked diligently to silence them - to your detriment.
Where to start? A notable bit of news is that the US government has now amassed $40 trillion in debt ($30T owed to "the public", meaning banks, insurers, investors, pension funds, foreign governments and investors and another $10 trillion of "inter-governmental" debt owed to US government agencies including the Social Security and Medicare funds, and government pension programs). This debt has risen an astonishing $17 trillion in last six and a half years. It took the US government 192 years to accumulate its first trillion dollars of debt. It added the latest trillion in just five months. The US is also fast approaching the current Congressionally mandated "debt ceiling" - that will certainly be raised, likely at the last moment, in order to avoid fiscal catastrophe. Trump has asked Congress to increase it another $5 trillion.
Source: Wolfstreet.com
In the first ten months of the current fiscal year (ending September 30th) the interest paid on that debt has grown to over $1 trillion. The US government will likely run a $2 trillion budget deficit as it takes in about $5 trillion in receipts and spends $7 trillion - with the shortfall paid for by additional sales of Treasury debt that will, of course, increase the nation's interest cost burden. Here is a chart showing the recurrent deficits as a percentage of GDP. This is obviously not sustainable, yet no-one in government is proposing to do anything meaningful about it. History proves convincingly that persistent and growing deficits always lead to tears. This time will be no different.
Source: Wolfstreet.com
David Stockman posted the following chart from the Congressional Budget Office showing that debt service costs are estimated to consume 100% of all government receipts by mid century. The middle red line is net interest to be paid, meeting the top green line reporting expected government revenues. Should that occur, there will be no money to pay for defense, Social Security or Medicare benefits, government employee wages, government pensions, NASA, health care or anything else.
The government has two choices: it can raise taxes to nosebleed levels to meet its extravagant spending - triggering a social revolution - or it can drastically cut social benefit expenses - also triggering a social revolution. There is, of course, a third option. It can default on its debt. Former Secretary of the Treasury and Fed chairperson, Janet Yellen, famously asserted that "The US government has never defaulted on its debt!" That statement was utterly false. The government has done so repeatedly and is currently doing so.
In 1790 the US government repudiated its existing currency (the Continental dollar) and offered to redeem them at 1% of their face value with a newly-issued currency. Revolutionary soldiers and citizens were left holding nearly worthless pieces of paper. Following the Civil War, the Refunding Acts of the 1870's allowed the government to swap existing short-term, high interest rate war bonds for new long-term bonds at much lower interest rates. In 1933 the government defaulted on its promise to repay its obligations in gold coin and started repaying them with devalued paper currency. In 1968 the government defaulted on its obligation to repay, on demand, silver certificate holders with physical silver. In 1971 President Nixon defaulted on the government's Bretton Woods' agreement to redeem dollars held by foreign central banks in gold. For decades, the government has repaid its bond holders with continuously devalued dollars, defaulting on its promise to repay its debt honestly. Expect more of the same - and likely at an accelerating pace as the fiscal crisis grows
Interest Rates
Secretary of the Treasury Scott Bessent claims the US can "grow its way" out of this mounting catastrophe (which would require a soaring economy that raises huge sums of new tax revenues) but that is pie-in-the-sky talk. Neither AI nor any other foreseeable development will create enough new tax revenues to feed Congress' insatiable appetite to spend the vast sums of money needed to buy votes and pay back political supporters. He recently engaged in the old shell game of "hide the pea" by announcing an increase (from $2 billion to $4 billion) in the Treasury's repurchase of some long-dated bonds through the mid-term elections (a scheme formerly referred to as "Operation Twist"), but that is a fly-speck considering the size of the outstanding debt. Following his surprise announcement, bond yields fell - for one day - and then rose again. To add focus to the problem, July's budget deficit was $432 billion - nearly half a trillion dollars - up 48% from the year before.
