Why America Is Going Bankrupt

What's up, Graham? It's guys here, and if you check the news, I guarantee you're going to see headlines that explain that the U.S. is on the brink of a recession. The debt default could trigger the Dollar's collapse, and the everything bubble is bursting. Well, the S&P 500, God knows, that 50—and the new Starbucks drink is suddenly sending people to the bathroom. To which they're not exactly wrong.

I mean, besides the fact that negative headlines drive more clicks, there is the real concern that our economy is slowing down. So with the debt ceiling supposedly just a few weeks away, well, Warren Buffett sells the stocks and warns that the incredible period for the U.S. economy is coming to an end. I thought it would be worthwhile to debunk whether or not there's any truth to these claims, talk about the latest findings in terms of whether or not inflation is actually coming down, and discuss how you could put yourself in the best position possible to take advantage of what's about to come.

Although before we start, I gotta come clean on this. A few weeks ago, I promised you guys that I would show you a picture of a blue lobster if you hit the like button and subscribed, and I completely forgot to do that. So as my way of saying sorry, here's a picture of a blue and a white lobster, both in the same picture, if you like and subscribe. So thank you guys so much, and now let's begin.

Alright, so to get to the bottom of what's really going on, look no further than inflation. Arguably, this has now become the single most important metric for our entire economy because the more it goes up, the higher rates have to stay, and the more stocks and housing have to fall. But in this case, inflation seems to be softening—or is it?

Well, the main category that gets the most attention is what's called the CPI inflation, which stands for the Consumer Price Index. This covers a weighted average of the most frequent consumer purchases, and it's tracked on a year-over-year basis every single month. However, there is a problem with this calculation because it might not be entirely accurate since some of the items that make up inflation are very volatile and go up or down a lot in price in the short term.

So to counteract this, they came up with core inflation. This purposely excludes food and energy that are known to be a lot more volatile based on factors outside of our control, like eggs rising 7% in price. So in terms of what's happening right now between them, it's both good and bad. Let me explain.

On the surface, inflation did decline below expectations, and it's below five percent for the first time since 2021. This also means that inflation increased 0.4 percent month over month, suggesting that even if we continue at the exact same pace throughout the next year, we should stay below five percent.

So why is this good news? Well, we saw month-over-month net decline in the cost of fuel, energy, natural gas, and transportation services. Well, everything else only saw a modest gain besides used cars and housing, which we'll get to shortly. Anyway, in terms of specifics, year-over-year, food saw one of the largest increases at 7.1 percent, with cereals and baking products of a staggering 12.4 percent. Food away from home, like restaurants, was also up 8.6 percent.

So unless you're eating rice and beans at home, you're probably feeling the effects of inflation a little bit more than this report would suggest. The same also applies to things like vehicle repair, frozen vegetables, and insurance, which topped the list of the highest annual increases. However, over the last year, energy costs have declined an average of 5.1 percent, and since that makes up a larger portion of the American budget, inflation does tend to skew to the downside.

Plus, it helps that health insurance, car rentals, and bacon led the largest price decreases. Yes, seriously! Did you know that there's an entire index dedicated to the inflation-adjusted prices of bacon? Yes, see, you still learn something new every day. Anyway, even though this sounds like mostly good news, there is another side that's worth taking into consideration, and that would be what's called core inflation.

Like I mentioned earlier, this excludes food and energy prices, and when you take those components out, inflation sits at five and a half percent year over year, which increased by 0.4 percent month over month. Even though this might not sound like a lot, this has stayed the exact same since the beginning of the year, even despite rapid rate increases.

I mean, just keep in mind that in April, core CPI was at 5.6 percent. In March, it was five and a half percent. In February, it was 5.6 percent. In January, it was 5.7 percent—you get the idea. Basically, this metric is a lot stickier than economists were expecting, and the bad news is that because of that, unless this comes down, rates are probably going to have to stay higher for longer.

This is also supported by housing, which is still the largest contributor of inflation. In this case, the cost of shelter increased by 8.1 percent in April, which is only down from 8.2 percent in March, or in other words, this contributed to more than 60 percent of the monthly increase in the index for all items excluding food and energy, which is a big deal.

Fortunately though, the good news is that housing only takes into account existing costs, like the leases that were signed a year ago, and not necessarily where the market is today. And with rents beginning to decline, we could start to see these numbers fall towards the mid to end of this year. On top of that, it's also said that Jerome Powell understands and expects housing to be a lagging indicator, and as a result, he's supposedly looking at what's called super core inflation, which is core inflation minus housing.

So when you begin to chip away at everything that makes inflation high, yeah, it's obviously going to start to look a lot better. Anyway, in terms of what this means for the rest of the economy, you're going to want to listen up. Arguably the biggest immediate impact throughout almost everything—from stock prices to rate hikes to housing prices to interest rates—is a topic that you're about to hear non-stop, and that would be the debt ceiling.

