The United States government now carries nearly $40 trillion in gross national debt—the largest sum any government in the history of the world has ever owed, and one now compounding faster than the economy conscripted to service it. And yet, the blind guides in Washington and on Wall Street continue to play their games, utterly oblivious to the reality that the central bank is trapped, the consumer is broken, and the credit cycle is about to snap.
The Federal Reserve’s illusionary engine
Since taking office on May 22nd, the new Federal Reserve Chairman, Kevin Warsh, has already printed approximately $44 billion of high-powered money. It seems the new Fed-head is doing his part to continue destroying the purchasing power of the U.S. dollar. Chairman Warsh recently axed forward-looking guidance from the FOMC statements. For more than two decades, Wall Street has been coddled by this forward guidance, which artificially suppressed volatility and compressed risk premiums. The result? Happily, the market is now setting long-term borrowing costs. The 10-year Treasury yield recently eclipsed 4.6% and touched 4.75%, while the 30-year yield surged to 5.28%—a level last seen in 2007. Long-term borrowing costs are ripping higher, acting as a brutal, organic tightening mechanism that the Fed can no longer control.
The Japanese unwind and the treasury’s flaccid interventions
Meanwhile, Treasury Secretary Scott Bessent seems to be far more concerned about propping up the collapsing Japanese Yen than protecting the integrity of the United States Dollar. In a flaccid and desperate attempt to stop the Bank of Japan (BOJ) from dumping more U.S. dollars and Treasuries onto an already saturated market, Bessent sold the Treasury’s holding of Euros to buy Yen. Japan remains the single largest foreign creditor to the United States, holding more than $1 trillion worth of Treasury debt. If the Japanese are forced to liquidate their cache of American debt to save their own currency, it will send U.S. bond yields into the stratosphere at the exact moment the United States desperately needs debt service payments to fall.
The U.S. Treasury spent billions trying to prop up the currency of its top lender. But the Treasury’s $13 billion worth of Euros will not last very long, and this cosmetic medicine does absolutely nothing to fix the underlying structural cancer. Japan’s national debt-to-GDP ratio has reached a grotesque 248%, putting unrelenting upward pressure on Japanese Government Bond (JGB) yields.
Compounding this disaster is the outbreak of war in Iran, which has sparked a massive spike in global energy prices, sending crude oil soaring. Because Japan is an island nation completely devoid of natural resources, it must purchase its energy from abroad. To do this, it must sell Yen, convert those Yen into U.S. dollars, and then purchase oil. Today, oil prices are surging while the value of the Yen is in freefall. This toxic combination forces the Japanese to convert an exponentially greater number of Yen just to chase rising energy prices. As a result, domestic inflation fears have escalated, JGB yields have surged, and the interest rate differential between JGBs and Treasuries has radically contracted. This spread has collapsed to just 1.8 percent, down from 3.9 percent in 2023. As the spread shrinks, investors are incentivized to hold JGBs rather than export their capital to U.S. Treasuries. The global pool of capital willing to finance America’s profligate deficit spending is drying up in real-time. Expect the situation in Japan to get significantly worse.
The labor market freeze
Wall Street analysts love to parrot the narrative of a “resilient” American labor market, but a look at the data from the Bureau of Labor Statistics reveals a completely different reality. The Non-farm Payroll report for July was an unmitigated disaster, showing that the economy shed 23k jobs, while the two-month lookback revisions slashed an additional 103k jobs from previous months. The Household survey painted an even bleaker picture, revealing that 87k jobs were destroyed last month alone.
This deterioration perfectly mirrors the latest ISM Services Index, where the crucial employment subcomponent collapsed from a positive 51.2 in June down to a contracting 47.4 in July. For those who believe this is a temporary blub on the radar, look at the rolling averages: the U.S. economy has created a measly average of just 20k net new jobs per month over the trailing three months according to the Establishment survey. If you step back and look at the Household survey over a broader horizon, the U.S. economy has 963k fewer people employed today than it did in July of 2025.
It is not merely the quantity of job creation that is breaking bad; the structural quality of the labor market has turned completely rotten. The number of full-time workers in this country has plummeted by a staggering 2.3 million since January of 2025. In fact, America’s total full-time worker count has grown by a pathetic 1.4% over the past seven long years. The entire illusion of job growth is being driven by desperate individuals taking on second and third part-time jobs just to keep their heads above water.
Recession or depression?
In case you believe recessions have been abrogated, just think about how badly consumers have already been battered by years of surging inflation; and now have to deal with even higher energy prices, declining real wages, a soft labor market, and rising borrowing costs.
This leads to me discuss the reasons why the next consecutive quarters of declining GDP will probably be the worst economic contraction ever suffered by the United States. This is because for the first time in history we have a triumvirate of asset bubbles (equities, real estate, and credit) all existing concurrently and in record proportions. But what will make matters even worse is the government will not be able to easily bail out the economy and markets as it has done in the past.
Sharply reduced borrowing costs has been the remediation process of every past recession. The Fed vastly reduces short-term interest rates and the long end of the yield curve usually follows along. The Treasury borrows massive amount of money and the central bank monetizes all the new debt. This economy is flooded with liquidity and asset prices soon respond by moving higher.
However, this function may no longer work because our government’s balance sheet is now broken. Our Debt to GDP ratio is now 123%, not the 60% level seen in past recessions. At the start of the next recession our annual deficits will already be at $2 trillion, as opposed to the $100 billion base enjoyed during past recessions. Also, inflation has been well above target for over five years. In past recessions inflation was not entrenched into the economy as it is now. The Fed’s balance sheet is approaching $7 trillion, not the $700 billion it was entering the Great Recession. Finally, the personal savings rate is currently just 2.7%, which is in the basement of history.
What all this means is that long term interest rates will most likely rise, instead of fall as they have done in past recessions. This will at the very least encumber the healing process of the markets and economy. Whatever type of decline lies ahead, recession or depression, it will most likely take markets and the economy much longer to recover than it has ever taken before.
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