Originally published at: US Debt Hits $35 Trillion Amid Stagnant Bank Lending – Peak Prosperity
The US national debt has reached a staggering $35 trillion, increasing by $1 trillion in less than seven months and by 50% since January 2020. Despite reported economic growth since 2020, the debt has surged, raising concerns about its impact during future recessions. The debt-to-GDP ratio, which compares the national debt to the size of the economy, soared from 106% at the end of 2019 to 133% in Q2 2020 due to the economic downturn and stimulus spending. Although it dipped to 117% in Q1 2023, it rose again to 121.7% in Q2 as GDP grew faster than the debt. Interest payments as a percentage of tax receipts are a critical metric, with Q1 showing a dip due to increased tax receipts. Q2 figures are expected to show a further dip. Treasury bills (T-bills), which are short-term securities, have seen fluctuating issuance. The share of T-bills in total marketable Treasury securities rose from 16% in April 2023 to 22.5% by March 2024 but has since dipped to 20.7% due to high tax receipts. Of the $35 trillion in Treasury securities, $7.16 trillion is held by government entities and $27.84 trillion by the public, including international investors, central banks, the Federal Reserve, US banks, and other institutional investors.
In the financial sector, there is an apparent contradiction between a seemingly strong U.S. economy and the reluctance of banks to lend. Despite positive economic indicators like a 2.8% GDP growth and inflation nearing the Fed’s target, banks are cautious due to perceived risks in the real economy, including counterparty risks and ongoing banking crises. George Gammon, a macroeconomics expert, argues that the yield curve inversion, a reliable recession indicator, has been signaling trouble for over two years. He explains that banks prefer buying long-term treasuries over lending due to unfavorable risk-reward scenarios, indicating their lack of confidence in the economy. Gammon highlights that the banking system’s interconnectedness amplifies systemic risks, making it vulnerable to crises. He notes that unrealized losses in banks have soared to $700 billion, far exceeding the $75 billion during the 2008 financial crisis. This, coupled with declining money supply and rising delinquency rates, suggests underlying economic fragility. The discussion also touches on the Fed’s potential actions, with speculation about rate cuts in 2024. Gammon believes that the Fed’s historical inability to engineer soft landings makes a hard landing more likely. He points out that the yield curve’s recent behavior, particularly its uninversion, aligns with past patterns preceding recessions.
In other financial news, small-cap stocks have recently caught up with tech stocks, as shown by the iShares Russell 2000 ETF (IWM) and QQQ, an ETF tracking the Nasdaq 100. However, this rotation from tech to small-caps isn’t advisable. In a bear market, cash and gold are safer bets for liquidity and preserving purchasing power. Tom Dyson, Investment Director, released the August Monthly Strategy Report, introducing a new gold stock to the Official List. An updated Dollar Report will be available next week. The Federal Reserve’s Real Broad Dollar Index shows the value of the US dollar against major trading partners’ currencies. The Federal Open Market Committee meets next week, with potential interest rate cuts on the horizon, which could weaken the dollar. This aligns with Donald Trump’s plan to boost US GDP by weakening the dollar and imposing tariffs on Chinese imports. Despite no clear technical pattern for the dollar’s future, it is believed it will decline in gold terms, prompting Tom’s new gold stock recommendation. Federal debt is nearing $35 trillion, likely to increase further, especially with a lame-duck President. The US Treasury’s Quarterly Refunding report next week could impact interest rates and asset prices, particularly growth and tech stocks.
On the international front, the European Union has transferred €1.5 billion to Ukraine, using proceeds from frozen Russian assets. This move is part of a larger Western effort to support Ukraine financially and pressure Russia. European Commission President Ursula von der Leyen announced that the EU will send Ukraine 1.5 billion euros ($1.63 billion) that represent revenues from Russian assets frozen by the 27-member bloc. Following Moscow’s invasion of Ukraine in February 2022, the West froze some 276 billion euros ($300 billion) in sovereign Russian wealth funds. The Group of Seven (G7) industrialized countries last month decided to service a $50 billion loan for Ukraine with proceeds generated by Russia’s frozen assets, prompting Moscow to threaten legal action. Ukrainian Prime Minister Denys Shmyhal voiced gratitude for the EU move, emphasizing the importance of turning adversity into strength and building a safer, more resilient Europe. In reaction to von der Leyen’s announcement, Kremlin spokesman Dmitry Peskov said Russia will not leave the EU’s move unanswered but said Moscow’s response had to be carefully planned.
Sources
US National Debt Hits $35 Trillion: Debt-to-GDP Ratio Dips Slightly Amid Economic Growth
The US national debt – the total amount of Treasury securities – rose to $35.00 trillion, according to the Treasury Department on Friday (rounded to the nearest billion: $34.998 trillion).
Source | Submitted by rhollenb
Banks See Storm Clouds Despite Booming Economy: George Gammon Predicts Hard Landing
So if we have this booming economy, why aren’t the banks lending? Just ask yourself that. Do they not want profit? Are they somehow not greedy? Of course not. The reason they’re not lending is because the risk-reward doesn’t make sense.
Source | Submitted by rhollenb
Navigating Financial Kettling: The Perils of Market Concentration and Government Oversight
Watch out for the financial version of kettling too. For stocks, this means having too much of your portfolio concentrated in a few very large tech stocks. It’s very hard to get out without taking big losses, once the selling begins.
Source | Submitted by DrBRGR
EU Redirects €1.5 Billion from Frozen Russian Assets to Aid Ukraine, Kremlin Vows Retaliation
“Today we transfer 1.5 billion in proceeds from immobilized Russian assets to the defense and reconstruction of Ukraine,” von der Leyen wrote on X.
Source | Submitted by AaronMcKeon