The national debt has spiraled to nearly $34.6 trillion. It's easy to point out that this is the problem. But what are we going to do about it? Answering that question isn't so simple.
But as host Mike Maharrey explains in this episode of the Money Metals' Midweek Memo, there is a blueprint we could follow to address the spending and the debt. Thomas Jefferson gave it to us. The question is whether anybody in Washington D.C. has the courage to implement it.
In this episode, Mike also talks about an unusual dynamic in the recent gold and silver rally.
Mike opens the episode reminiscing about childhood conflicts that often ended with somebody demanding, “What are you going to do about it?”
“When you think about it, that’s a fair question. If I’m not willing to back up my demand with a solution, well, I’m just running my mouth. That got me to thinking; I spend a lot of time identifying problems and pointing out how the powers that be are mucking it up. I don’t want to be that guy just running my mouth pontificating with no real solutions.”
With that in mind, Mike sets up a discussion about how to address the massive national debt.
But before he gets into the main topic, Mike discusses a strange dynamic in the current gold and silver rally – Treasury bond yields are rising at the same time.
“Typically, rising bond yields create headwinds for gold. Since gold is a non-yielding asset, investors tend to turn to bonds and away from the yellow metal as interest rates rise. So, what's going on?”
Mike identifies three factors that might be driving Treasury yields higher along with the price of gold.
- The markets might be figuring out that inflation isn’t beaten, despite the Fed’s best efforts. “If you dig under the surface of the most recent CPI reports, it’s clear that price inflation remains sticky. More significantly, rate cuts and a pivot to looser monetary policy mean more inflation."
- The West is losing its pricing power in the gold market. Greater influence is shifting to the east. “Even if investors in the West believe the Fed beat inflation, that the central bank is about to cut rates, and the economy will glide to a soft landing, they aren’t the only players in the gold market. Eastern gold buying -- particularly by China -- is an increasingly powerful force in the global market.”
- The bond market is straining under the sheer level of U.S. government borrowing and spending. This is driving bond yields higher despite the Fed’s best efforts. “And the dirty little secret is the Fed can’t tackle this problem with rate cuts alone. To tip the bond market in a more favorable direction, it will need to return to quantitative easing.”
"Unless the federal government gets its spending problem under control and/or the Fed steps in, the supply of Treasuries will continue to strain the market and drive yields higher. Bond yields are reflecting this ugly reality."
Mike uses this point to pivot into a discussion of one possible way to address the ballooning national debt.
"It’s not impossible. Thomas Jefferson managed to rein in spending and pay off the national debt. I will grant you that he faces a much less daunting debt than we do today, but his actions at least provide a decent blueprint."
He starts by putting the debt into perspective, noting just how much it has grown under both President Trump and President Biden.
“But this isn’t just a Trump/Biden problem. Every modern president inherited a huge national debt and managed to expand it during their time in office. In fact, since 1940, every successive presidential administration has spent more than the previous administration in inflation-adjusted dollars.”
Mike points out that there was a time when at least some people in public office actually cared about limiting debt and spending. Thomas Jefferson was a prime example.
“Thomas Jefferson faced a huge national debt when he took office in 1800. But unlike his modern counterparts, he didn’t grow it further. In fact, he significantly whittled down the debt. Jefferson and his fellow Democrat-Republicans in Congress knocked about $26 million ($420.8 million in 2018 dollars) off the debt through his two terms in office — this despite taking on an additional $13 million of added debt for the Louisiana Purchase.”
How did he do it?
As Mike explains, he aggressively cut spending across the board. He shrank the federal bureaucracy, which wasn’t very big to begin with, and he also cut the military.
Jefferson even managed to shrink the debt while lowering taxes.
"There’s a basic lesson here. If you want to reduce debt, you have to make government smaller."
Mike concedes that the problem today is much bigger than the situation Jefferson faced.
"But the principle is the same. Spend less and use the excess to pay down the debt. That’s it. There is no other option short of default."
The question is whether or not anybody in D.C. has the political will to put Jefferson’s blueprint in motion.
Mike isn’t optimistic.
That’s why he suggests now might be the time to get “real money” – gold and silver.
About the Author:
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
