Thoughts on….Everything - Part Deux
“Where the road runs down by the butternut grove,
To old Bill Skinner’s stream.
Do tell at the noonday bell,
It’s time for a summertime dream.
In a lunch pail town in a one-horse way.
You can live like a king and queen.
Let’s steal away in the noonday sun,
It’s time for a summertime dream.
Birds in all creation will be twitterin’ in the trees.
And down below’s a pond I know,
You can swim in it if you please.
And if you come down when the mill shuts down,
You can see what chivalry means.
Let’s steal away in the noonday sun,
It’s time for a summertime dream.”
So, the Part Deux has two origins. I took French throughout High School because back then, it was the language of diplomacy and I thought I should know that. But also, my favorite movies are always comedies, and Hot Shots, Part Deux is one of those. However, it was not as good as the Austin Powers trilogy, which may be the three finest films ever made.
But I digress.
On to my next series of thoughts on everything:
The Debt and Deficit: I have been a fiscal conservative throughout my political career. For 25 years, I have been shouting that “the sky was falling” because the debt was too high and a fiscal reckoning was imminent. I have been wrong for 25 years. In the middle of that period, then Vice President Dick Cheney said in an interview that “deficits don’t matter.” I was horrified. But he has been right.
He has been right…so far.
At some point they will matter. The question is, when does that point come?
Japan has been the most indebted major country as a percentage of GDP for decades. “Deficits don’t matter” people have pointed to Japan as proof that they don’t matter since Japan has not collapsed and although their growth has been muted, people there are generally prosperous and happy.
But now with inflation rearing up in Japan and the cost of higher interest rates on their debt looking scary, the Japanese government is having to make unusual moves to try and keep everything together.
Similarly, the United States’ debt problem is starting to raise eyebrows amongst investors and others outside of the political sphere. Treasury Secretary Scott Bessent roundly criticized then Secretary Yellen when she started issuing less long term treasury debt for fear that the demand to buy wouldn’t be there. But upon taking the job himself, Bessent continued and now has expanded the policy.
On top of all that, the private sector is also on a borrowing binge. In spite of the massive trillions in new debt issued by treasury this year, the private sector has borrowed more and issued more debt that the government. The United States is not an island here either. Other governments and businesses are borrowing like crazy as well.
Will there be enough buyers for all of this debt? Will interest rates have to rise everywhere to entice said buyers?
If you presume that we are getting much closer to the tipping point where I eventually become right and VP Cheney wrong, there are only a few solutions. Furthermore, since no one knows exactly when a “debt crisis” would occur and fixing the problem after the crisis is very much more difficult than trying to prevent it, the time to start doing something about the debt and deficits is rapidly approaching if not in front of us now.
Let’s review the options:
Fiscal Austerity: Translation - Cut spending and raise taxes. Javier Milei did this in Argentina, cutting spending by about 27%, letting the currency decline, raising utility rates, cutting social security and pensions and bringing on a recession. It was called “motosierra” (chainsaw). Society suffered a lot of disruption and pain. But it worked. Inflation dropped from 200% a year to 19% now (and dropping) and the country runs a budget surplus after decades of deficits. Can that happen in the U.S.? I would suggest no. Trump has been consistent since 2016 in opposing any cuts to Medicare or Social Security. In an unsafe world, defense spending is more likely to go up than down. The $40 Trillion debt along with rising interest rates make the interest cost higher every year. Yes, you can eliminate, and should eliminate the Department of Education and do DOGE (Elon Musk’s expense cutting plan) stuff, but that will not offset how quickly the entitlement, interest and defense spending is increasing. Normally, Republicans do not raise taxes. But Trump already did. Tariffs are taxes. However, the revenue he expected to get was cut way down by the Supreme Court ruling. Democrats, should they retake power, will raise all kinds of taxes except for tariffs, because they are against anything Trump is for. But, Dems won’t raise taxes as much as they will increase entitlement and welfare spending. And fraud spending has now been exposed as a central part of the Democratic party’s campaign strategy. They are full-throated defenders of fraud. So, fraud spending will increase as well. Secretary Bessent came into office promising to reduce the deficit from 6.3% of GDP in Biden’s last year to 3% by the end of Trump’s second term. It’s tracking at 6.0% this year. There’s a long way to go.
Grow Your Way Out: This is Scott Bessent’s preferred solution for obvious reasons - no pain. His 3-3-3 plan was to grow GDP so that the deficit as a share of GDP dropped to 3%, plus 3% real GDP growth and 3 million new barrels a day of U.S. oil production. How is he doing? GDP growth was 1.8% in the first half of 2026 and the Atlanta Fed’s GDPNow for the 3rd quarter is tracking at 4.6%. If that were to hold through the end of the year, 3% GDP growth may be here right now. U.S. energy production continues to rise, partly because of the increase in prices due to the war in Iran, and so Bessent is on track to get the 3 million more barrels by 2028. But that deficit? The point of the 3-3-3 plan is that government spending is not supposed to increase as fast as the GDP growth. In fact, since GDP growth automatically means more tax revenue than GDP (since tax rates are progressive), as long as spending goes up by less than nominal GDP growth you can get there. But, that’s not happening. If the “Grow Your Way Out” plan is going to work, spending growth has to slow way down. As I mentioned above, the opposite is currently happening.
