To The Moon

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Yellen & US “Fearless” Debt Party

Good days everyone, just one more days until 2025, so let’s brace ourselves and get ready to end the year with a serious financial warning. If you think 2025 will start off smoothly, it’s time to readjust those expectations.

Under Biden’s administration, we saw a slew of reckless spending plans—the CHIPS Act, the Inflation Reduction Act, and more. These are essentially euphemisms for government spending that only drive inflation higher. But let's be realistic: things aren’t likely to improve under Trump either. In fact, the borrowing could escalate even further, particularly with his proposed global trade war.

During Trump’s first term, national debt increased by $7.2 trillion. By the end of Biden’s presidency, it’s expected that debt will exceed $7 trillion again. The biggest issue the U.S. faces is a spending crisis, primarily driven by deficits in entitlement programs, defense, and healthcare—sectors that are nearly impossible to cut without collapsing the system. The global financial system is built on debt, and eventually, we’ll reach a tipping point. Either the U.S. will default on its debt, leading to total chaos, or the debt will continue to spiral upwards, debasing the value of money. In the latter case, printing more money to cover obligations will further devalue the currency.

As of today, U.S. government debt exceeds $36 trillion—accounting for almost 35% of global debt. It’s more than the debt of China, Japan, and the EU combined. If this debt bubble bursts, it could trigger a collapse in global bond markets as well.

So, before you head out to your New Year’s Eve party, remember that another countdown is quietly happening—the countdown to a potential financial disaster. And it’s not just me raising the alarm. Janet Yellen, U.S. Treasury Secretary, is also sounding the warning party. With nothing left to lose, she’s publicly acknowledging that the U.S. Treasury is about to hit a wall. In mid-January, the debt ceiling will once again be breached, signaling that borrowing will only keep climbing. This is becoming American yearly party event.

Yellen has admitted that the situation is within control until end of Biden gorv she finally change her story to spiraling out of control. On January 2nd, 2025, the new debt limit will be set at $31 trillion, which means we could see an immediate spike to $36 trillion within weeks. To avoid breaching the limit, Yellen will have to resort to special accounting maneuvers—marking just another desperate move in a series of last-ditch efforts.

US Treasury Financial Emergency

Janet Yellen recently apologized for the deficit, but wasn’t she the one responsible for executing Biden’s borrowing plans in the first place? When the U.S. Treasury announces accounting maneuvers, we need to pay attention. Let me break it down without the technical jargon so you can understand what’s really happening here.

In an emergency, the Treasury can draw down its cash balance to meet obligations. Essentially, Yellen could dip into the "piggy bank" to prevent a financial collapse. You might be thinking, "Isn’t this just normal Treasury operations?" Not quite. The Treasury is supposed to have enough funds in its current account to cover expenses. If that’s not the case, the country risks a spending freeze.

Right now, the operating balance is about $730 billion—sounds like a lot, but it’s not nearly enough given how quickly the U.S. government burns through money. Back in May 2023, that balance nearly hit zero, dropping to just $37 billion. At that point, the U.S. government was on the verge of running out of cash. If that had happened, it would have triggered a default on spending obligations, including interest payments on debt, leading to a technical default on Treasury bonds—the so-called "Day X," or Day of Reckoning.

It’s likely Yellen will just push the problem down the road by raising the debt ceiling again. But draining the Treasury’s account could still lead to a bond crisis. This wouldn’t be pleasant, especially with bond yields on the rise. In the last couple of days, we’ve seen stocks drop by 2-3% as bond yields defied expectations and kept climbing.

This chart illustrates why Yellen’s emergency maneuvers could be a problem. Since 2020, the Treasury’s balance has been bouncing up and down like a rollercoaster—from near zero to over $500 billion and back again. These fluctuations are extremely disruptive to the bond market, which is supposed to be stable. As a result, yields will continue to rise and the markets will become more volatile.

Think about it: if the Treasury’s balance nears zero, the instinctive reaction will be to borrow more—fast. This could flood the market with an avalanche of bonds, driving yields even higher. Even if we ignore the impact on global markets, this will have negative consequences for the U.S. economy as well. Borrowing costs would skyrocket, and there would be serious ramifications.

