Debt Spiral
Surviving a national debt spiral is a challenge for households, business, and the government.
For households, a national debt spiral will manifest as the worst cost of living crisis in generations as monetary inflation reduces the purchasing power of the fiat currency.
Fiat currencies that will experience the worst monetary inflation are those where global demand for the currency, either for global trade, international loans or bonds, is the weakest.
So, currencies with spiralling public deficits and weak global demand for their currency are more vulnerable to a debt spiral, a bond market crash, hyperinflation and currency failure.
For example, the CHF is a safe haven currency.
The currency isn’t used much in international trade.
Nevertheless, a low public deficit, sound fiscal management and geopolitics, the neutrality of Switzerland, the mountainous terrain, and a citizen’s army, every adult male has an assault rifle, given military training to use it, make it difficult to invade.
So, CHF is a better store of value than GBP or EURO, which explains the Swissy rally I forecasted five years ago.
What is a debt spiral?
It is a cycle of increasing debt despite payments made on time.
A debt spiral can be due to high-interest debt, a sudden need for more debt, or a loss of income.
So think of what has happened in the US over the last decade.
Was there a sudden increase in debt?
Indeed, the 2020 pandemic lockdowns were financial and economic suicide.
I think the stress of a debt spiral, currency debasement, and cost of living crisis stagflation has probably killed more people than the pandemic.
I know two people running a small business; one committed suicide, the other died of a stress-related heart attack during the lockdowns.
Locking down the economy and then the Fed printing 3.3 trillion dollars alone in 2020 is a textbook example of how to ignite inflation and a bond market crash.
Reducing the global supply of goods and increasing the money supply causes inflation. It is that simple.
How a debt spiral destroys a fiat currency
So, the 2020 lockdowns resulted in trillions of dollars added to the national debt, which resurfaced as treasury bonds.
When excessive debt becomes monetized, that leads to an imbalance in the treasury bond market.
A lack of investor demand and an oversupply leads to a repricing of treasury bonds based on the market dynamics.
When treasury bond prices fall, their corresponding yields rise.
The market mechanism pushes up borrowing costs, bearing in mind the 10 and 20-year treasury bond yields determine loan and mortgage rates. Yield targeting is when central banks create currency to buy surplus bonds to suppress bond yields.
In the short term, in the initial phase, QE bond buying works.
However, it has diminishing benefits because creating currency is inflationary in the long term.
Going further into debt to service an exponentially growing national debt is the beginning of a debt spiral
What comes next is a bond market crash, which occurred in 2023, hyperinflation and a currency collapse.
Cash becomes trash, and holders of debt assets lose it all.
Tangible assets, farmland, productive assets and precious metals tend to do well.
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