Chris Whalen: The Economy Is At A Tipping Point

We're one bad Treasury auction away from trouble

Happy July 4th!!

Today's guest wrote the book Inflated: How Money & Debt Built The American Dream

In it, he wrote: "The first rule of any fiat system is no fiscal deficit"

Well, the US -- and virtually every other G7 country -- is breaking that rule six ways to Sunday given the unprecedented record levels of deficit spending currently underway.

Does that mean we're headed for trouble?

To find out, we'll ask the author himself, Chris Whalen, Chairman of Whalen Global Advisors LLC and expert on the banking, mortgage finance and fintech sectors.

Chris sees the economy at an inflection point, where rising unintended consequences are going to start placing restraint on future deficit spending, no matter how badly our fiscal leaders may want to spend.

To learn why, click here or on the image below:

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Adam’s Notes: Chris Whalen (recorded 7.3.24)

EXECUTIVE SUMMARY

• Chris assesses the global economy as stable but heavily burdened with debt. He notes that throughout history, borrowing has become a common solution for societies unable to meet their immediate needs through taxation, a pattern that repeats in roughly every century. This cycle is similar to the American experience, where borrowing eventually becomes unsustainable.

• He rates the current economic situation as a 7 out of 10 on the "out of hand" meter (10 being the worst score), indicating significant concern about the $36 trillion debt and social security obligations. He argues that addressing these issues requires a level of focus and purpose that is currently lacking in Washington, where political actions are often influenced by the highest bidder. He draws parallels to historical instances, such as the inflation caused by post-Civil War policies and the subsequent impact leading to the Great Crash of 1929.

• The enormous size of the U.S. Treasury's debt and its cash operations are a major source of instability in the financial system. Chris highlights that the Treasury's large-scale borrowing, often with short-term debt like T-bills, significantly impacts the markets. He mentions that the Treasury General Account's large cash reserves, now parked at the Federal Reserve, drag the markets around. This substantial borrowing requirement, approximating 20% of federal spending, forces the government to raise vast sums, such as $800 billion in a major refunding event later this year, which destabilizes the system.

• Chris anticipates a potential consumer recession due to rising interest rates and consumer fatigue. He points out that higher costs, such as credit card interest rates reaching 24-25%, strain consumers' ability to manage their finances, including paying for essentials like housing and education. He advises investors to consider