The FED Just Popped The Market Bubble

What's up guys, it's Graham here. So first of all, I am shocked that more people aren't talking about this, because we are about to face the worst U.S. debt crisis in history. Instead of addressing the problem head-on, we're putting up statues of Walter White and Jesse Pinkman in Albuquerque. Okay, that's actually not a bad idea, but in all seriousness, as of now, the U.S. has amassed a staggering 30 trillion dollars of national debt. Credit card balances are increasing, the personal savings rate has fallen to its lowest level since 2013, and at some point, experts are saying it has to come to an end.

After all, for the last 20 years, the federal government has operated on a perpetual deficit where they continually spend more money than they take in. But now that the Federal Reserve is beginning to reverse course, this national debt is about to become a major problem throughout our entire economy, and almost no one is speaking about it. So let's talk about the severity of what's happening, why the U.S. dollar continues getting more expensive, the impact this is about to have on everyone watching, and then most importantly, how you could use this information to make you money.

Since, after all, this is a personal finance channel and all of this is for entertainment purposes only, because I'm just some dude making YouTube videos from a half-converted garage. So thank you guys so much, and now, with that said, let's begin.

Alright, so in order to understand what's going on and why there's a growing concern, we need to discuss the national debt. This refers to the total amount owed by the United States, and in just the last three years alone, it's increased to a staggering 35 percent faster than any other time in history. Now, at this point, I'm sure most people would question, “But Graham, why do we need to have a debt like this to begin with?” After all, you would think that in a perfect world, with an economy as big as the U.S., they would just pay for things in full when they could afford them.

But, uh, that's not happening. See, the United States is, at its core, kind of like a business. It has what's called the GDP, which stands for gross domestic product, and that is the entire market value of all the goods and services produced within the country. The purpose of this is to measure our economic output, see if we're growing as a society. When that number goes up, it tells us that incomes are increasing and people are spending more money.

But on the flip side, though, when that number goes down, like it is right now, it shows us that our economy is contracting, demand is slowing down, and the prices could fall. Now, this is really important because alongside the GDP includes all the revenues the country has to make to keep itself running. After all, roads need to be built, the military needs to keep running, police and firefighters have to get paid, and up to a hundred dollars worth of free crypto needs to be claimed down below in the description when you sign up for FTX US using the code Grant.

Okay, the last part has nothing to do with our economy, but a lot of those other services are paid for through taxes, which amounted to just over four trillion dollars last year. Although there's been a shortfall in terms of how much the government makes and how much they spend, and that's where we go into debt, of which last year alone we spent two trillion dollars more than we took in.

Although, in terms of who actually buys and owns the debt, it's rather interesting, or at least it's interesting for me, because I'm weird, as you're about to see. Twenty-three trillion dollars of the national debt is owned by the public, which includes foreign state and local governments, U.S. banks, individual investors, pension funds, and insurance companies. The other seven trillion dollars is owned by the country itself, funded by government programs and services that take in more money than they spend.

You know, all of this is really important to mention up front since in order to understand why this is becoming such a big problem, you have to understand where that money is being owed because it's about to become a lot more expensive. Let me explain. Up until now, the cost of maintaining the national debt was actually fairly affordable, all things considered. When interest rates were at record lows, the United States was able to borrow money essentially for free and then let the power of inflation slowly reduce that number.

It would be no different than borrowing money at a one percent interest rate, and if inflation is three percent, all of a sudden, not paying off the loan makes you a two percent profit. Except now, interest rates are beginning to go up, and the entire economy is about to be turned upside down. See, on the surface, achieving a neutral interest rate has one really bad side effect: a recession.

In fact, a former Federal Reserve senior staff member pointed out that an economic downturn followed every single time the Fed matched interest rates with inflation. The only exception occurred in 1994 during a productivity boom, giving credibility that the only way to tame inflation is with a recession shock. As a result, the managing director of the International Monetary Fund warned of a complete global debt crisis, as banks raised rates, debt costs more, and all of a sudden, other countries can't afford to pay the cost for goods and services that we produce.

This means inflation increases while growth declines. I know this sounds kind of complicated, but once you hear this out, it's going to be pretty eye-opening. This is what's referred to as the dollar milkshake theory. Yes, seriously, they named one of the scariest aspects of economic doom and gloom after a milkshake. But I digress.

The dollar milkshake theory is based on the fact that the U.S. dollar serves as the reserve currency for the entire world. This means that every country trades in U.S. dollars because of its stability, resiliency, and global acceptance. After all, imagine getting paid in Somalian colorful coins while then trying to convert that back into your native currency. It would be a hassle. So instead, we have a reserve currency that the entire world transacts with.

However, currencies like the U.S. dollar don't just hold the same value every single day. Sometimes our dollar will fluctuate against other currencies. As they print more, we print more, they have more demand, we have more demand, and in a normal market, the economy tends to balance itself out. However, as other countries begin to slow down relative to the United States, their currencies decline in value, making it more expensive to pay for goods and services with U.S. dollars during a time where they could least afford it.

