The Federalist: Is Our Exploding National Debt Fueling A Stock Market Crash?

Article by Willis Krumholz in The Federalist

America’s debt and deficits usually are spoken of in terms of economics, but they have huge implications for national security. To see why, start with the economics angle.

Famed investor Michael Burry — who foresaw the housing market bust and was played by Christian Bale in the hit film “The Big Short” — has just issued a warning. In a series of tweets, Burry said that the stock market could crash because of too much debt.

Burry also fears inflation could become uncontrollable, based on a sharp year-over-year increase in data that tracks retail sales and money supply, coupled with unprecedented federal budget deficits and bond-buying by the Federal Reserve, known as quantitative easing. Indeed, retail sales are up year-over-year due to unprecedented stimulus from Washington.

Burry’s warnings might seem conflicting to some. How could there be both a higher risk of deflationary bust and out-of-control prices? The answer is that the further we go in the land of debt and deficits — which doesn’t just exist for the government, as corporations also have high debt levels relative to GDP — the greater the risk of macroeconomic shocks that cause untold pain for normal Americans.

Debt is unstable, and acts as a deflationary force in times of crisis. Think of it this way: all else equal, if you run up the credit card, that reduces your ability to spend in the future. If corporations or households take on too much debt, this drags on future demand. 

Many point out that the U.S. government can’t go bankrupt because it can print money to repay the debt, but risks remain. Right now, the United States isn’t at risk of hyperinflation. Much of the “printed” money due to quantitative easing sits in banks’ excess reserve accounts at the Federal Reserve. This money doesn’t hit the real economy, which is part of the problem, because it arguably pushes up asset prices and increases inequality without ever hitting Main Street.

But Burry has a point. Once the money printing starts directly financing government deficits, inflation could get uncomfortable.

This situation threatens U.S. national security. Right now, the U.S. national debt to GDP is about 100 percent, reaching World War II levels but without the world war. Some might claim coronavirus is like a war, but it isn’t remotely comparable to World War II (which killed 75 million people) and our debt situation was on this trajectory well before the coronavirus hit. One risk is that  .....

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