Doomsday Scenario Update

Sheila Weinberg  |  May 28, 2024

In 2015, Truth in Accounting laid out two doomsday scenarios for the finances of the U.S. federal government. Almost ten years later, let's look at an update.

The first scenario, ominously titled "Death by Panic," is rapidly evolving. With the continual escalation of the budget deficit and an ever-expanding trade imbalance, the United States finds itself accumulating a staggering amount of foreign debt. Heavy reliance on foreign investors and governments, notably Japan and China, to purchase government debt exacerbates the situation. According to USAFacts, between 2000 and 2022, Japan's holdings of U.S. Treasuries grew from $534 billion to just over $1 trillion, while China’s ownership grew from $101 billion to $855 billion.

As this nightmare unfolds, foreign investors lose faith in our ability to address the deficits. In April 2024 former US Comptroller David Walker stated this has already started to happen. In the future global confidence in U.S. fiscal management plummets, triggering a mass sell-off of U.S. bonds, notes, and bills. The desperate attempt to find buyers forces the U.S. to escalate interest rates to exorbitant levels, leading to a near-collapse of the dollar's value practically overnight. Struggling to secure necessary funds, the government faces insolvency, necessitating a shutdown. Social Security and Medicare benefits become unattainable, leaving retirees financially stranded.

The second nightmare scenario, ominously dubbed "Death by Hyperinflation," revolves around the U.S. Treasury financing its debt by selling bonds, notes, and bills to the Federal Reserve. The Federal Reserve creates money out of thin air by purchasing these securities with checks lacking tangible backing. This step is already happening. Until 2010, the Federal Reserve had purchased less than $1 trillion in Treasury securities; now, it holds more than $4 trillion. This unchecked money creation has fueled inflation, which will escalate as the government generates more money to meet its financial obligations without corresponding economic growth. 

Eventually, this inflation spirals out of control, culminating in hyperinflation. The value of the dollar plummets, leaving workers struggling to afford basic necessities and retirees watching their savings diminish rapidly. Foreign investors seize the opportunity to acquire U.S. assets at rock-bottom prices. At the same time, banks are forced to cancel credit cards due to the inability to keep up with the dollar's plummeting value.

In either nightmare scenario, the consequences are dire: widespread unemployment, depleted savings, and bleak prospects. Civil unrest erupts as black markets thrive, workers protest, seniors demand action from Capitol Hill and the White House, and riots and anarchy grip the nation.

These possible nightmare scenarios highlight the need for urgency. The situation demands attention—Americans must awaken to the looming financial catastrophe before it becomes an irreversible reality.

In 2015, projections indicated that in 2024 the national debt could reach alarming levels, placing significant strain on the government's ability to fund essential programs and services. Those projections are becoming a harsh reality with new spending around wars and immigration.

The COVID-19 pandemic, which ravaged the global economy in 2020 and beyond, exacerbated the U.S. government's existing financial vulnerabilities. Massive stimulus packages to mitigate the economic fallout have further inflated the deficit, pushing the national debt to unprecedented heights.

Demographic shifts, such as the aging population and increasing healthcare costs, place immense pressure on entitlement programs such as Social Security and Medicare. Meanwhile, infrastructure needs, national security expenditures, and other essential government functions demand substantial financial resources.

Despite efforts to address the looming crisis through tax reforms and spending cuts, political gridlock and partisan polarization have hindered meaningful fiscal policy changes. As a result, the U.S. government finds itself on an unsustainable financial trajectory, with the specter of fiscal insolvency looming ever larger.

Without tackling one of the root causes; the flawed accounting being used at all levels of government along with decisive action to rein in spending and increase revenue the United States is facing severe economic consequences in the years to come. The urgency of addressing these challenges cannot be overstated, and it starts with government accounting for our tax dollars properly. Bad data leads to bad decisions. The nation's long-term stability and prosperity hang in the balance.

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