Brace for a possible U.S. debt crisis if inflation stays elevated, democracy itself is at risk – Michael Gayed

(Kitco News) – The U.S. could have a sovereign debt crisis as Treasury yields rise and other countries fail to pay back their dollar-denominated loans, said Michael Gayed, portfolio manager and Publisher of the Lead-Lag Report. These trends, in turn, could pose risks to U.S. democracy.

Gayed’s research shows that Treasury yields, on a weekly basis, have been rising 68.6 percent of the time in 2022, a level that is unprecedented. Rising yields could weaken a government’s ability to fulfill its debt obligations.

“My hope is that this anomaly ends, and that we’re not headed for a sovereign debt crisis,” said Gayed. “We want to be really careful about how despotism happens. Conditions create the monster. What I’m really referring to is how the Weimar Republic created conditions for Hitler’s rise to power.”

Although Gayed said that another Hitler-like despot is not necessarily going to arise, he stressed that conditions in the German Weimar Republic of the 1920s, with its high inflation and debt troubles, are analogous to the U.S.’s similar problems today.

Gayed spoke with David Lin, Anchor and Producer at Kitco News.

Multiple Black Swans

The S&P 500 down 18.5 percent year-to-date, with some stocks, like Netflix and Tesla, crashing as much as 63 percent. This, combined with high U.S. debt burdens, rising Treasury yields, and inflation, could cause “multiple Black Swans” and a “pretty ugly” market environment, said Gayed.

He added, referring to U.S. debt obligations, “When you have $170 trillion of unfunded liabilities and $30 trillion of visible liabilities… how could that not be inflationary? The only way to resolve that is to pay down that debt.”

Gayed suggested that a deflationary event is possible if an emerging markets country “can’t pay off its dollar-denominated debt.”

In general, he stressed caution as we enter a period of rising market uncertainty.

“The end result of all this is either some kind of sovereign default crisis, which is a deflation event, or the exact opposite, which is hyperinflation, which results in conditions under which something really bad comes,” said Gayed. “Something bad [could happen], in terms of a new leader that you don’t want to see lead.”

Political Implications

Gayed said that he is especially worried about the political ramifications from the U.S.’s inflation, which was 8.5 percent in July.

“Do not underestimate how devastating inflation can be towards psyche, and how that can result in conditions we don’t want to ever see in a democracy,” he explained. “If politicians keep doing the same stupid asinine things to throw more fuel on this inflationary fire, and calling it an Inflation Reduction Act, you’d better believe there are real risks that you could have something really ugly that we’ve never seen in America before.”

Gayed added that “protests and real violent types of action against local governments” have been happening worldwide in response to inflation. He warned that if inflation is not resolved soon, “something much more severe comes from a governance standpoint.”

“It’s not a base case, but… if the U.S. government is not able to cover its interest expense with higher taxes, the Fed will simply do it,” he said. “But that means inflation is going to be the end result of that… the end result of elevated inflation is something that we don’t want to see, which could be the rise of real despotism.”

To hear Gayed’s thoughts on gold and Bitcoin, watch the video above.

Follow David Lin on Twitter: @davidlin_TV

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