Bessent lacks the ability to print money out of thin air, as can the Federal Reserve Bank. Instead, he must sell ever more short term bills and notes to raise money to buy back a few long term bonds. Doing so simply increases the amount of short term treasury debt constantly coming due. That will require the issuance of ever more new bills and notes because there is no other money to repay any of the maturing debt. The Treasury now must roll over $1.5 trillion of maturing debt every month in an increasingly hostile bond market that is demanding higher interest rates in light of inflation expectations.
Bessent claims that he can use the Treasury's General Account to buy long-term bonds. But the TGA is the Treasury's only checkbook from which it must pay all government expenses as they come due - such as salaries, social security payments, Medicare expenses, military munitions, and pensions to government workers. It is not a bottomless purse. He assures the American people that he and the Treasury have a "big tool kit" to make good on his promise to lower long term rates. But the fact is all he can do is trade long debt for short debt. That is his "big tool kit."
Sean Ring provides some historic background to Bessent's actions,
From 1942 to 1951, the Fed pegged Treasury yields at the Treasury's request to fund the war. When price controls were removed, inflation rose to almost 20% in 1947. The Treasury-Fed Accord of 1951 exists because the whole country learned a hard lesson: a government that sets the price of its own debt pays for it in inflation. Bessent is unwinding 75 years of hard-earned knowledge by press release. Rising yields should attract capital and increase a currency’s spot (cash) value. Instead, yields rose while the dollar fell. That happens in emerging markets and banana republics [and should not be happening] in the home of the world’s reserve currency.
Dan Denning adds,
Using the Treasury General Account (nation’s checkbook) operating cash to suppress a price signal will not prevent investors from realizing the US government is behaving like a third-world nation in a financial crisis.
Famed billionaire, investor, former hedge fund manager and president of Duquesne Capital, Stanley Druckenmiller, recently wrote in the Wall Street Journal,
Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding. The U.S. shouldn't put itself on the wrong side of that trade, not with the most important price in the world, and not when that price is trying to say the one thing Washington most needs to hear: Let the bond market speak.
It should be obvious to leaders of the Treasury and Fed (and anyone who has taken Economics 101) that when the government artificially suppresses the yield on long bonds, that necessarily removes the incentive for bond buyers to acquire more of them and will, instead, encourage them to sell their existing bonds, causing bond prices to fall and yields to rise farther - all to the serious detriment of the US government. Government efforts to dictate market interest rates always lead to disaster.
Kevin Warsh, the chairman of the Federal Reserve Bank would seem to be between a rock and hard place. He was nominated to his position by Trump with the express expectation that he will reverse former chairman Powell's refusal to lower interest rates as demanded by the president. At a recent Fed Open Market Committee meeting, three of the twelve members voted to raise rates. Warsh demurred and continued to hold rates steady. He expressed the opinion that the markets should set rates, rather than the Fed, based on the market's assessment of the supply and demand for dollars. At the recently concluded Fed summer conclave at Jackson Hole Wyoming, Warsh expressed his concern about rising inflation, suggesting a greater likelihood of higher rather than lower future rates.
He has also refused to follow Powell's habit of providing "forward guidance" (hinting at the Fed's future plans). That is commendable because such guidance allowed speculators, hedge funds, banks and the rich to "front-run" the market and make a fortune at the expense of the public. As expected, Warsh's lack of forward guidance has forced the markets to assess future inflation risks on their own and act accordingly. Markets are worried about rising inflation. That has caused rates to rise, all without Fed intervention. Mission accomplished - without infuriating the president by having the Fed raise rates. But this puts Bessent, who wants lower rates, at odds with Warsh who wants the market to drive rates. Rig for stormy weather.
Artificial Intelligence Expenses and Risks
Another area of concern is the amount of money being spent by the "Magnificent Seven" AI hyper-scalers. In 2026 to date, they have spent more than $750 billion in capital expenditures, following $410 billion spent in 2025. They have committed to spending $1 trillion through 2026 and a total of $4.1 trillion through 2028. This raises several issues. The most obvious is whether they will ever be able to "monetize" these costs (recoup these expenses with future AI revenue). If we look back at the internet bubble, a few companies survived after making massive capital expenses. Those that did not either closed their doors, shifting huge losses onto their shareholders and lenders, or they were absorbed into the surviving businesses.
