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Counter-Intuitive Inflation – Uncontrollable Spending Leads to an Unsolvable Problem

This is an excerpt from Counter-Intuitive Inflation. We’ll be posting sections over the first two weeks of October.

Uncontrollable Spending Leads to an Unsolvable Problem:

There are three huge parts to the US Government’s budget. Right now, there is no appetite to cut military spending, but that’s going to happen in the future. The remaining two segments are social services/entitlement programs and interest on the debt. Let’s start with entitlements.

The topic of entitlement programs is polarizing. There are reasonable moral arguments that can be made in favor of caring for the sick, elderly, or unfortunate. DKI is not making arguments for or against your favorite government programs. US off-balance sheet liabilities for social welfare programs is approximately $200 trillion dollars. That, plus “official” debt of $33 trillion, adds to US obligations of nearly a quarter of a quadrillion dollars.

Regardless of any of our opinions about the morality or wisdom of any program, what can’t be paid won’t be paid. This either ends with an official default where the US repudiates its debt, or a stealth default where the government pays its obligations in dollars that are so debased that the value received is not meaningful. We have incurred obligations that cannot be met and everyone who holds dollars or does business in dollars will bear the cost. This is a practical economic observation, not a political preference for particular policies.

Regardless of your personal politics, try to look at the below charts with an open mind. From 1990 to 2019, Federal spending on welfare and social services tripled. The giant spike at the end was related to Covid. We can call Covid an exceptional one-time emergency, but government spending isn’t decreasing meaning we now have “exceptional” continuous spending.

This goes from unsustainable to insane. $1 trillion a year? You’re not going to get the bill in your taxes. You’ll pay for it in future inflation.


This issue is understated as we tend to focus on Federal problems. Let’s add in State and Local spending:

Even the move of citizens from States that spend a lot on social services towards States that spend less isn’t changing this trend.

Here’s social security spending. If you think this trend is scary and unsustainable, please realize we have a declining birthrate and many in the Baby Boomer generation are about to retire. We’ve made promises but have no plan for how to pay the bill.

I’ve seen surveys indicating many young people believe aliens and UFOs are more probable than them receiving social security. This opinion is both crazy and correct.

There is a myth that social security is pay as you go and self-funding. That was true decades ago. It’s not anymore.

Graph from the Economic Policy Journal.

The title of this section is “Uncontrollable Spending Leads to an Unsolvable Problem”. So, here’s one more graph to show you how intractable our Congress is:

Chart from The Heritage Foundation

Please notice that there are never any meaningful cuts. Republicans claim to be the party of financial conservatism. Democrats claim Republicans want to slash spending to hurt the less fortunate. Neither characterization is true. Even when Republicans have complete control of the government, they don’t cut spending. The next time there’s a budget, spending, or debt ceiling debate in Washington DC, look carefully at the language used. There’s always talk about slashing spending, but that almost always means a slight slowing of the rate of growth.

Growing government spending slightly more slowly is not the same as cutting anything. I’ll suggest the following:  Both parties are lying about any spending cuts, and no one in Congress is serious about slowing the massive overspending we’ve seen in the last few decades. That means regardless of who we elect, the government is going to spend until the dollar is worthless and the bond market refuses to absorb the next trillion dollars of additional unpayable debt. What can’t continue won’t continue, and neither party has a plan or a desire to deal with the issue until forced to do so. At that point, it will be too late to save anything.


Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use.  The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so. 


The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI, affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write. 


Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 


In no event shall DKI be liable for any costs, liabilities, losses, expenses (including, but not limited to, attorneys’ fees), damages of any kind, including direct, indirect, punitive, incidental, special or consequential damages, or for any trading losses arising from or attributable to the use of this report. 

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