Simply put, this is the maximum amount of money that the U.S. government is able to borrow to pay for all of its obligations, like federal employees, Social Security, interest on the national debt, and 440,000 a year to hire elevator attendants to push the buttons for Congress. So once the limit is reached, they either have to agree on a new higher debt ceiling, or the United States begin shutting down before defaulting on its debts, and that would be bad—really bad.

As of now, Treasury Secretary Janet Yellen warns that the United States could run out of cash as soon as June 1st, which is a lot sooner than expected—thanks to lower tax revenues, of course. Raising the debt ceiling is nothing new, and it's been extended or revised 78 times since 1960, or basically more than once every single year.

But this time, it's said that the debt ceiling is different. Why? Well, because both sides can't seem to come to an agreement, and the clock is ticking. See, this topic dates all the way back to 1917 when Congress was directly in charge of authorizing all government spending. So if there was a war, infrastructure, or investment the U.S. should make, Congress would vote on each measure accordingly and decide whether or not it's worth spending money on.

But to provide slightly more flexibility throughout World War I, Congress created the Second Liberty Bond Act, which established a ceiling in terms of how many new bonds could be issued and how much money could be spent. In a way, this is almost like them going from a case-by-case spending basis to using a credit card where they had a limit in free range up until that amount. And you can see where this is headed.

Of course, since they went to a credit-like system, they also got a credit score. They told other countries how likely they are to repay back their debts. In this case, the U.S. has what's called the AAA rating, which means they're extremely safe to lend money to because they've never ever defaulted. Although in terms of what's happening today, government spending is just out of control.

If a new debt ceiling is going to be reached, one side has to give in; otherwise, it's going to be complete chaos. So is this something to actually be worried about? Well, first of all, let's get this out of the way: Congress likes to spend a lot of money, regardless of what side you're on. And for the last hundred years, this has completely devolved into a political game of tug of war of various spending agendas.

However, so far, even though we've gotten very, very close, the United States has never actually defaulted on their debt. I mean, I guess they technically defaulted in 1979; that was blamed on a check processing issue. And in 2011, they got so close that the S&P 500 credit reporting agency downgraded them from AAA, while all three stock indexes immediately declined between five to seven percent. But besides that, we've been in the clear.

The biggest issue that I personally see is that one side wants to keep spending the exact same, the other side wants to cut spending entirely, and neither of them are close to making an agreement. For example, House Speaker Kevin McCarthy said that he has bidened numerous times if there were places that we could find savings in the federal budget, and you wouldn't give me any. But Biden responded that everyone in the meeting understood the risk of default. Instead of him giving us the plan to remove the default, he gave us a plan to take the default hostage.

At this point, the way I see it is that the debt ceiling has become the only leverage point to fiscal policy here in the United States. Unless one side budges, there's going to be a stalemate in terms of what this means for you. Moody's Analytics predicts that in a prolonged standoff, stock prices would fall by almost a fifth, and the economy would contract by more than four percent, leading to the loss of more than 7 million jobs.

Honestly though, in terms of whether or not this is something to be worried about, my opinion is that it's probably not since defaulting would be significantly worse than agreeing to spend more or less money. And I think we could probably say that no one is actually daring enough to be the one to cause the first ever default in the United States. Even though they might pretend like it, I doubt they would actually go through with it.

Instead, I think it's more reasonable to look at Warren Buffett in terms of where to focus your energy because he just came out with some new thoughts that are worth taking into consideration. In the latest shareholder meeting, Warren Buffett and Charlie Munger said that they had sold $13 billion worth of stock for cash while making it clear that the incredible period for the U.S. economy has been coming to an end.

Over the last six months, separate from that, he's also sold $25 billion worth of stock over that exact same time, and that's worrying people that perhaps cash is the safest place to be. After all, it was mentioned that there are three main concerns for the U.S. economy. That would be China, the banking sector, and commercial real estate—all three could be enough to send the economy into a tailspin.

Separately, Forbes mentioned that the 10 largest stocks are responsible for nearly 90 percent of the S&P's return earned this year, while the other 490 companies underperform, which is the weakest it's ever been, and concerning that the market might not be as strong as people think it is. Now, it does appear that the market is currently pricing in a 94% likelihood that the Fed pauses rate hikes for the rest of the year, but this hinges on so many variables.

And with high-income households seeing the fastest slowdown in wages, it's really just a waiting game to see what happens. So as far as what I think, I tend to believe that it's a good idea to temper your expectation for the market over these next few years. I mean, assuming we'll continue to see these 15% to 30% returns on an annual basis just isn't sustainable.

And this is also mirrored by Vanguard, whose outlook ranges for an average of 3% to 5% annual returns for the next decade. Because of that, I think it's more important than ever to make sure that you're properly diversified, you keep a strong source of income, and you keep some cash on the sidelines for an emergency fund.

I know that's the boring answer, but I believe if you do that while lowering your expectations, it'll put you in such a good spot to come out ahead long-term—very, very profitable. So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram, and don't forget that you could get a free stock with all the way up to a thousand dollars when you sign up with their paid sponsor public.com down below in the description when you make a deposit with the code GRAHAM. Enjoy, thank you so much, and until next time.