The U.S. economy has shown remarkable resilience: neither the coronavirus pandemic nor the energy crisis caused a recession like 2008, let alone the crash of 1929.
Could the Fed have learned from past mistakes and put a definitive end to deep recessions and financial storms?
Unfortunately, this is far from being the case. The "successful" overcoming of these problems has not resulted from a brilliant strategy but from indebtedness: from $23.2 trillion in the first quarter of 2020, total public debt soared to $33.1 trillion.
To put it into perspective, this amount exceeds the combined economies of China, Japan, Germany, India, and the United Kingdom. On an individual basis, each American owes slightly over $99,000.
Obviously, this amount will never be repaid unless the dollar is devalued by 60-80%. Still, investors don't seem to care much as long as the U.S. government meets its interest obligations.
And thanks to the Fed's actions, they have seriously stepped up. By the end of fiscal year 2023, which concludes at the end of September, net interest expense is projected to reach approximately $663 billion.
By comparison, they were $476 billion in 2022, up $187 billion, representing year-over-year growth of 40%. Is this the Bidenomics miracle we've been hearing about?
Howbeit, in the next year, debt spending is expected to exceed expenditures on pension insurance, disability insurance, unemployment compensation, and food assistance.
Looking ahead, by 2029, net interest expense will exceed defense spending. It is clear that such a system cannot be sustained indefinitely, and eventually, the bubble will burst.
One of the few assets that could partially protect the savings from this scenario could be gold (XAUUSD).
So why do investors continue to purchase US Treasuries?
First, because so far, the United States has never defaulted on its payments, and the country continues to lead the world economy. In other words, there is still a belief in the "too big to fail" principle.
Second, U.S. government bonds continue to represent the standard method of settling international transactions, accounting for more than half of all foreign exchange reserves held by sovereigns worldwide.
Therefore, it is in no one's interest to collapse the system. Instead, we may see a gradual reduction of the instrument in countries' portfolios, but later, after the current crisis erupts.
What should be the strategy in the coming months?
Although the U.S. debt bubble continues to rise, we should not expect an immediate burst, as the actual preconditions are not in place. What we could see instead is a financial crisis.
As the Fed continues to fight inflation by raising rates, household and business spending is rising, putting downward pressure on consumer demand and investment programs.
This will eventually lead to a fall in profits and a turnaround in the market, forcing the regulator to change its restrictive monetary policy stance. As a result, demand for bonds could rise, as could prices.
Yet, given all the problems mentioned, it would be prudent to stick to 2-5 year Treasuries. But before jumping on this boat, analysts recommend waiting for macroeconomic signs of an economic slowdown.
