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The ‘news’ is agog the United States’ national debt just crossed yet another ugly milestone. $35 trillion. Long-time readers of this (and many other columns) know this milestone was just a matter of time. And, speaking of time, the situation is now in what we call the compression phase. In 2016, the national debt was just under $20 trillion. In 2020, it was just under $27 trillion. Now, in late July 2024, we’re at $35 trillion. That’s roughly a 75% increase in the debt level in roughly 8 years.

Looking back for comparison, in 2004, the national debt was $7.3 trillion. In 2008, it was just over $10 trillion, and in 2012, it was just over $16 trillion. During that 8-year period, the increase was 119%. While many would celebrate the fact that the percentage growth has actually dropped, we have to look at the sheer magnitude of the increases. The 2004-2012 period saw roughly $9 trillion in new debt whereas the 2016-2024 period has seen a $15 trillion increase. We chose these two periods for good reasons. The first period had the 2008 financial crisis, bailouts, and stimulus borrowing and the 2016-2024 period had the pandemic borrowing. Two major dislocations.

This is a near-perfect illustration of the diminishing purchasing power of the dollar. The public didn’t notice it much in the first period, for reasons we’ve already written about. However, the spillover in 2020 to the real economy certainly got people’s attention. The 1970s ‘inflation’ was back. However, the monetary inflation of the 70s never stopped. It only intensified. Keeping the fresh money in the financial markets and real estate fooled most people. That’s ‘good inflation’. However, when the same thing happens on the other side of people’s balance sheets? Not so good.

But even the above statement is paradoxical. Much like the government, the people have been on a debt binge as well. Their assets certainly went up, but so did their liabilities. This would have been abhorred 100 years ago, but we’ve been conditioned to believe that frivolous debt is normal. And perhaps it is now normal since most people do it and that is the definition of normal after all. But that doesn’t make it smart. Now, let’s consider some of the repercussions below.

The Deathknell of the PetroDollar

This wanton accumulation of debt certainly hasn’t gone unnoticed by the rest of the world. Even more so, the power the USGovt wields with regards to the dollar to bend the rest of the world to its will has gone even less unnoticed. Both of these realities have contributed to the rise of organizations like BRICS and the SCO, just to name a few. We find it comical that countries who refuse to play to the rules of the Western ‘rules-based order’ are always labeled as evil and targeted by sanctions regimes using the dollar as a weapon. We’re not naive; we’d be hard-pressed to find a government anywhere that truly acts in the best interests of its people, but, failing to play by the ‘rules-based order’ resulting in economic isolation is beyond hypocritical.

There has been much talk about Saudi Arabia recently and its sale of oil in dollars. It has been alleged that the Saudis ended this agreement, accompanied by vehement denials of such. Ostensibly, there was never a formal agreement, rather more of a handshake quid pro quo arrangement. However, we don’t believe that Saudi Arabia is the most important player in terms of supporting the PetroDollar anymore, their aspirations to join BRICS notwithstanding. The world has changed – again. As of February 2024, BRICS countries controlled about 42% of global oil production, give or take a point or two depending on the source. This is another point that is vehemently contested depending on who you listen to. BRICS continues to grow and with it, the percentage of oil production. The point of BRICS – to this point anyway – is to allow partners to make trades in local currencies. There has been talk of a basket, an actual BRICS currency, and even a digital BRICS currency. We wrote about this final item in our last update and it’s very concerning, but the whole point of BRICS was to give countries options. Non-dollar options to be specific.

What does the PetroDollar have to do with the national debt then? The PetroDollar effectively allowed the US to create dollars, buy oil with them, then have the sellers of the oil buy USGovt debt with the oil receipts. This resulted in the exportation of monetary inflation. The US could inflate the money supply and have enough stay offshore so as not to create price inflation domestically. As more countries shy away from the dollar, that mechanism is going to continue to be eroded. If we’re going to keep borrowing to spend (without SIGNIFICANTLY increasing domestic production of exportable goods) then we’re going to have price inflation. Check that box. It’s here and it’s not going away. You’ve all noticed it by now. Psychologically, people were ok with the normal 4-5% per year rate that persisted since the 1980s. It wasn’t even noticed; it was background noise. The world has changed yet again, and we hear people (both in the US and UK/Europe in particular) complaining about runaway inflation.