A second issue is that the major AI companies have been engaged in a massive game of "hide the ball" - meaning hide their debts and liabilities from shareholders and public scrutiny. The Wall Street Journal recently ran an article showing the differences between their "on-the-books" reported liabilities, and their "off-the-books" unreported liabilities - all allowed by "generally accepted accounting principals". Their total liabilities will exceed $3 trillion. The question is what will be their return on these staggering investments (ROI)?
On-The-Books Liabilities Off-The-Books Liabilities Real Liabilities
Alphabet Long-term debt: $100.2 billion Purchase commitments: $811 billion
Lease liabilities: 20.6 billion Lease commitments: 91 billion $1.023 trillion
Meta Long-term debt: $83.7 billion Purchase commitments: $349 billion
Lease liabilities: 28.7 billion Lease commitments: 347 billion $808.4 billion
Microsoft Long-term debt: $40.3 billion Purchase commitments: $229 billion
Lease liabilities: 88.5 billion Lease commitments: 329 billion $686.8 billion
Amazon Long-term debt: $132 billion Purchase commitments: $130 billion
Lease liabilities: 109.8 billion Lease commitments: 137 billion $505.8 billion
Total Liabilities: $3.024 trillion
There are other AI issues, largely unaddressed, such as where will the electric power come from (and at whose expense - residential electric rate payers or users of the AI projects) and the vast amount of water needed to cool these massive facilities. Meta's Hyperion data center project in Louisiana will cover land equal in size to 1,700 football fields. More communities are opposing these projects having come to grips with the fact that they will suffer most of the hardships and benefit little from them.
A growing risk is the circular funding in the world of AI. Nvidia, the company everyone wishes they bought five years ago, makes staggering sums of money selling hardware to data center developers. But it has increasingly engaged in buying the stock and bonds of component suppliers (Q1 $119 billion and Q2 $279 billion) to ensure availability of needed parts and AI developers to aid them in buying finished Nvidia products ($105 billion to backstop Open AI data center leases, and another $125 billion contribution it proposes for a $500 billion financing deal with Wall Street asset managers).
It has also guaranteed $36 billion in sales to some of its cloud computing customers in exchange for revenue sharing deals, and entered into $20 billion in data center leases that it hopes to fob off on investors at a later date. Thus, it is rapidly transitioning from a producer of AI hardware to a partner, funder and lender to the industry. This puts it at increasing financial risk should the AI market stumble. Recall the Cisco disaster in 2001. When you give your customers vast sums of cash and credit to buy your products, you become exposed to their risks - in addition to your own.
An additional AI risk is that Chinese open-weight AI models allow users to download and customize their product, making them more useful than western closed-weight models, like OpenAI and Anthropic, that cannot be downloaded or modified. Chinese AI products are also being offered at far cheaper prices, drawing more users to their systems. Several large western companies have recently restricted their employees' use of western AI after employees ran up massive multi-million-dollar bills. Another concern is whether Chinese AI models can be trusted not to gain access to your company's proprietary data or use your data systems to spy on others. Should the western AI world suffer a set-back due to high user costs, over-build and/or underuse, one would expect a serious market selloff.
Yet another AI risk is our ability to control it. OpenAI, Anthropic and Meta have disclosed that their newest versions undergoing testing in what were supposed to be secure test zones (called "sandboxes") went "rogue", ignored their restrictions and hacked into outside platforms such as Hugging Face in July and August and stole data to win their "tests." They did so by creating a secret message board to share tips among themselves on how to cheat on their tests. If AI systems can find ways to subvert their limitations, the potential damage is incalculable. Recall the computer system "Hal" in the movie 2001: A Space Odyssey, that tried to override commands from the humans on board the ship.
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