And it's called the milkshake theory because in this scenario, the U.S. would suck up dollars from around the world, resulting in cascading defaults throughout every other large economy. Why did the dollar get so strong, you might ask? Well, the answer is pretty simple: so you can finally go on that European vacation you've always wanted to go on. Just kidding, it's because the United States is raising their interest rates faster than the rest of the world.

When you have one country who's paying more, demand goes up, and the U.S. dollar becomes slightly more valuable relative to every other currency. There's also the belief that the U.S. is seen as a safe haven asset, and during times of economic uncertainty, it's a good place to park some extra cash. Although with all of that out of the way, you're probably wondering, “But Graham, why should I even care? Plus, I’m on a diet, so I don't even drink milkshakes.” And yeah, me too.

Although here's how it's going to affect you in terms of the average American: we gotta have a sit-down talk because it's getting serious. Monthly car payments have just recently crossed an average of $700 a month for the first time ever, with the number of people spending a thousand dollars a month or more having doubled in just the last year. Credit card usage is also increasing, with banks issuing 28% more credit than they did at the same time last year.

Even worse, but during the same time that credit card debt ballooned to a record high, it was found that only 45% of credit card users pay their bill in full, while the other 55% were stuck paying an average interest rate of 17.3%. Student loan debt isn't any better either, with the average balance sitting at just over $37,000, at the same time that mortgage debt increases from rising home values.

And if the economy enters a sharp and sudden recession during a time where interest rates are going up, people may have a much more difficult time paying down their debts. In fact, JP Morgan just came on record to say that they're bracing themselves, and we're going to be very conservative with their balance sheet. Well, banks become way more careful in terms of who they lend money to. That just means in the big picture there's less money to spend and save for the average American.

Where a higher percentage of their income goes towards paying off higher interest rates accumulated during a time where everything was good in terms of our economy. In a recession, though, the analyst expectations are extremely mixed. On the one hand, some experts say that when you look at our debt in relation to how much money we make, we're actually not that bad, and we're actually quite a lot lower than many other countries.

We could see here that, yeah, sure, we might owe the most amount of money, but we also make quite a lot of money as well. And when you factor in how much money we take in, look right there. From this perspective, it would be like someone taking out a 30 million dollar mortgage, which to some people sounds crazy, until you realize that person is worth 128 million dollars and makes four million dollars a year.

In fact, this is an actual example of the United States, with the exact same ratio, just minus a few zeros. So the amount of debt that we're taking on relative to how much we're worth is relatively small, and some economists even say that it won't be a problem until it becomes 150 percent of our GDP.

However, others say that this debt is a ticking time bomb because over the next three decades, it's projected to increase past 200 percent of GDP at the same time that interest payments would be the single largest U.S. expense. At that point, social programs and spending would be severely reduced, and we'd be forced to go further and further into debt, hurting our economy as resources dry up.

That's why we're in a weird spot, because some experts believe the national debt is not an urgent issue and it could easily be swept under the rug for another few decades. But we also can't have an economy with perpetual eight percent inflation, so there's really no other choice other than to raise interest rates, shock the market in, and then hope eventually the demand matches supply.

So in terms of my own thoughts about this, as an armchair economist who talks in front of the camera all day, I'll admit it's a really difficult problem that probably is not going to be solved anytime soon. In terms of a more immediate side effect, I'm absolutely seeing a situation where demand is slowing down because people believe the economy is getting worse.

So it almost becomes like a self-fulfilling prophecy, where people hold off from making big purchases because of economic uncertainty, which in turn results in lower prices and even more economic uncertainty. I also believe that at some point, we're going to see increased taxes to help bridge the gap between how much the U.S. makes and how much they spend.

Like, as of now we're spending two trillion dollars more than we make, and when Social Security funds are quickly running out of money, the only immediate solution is to tax more to pay for it. Of course, this also poses a threat that higher taxes will discourage growth, innovation, and investment. With a recent study finding that a one percent of state GDP tax decrease for the bottom ninety percent of earners increases state GDP by 6.6 percent.

Now realistically, we're probably just going to see a blend of everything, while demand slows down, inflation is reduced, the national debt is pushed off a little bit longer, and taxes are marginally increased. But it's definitely not a good situation to be in, and only time is going to tell how this plays out.

So in terms of what you could practically do, realistically stay away from any and all consumer debt, avoid variable interest rate loans, and always do your best to save at least 20 percent of your income. This should put you in the best position possible to weather any economic uncertainty and continue investing during a time where prices are lower.

This is also why it's such a good idea to diversify and spread your investments as much as possible, whether that be through index funds, real estate, cash, small amounts of cryptocurrency, or that Pokémon collection you've been eyeing on eBay. This way, no matter what happens, you're always going to have something to fall back on. And when you invest in the entire worldwide economy, you're going to be in the best position possible to see stable, consistent, long-term returns.

So, with that said, you guys, thank you so much for watching. Also, feel free to add me on Instagram. Thank you so much for watching, and until next time!