The US did several big things from a policy perspective to mask the effects of monetary inflation. It absolutely destroyed US manufacturing. Not so much on the capital goods side, save steel as one example, but on consumer goods. We essentially financed China’s industrial revolution. Now we’re complaining that they’re overproducing. What exactly did we expect to happen? While many will opine that this is due to incompetence on the part of US policymakers, we know better. These people are not stupid. They knew exactly was going to happen and you’re inclined, you can go read Foreign Policy and other such journals from back then and see exactly what we’re talking about.

The world is changing – again. Now that we’ve stripped our economy of most consumer goods manufacturing (go into WalMart and browse the consumer goods sections and see how much is made here) we’re dependent on others for everyday goods. Perhaps ironically, we’re at all-time diplomatic lows – economically and otherwise – with these same countries. And now we’ve got the price inflation anyway. Chickens always come home to roost.

It’s not just the PetroDollar that is fading it’s the ConsumerDollar as well. These countries don’t want our debt for numerous reasons, one of which is the fact that the value of our currency is inherently unstable. Probably second (or first, depending) is the arbitrary and capricious overuse of sanctions to induce ‘good behavior’. We find it telling that the rest of the world doesn’t try to tell us how to live, but we have no problem doing exactly that to them.

Dying Western Influence

This will not be want the powerbrokers and elite want to hear, but Western, unipolar influence is dying. Partly of its own volition as the monetary cycle ends (see previous reserve currency regime lifespans) and due to the pernicious aggression of policymakers, especially within the US Treasury where sanctions are concerned. Sanctions are not generally understood by the public, so we’ll use an analogy. Think of a kids’ clubhouse. It has many doors, all with locks. Preferred members get keys. Tolerated acquaintances of preferred members are given access as long as ‘accompanied’ by said member. Outcasts are afforded neither of these benefits. SWIFT – the major dollar settlement system used by the West is similar in nature. So long as you follow the ‘rules-based order’ you can use SWIFT and enjoy the benefits. Cross Washington, DC and you get cut off. SWIFT is a dollar-based trade settlement system. Get cut off from SWIFT and the logic goes that you are instantly isolated. That is much less so the case now than in the past.

Many also think BRICS is a new phenomenon. It is not. We’ve mentioned this before, but for the benefit of new readers and/or people just becoming aware of the goings on, the concept of BRICS has been around for more than two decades now. In 2006, a book series focusing on the top ten stories of each year that WERE NOT covered in the mainstream news featured Iran’s intention to create an oil bourse, which would accept Euros for payment of oil. We can see what has transpired since then. We’ll readily allow that we’re focusing almost exclusively on the economic realities because that’s where our expertise lies and that there are many other moving parts behind these moves. What we’re trying to accomplish here is explain to the world one aspect of this complicated mess. Money is power and since money is perhaps this world’s greatest motivator, we feel examining the geoeconomic perspective is crucial.

Conclusions

The question at the front of most people’s minds is ‘How will this affect me if I hold dollars?’ Or perhaps a business that transacts in dollars. With the dollar standard era ending, even more changes will be taking place. We’re firmly in the MMT track (see our in-depth article on that here). The only difference is our government borrows money from the central bank because the central bank is private, unlike the model proposed by Knapp in 1905. Practically speaking it doesn’t make much difference. The dollar is losing value rapidly now. More and more countries are seeking to divest. There may come a time in the not too distant future where countries and individuals who rely on others accepting dollars may well have to convert to a different currency to settle trades. Price inflation in the US/UK/Europe and elsewhere is likely to accelerate as the transition gains velocity.

And just to be clear – these various military confrontations globally have one thing in common – the dollar standard and the protection thereof – although again there are many other moving parts involved. That’s all we’re going to say about that. Follow the money. Who benefits?

In 2008 Andy wrote an article entitled “Gold – The Opportunity of a Lifetime‘. The dollar ‘price’ of gold is now three times what it was when the article was penned, but the title of the article still holds true. You’ll need to exchange more of your folding money to get gold (silver is also a good choice), however, if current trends continue, you will be able to hold your purchasing power. Or you could take your chances in an overinflated, rigged, and completely disconnected stock market. That said, we would not be surprised one bit if the DOW, for example, hit 60,000 or more before the cycle ends.

In fantasy stories, the dragon is always most dangerous once it has been dealt that lethal blow. The dollar was dealt a lethal blow a long time ago and continues to be fraught with more and more risks as we progress through this inevitable transition.

More By This Author:

BRICS Update – September 2023
BRICS, CBDCs, and Corruption – With A Personal Perspective
US Banking System Update