Currency Emergency: When The Debt Comes Due

What happens when the debt comes due?

It’s a question millions of Americans are grappling with in their personal finances. It’s also a multi-trillion dollar question facing officials in Washington, D.C.

How they decide to answer it – or evade it, as the case may be – will have profound implications for investors and anyone who holds U.S. dollars.

For months, the financial media has been running stories about how the pandemic led to a surge in savings. The U.S. consumer, thanks a host of government supports including stimulus checks, student loan debt relief, and eviction and foreclosure moratoriums, is supposedly in great shape.

Why, then, are Americans taking on new debt at the fastest pace in over a decade?

The Federal Reserve reported this week that household debt surged during the second quarter by the most in 14 years. Much of that is represented by mortgage debt as buyers take on ever more in order to be able to buy homes that are rising rapidly in price.

Some perpetual optimists rationalize surging mortgage balances as sign of a strong jobs and housing market – forgetting how badly things can turn out (and did in 2008) when financial system leverage becomes excessive.

It’s not just houses people are speculating on with borrowed money. Margin debt at brokerage houses has surged. And according to Fed data, credit card balances grew by $17 billion while auto loans surged by $33 billion in the past year.

All told, Americans owe about $15 trillion – and that, of course, doesn’t include their share of the swelling national debt owed by the U.S. Treasury.

Treasury Secretary Janet Yellen announced Wednesday she would be pursuing emergency measures to raise $126 billion and avoid breaching the Congressionally imposed debt ceiling. The government owes $28.6 trillion on the heels of a record a record $3.4 trillion budget deficit.

The Treasury’s accounting maneuvers will, for now, avert a disastrous debt default. And, like so many times before, Congress will eventually raise the debt ceiling to enable more Biden administration borrowing – even if it’s a last-minute deal passed over the objections of fiscal conservatives.

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