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The debt problem

After the deal over the weekend in Congress to agree on how much government is going to spend on 2024 ($1.66Tn), in order to avert government shutdown (again), the logical follow up is to look as how that spending is going to be financed. In 2023, the U.S. budget deficit was $1.8Tn, or around 8% of gdp, and for 2024, it appears we will follow the same pattern, with the added challenge that deficits are cumulative. Furthermore, in the 3Q23, US nominal gdp grew less than the deficit, meaning we’re getting less than a dollar of growth per dollar of debt, which is incredibly dangerous. Mrs Yellen has now the task of tapping the markets and finance that deficit, plus pivoting from short term funding to long term one (10+ years) at a time when China and Japan are not as interested in our debt as they were in the past, which will inevitably increase interest expense, creating a vicious cycle. Ironically, the easier solution for this problem, might be inflation.


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