Inflate Your Way Out: This is a tried a true way of dealing with too much debt that dates back at least as far as the Roman Empire. It is clear from the Carter and Biden inflation days, that people don’t like double digit inflation. But, might they live with a sustained 4-5%? If you did that for 5 years and maintained the nominal deficit amount, you reduce the deficit in real terms by 25%. That’s price inflation. But you can also do this with monetary inflation. In that scenario, you print money like crazy so there is always enough out there to buy your debt. This causes the value of a dollar to decline against most everything else - real estate, stocks, gold, etc. So, the deficit marches along but there’s plenty of cash to finance it and again in real terms, it declines. But the person in an apartment with just a savings account goes backwards.
Financial Repression: This is a fancy economic term that I will explain. This is the method that the Japanese have used for 30 years and the U.S. did this in the aftermath of World War II to deal with the massive war debt. Under this scenario, the government pays a well below market interest rate and inflation rate on its debt. Today that could be, say, 1%. “Who would buy a bond paying 1% today?” you ask. Well, under financial repression, the government makes you buy it. They would start with banks and insurance companies but can basically require any number of businesses or individuals to buy the debt at this low rate to stay in business or to be a citizen. This is effectively a tax on everyone required to buy the bonds. It has the effect of lowering the deficit (less interest cost) and making sure the debt gets purchased because it is mandatory.
Default: Countries can always just decide “Yeah, I’m not paying you back for the money I borrowed. Write it off.” South American countries have been very good at this in the last 60 years. Obviously, this solves the problem. But, it also means you cannot issue new debt again except at stratospheric rates. A few years ago, I might not have even mentioned this option because it would mean the end of the United States as a credible country on economic matters. No one in their right mind would choose this option. But we now have “Democratic Socialists” out there who, were they to gain power, would absolutely do this because their ivy league indoctrinations clearly do not include economic truth. They are not ever in their “right mind.” If you own a treasury you must be rich or a corporation so who cares if they lose money?
So you say, “That’s cool. Thanks for the lesson in fiscal economics 101. What do you think is going to happen?”
My predictions on this will only go as far as the end of 2028. The decisions on what to do here are made by political people holding political power and considering political ramifications. This far out, no one has any idea who will win in the 2028 election and that outcome, along with the situation on the ground at that time, will have a huge bearing on decisions made. But, I can tell you what I see the Trump administration doing over the remaining 29 months they have in office.
Bessent’s 3-3-3 plan is not dead. As I mentioned, they are doing fairly well on two of the three goals. The tariffs were a major part of their deficit reduction plan and having those declared illegal was a big blow to the plan. Furthermore, the inability to get a quick resolution to the war in Iran has also added to the deficit in terms of defense spending and interest costs.
So, I think they will remain on this strategy if for no other reason than the fact that it is the most politically palatable. Bessent is trying to manage the 10 year Treasury bond both to ensure that it is liquid (a failed auction is the definition of a fiscal crisis) and that the rate does not get too high. This is basically a very light form of yield control and financial repression. To achieve the 3% deficit to GDP, the war will need to end, tariffs be reimposed, inflation come down and interest rates not rise. Some of these goals are in conflict. To achieve any one of them is difficult in any case. I see them as basically doing a little bit of austerity, inflation and repression with “grow your way out of it” being the headline.
And of course any kind of recession or stock market crash would destroy the “grow your way out” plan for the time being. For that reason, I expect the administration to do everything they can to keep the economic ball rolling. If that means some money printing or a little hotter inflation or getting more money from other countries then so be it. That is in spite of their public statements. Interestingly, when the new US dollar “stable coins” are created, they are required to be 100% backed by US Treasuries. So, that creates a built-in price-insensitive buyer for the thing that the government needs to make sure always sells. Another tip of that hat to financial repression, perhaps?
I will say this: both Kevin Warsh and Scott Bessent are very, very smart people with lots of experience in the real world and real markets as opposed to academia. I can’t think of many people I would rather have on the bridge entering heavy seas. The Captain (Trump) occasionally gives some strange and counterproductive orders. But he does listen to his subordinates.
The bottom line is that this fiscal conservative thinks we will probably avoid a debt crisis for another 2 1/2 years. But, it will not be easy maneuvering through that. Hopefully, the situation will be somewhat better at the dawn of 2029. But it will likely be only marginally better if at all.
Dick Cheney continues to be right and I continue to be wrong. But the game’s not over. I very much hope we never have to find out what it takes for me to be right.
Here’s what’s coming in the third and future issues of this series on “everything”:
Artificial Intelligence and Data Centers
The Fourth Turning is Here
The Economy and the Everything Bubble
2026 Elections
2028 Elections
The Oligarchy that Runs California
Other things I haven’t thought of yet
Until next time, I remain respectfully,
Congressman John Campbell
Drive Fast & Live Free
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