What if the U.S. actually defaults on its debt? Back in 2013, the Federal Reserve conducted a study on what would happen if there was a temporary default, even for just one month. Let’s take a look at the findings.

Yields Exploding Up

It won't be pretty. A default lasting just 30 days would lead to financial devastation. Treasury yields would spike by 80 basis points, and corporate borrowing costs would surge by over 2%. Stock prices could plummet by 30%, while the U.S. dollar would drop by 10%. This would increase import costs for the U.S., making everyday items at stores like Walmart and Dollar General more expensive. Industrial inputs would also rise, and the price of cars would go up. U.S. consumers would feel the pain, and the impact would be harsh.

In no scenario can the U.S. Treasury afford to let a default happen. Yellen, Powell, or whoever is in charge will have no choice but to inflate the debt away—there are no other alternatives. This means that in 2025, debt issuance will have to rise. I don’t believe for a second that Trump would allow a default during his term, so the next four years will likely remain inflationary. The markets are starting to price in this reality, understanding that the U.S. has a spending problem. As a result, investors are demanding higher returns.

US Bond Collapse To Worsen

The short-end bond investors are revolting. Yes, Fed funds, represented in blue, are now under 4.5%, but how is that a victory? The 10-year yield has soared to 4.6%, and the yield curve has now uninverted, signaling that this could be the new normal moving forward. Long-term borrowing costs are climbing, and we could very well see a 5% yield next year, which will likely shock the markets.

When analyzing interest rates and the U.S. economy, the 10-year yield is key—it’s the benchmark for almost every other borrowing rate, including mortgages, credit card rates, and personal loans. If the 10-year continues to rise, living costs in the U.S. will increase significantly.

Now, focus on the yield curve, which shows the latest update from last Friday. Compared to September, yields from the 2-year to the 30-year bonds have surged, some by over 100 basis points. The cost of borrowing for the 30-year bond is dangerously close to 5%, opening up a Pandora’s box for the U.S. economy.

Trump will need to reduce spending to bring yields down. The higher they climb, the more it unravels the financial system. But Trump has boxed himself into a global tariff war. His administration’s mission is clear: bring U.S. manufacturing back at any cost. Vote for Trump, and you’ll see a mass exodus of manufacturing from China to Pennsylvania, from Korea to North Carolina, and from Germany to places like Georgia. Trump has made this vision crystal clear.

Global De-Dollarization

U.S. manufacturing is coming back, and you can count on that happening. But, just like Thanos snapping his fingers, the key question is at what cost. There will be a tremendous price to pay for driving the debt higher, and ignoring that fact would be disingenuous.

Here's how Trump's strategy sounds to the world: he wants to borrow money from global markets to incentivize companies to return to the U.S. by funding the U.S. government in 2025. In the process, the global economy is effectively funding its own deindustrialization. Sooner or later, countries—especially the G7—will realize this.

Since 2015, a dangerous trend has emerged. Despite the U.S. dollar being the reserve currency, countries around the world have been holding fewer and fewer U.S. bonds. We're seeing a repatriation of global assets from the U.S. to other stores of value, and this trend will likely continue. Foreign central banks' holdings of U.S. bonds have dropped from 35% of total debt holdings to nearly 20%. That’s a huge decrease. Meanwhile, gold holdings as a percentage of currency reserves have increased from 12% to nearly 20%. If Trump continues to threaten the world with sanctions, it wouldn’t be surprising to see that number rise even further. We could very well return to 1990s levels, when gold accounted for 30% of total currency reserves.

These are some of the big macroeconomic effects of the past decade. We’ve already seen currency debasement and asset confiscation, and if a trade war is added into the mix, countries will be less willing to keep funding Washington like they did before. This will naturally lead to higher borrowing costs, at least in the short term.

Now, let’s talk about U.S. equity markets. As rates rise, they slow down the pace of economic growth. The S&P 500 is up over 25%, hitting 6,000 before retracing. That’s impressive, but it's not because earnings have risen—earnings have largely remained flat. This suggests that valuations are out of sync, which poses a big risk to U.S. stocks. If the fairytale narrative shifts suddenly, a potential crash could be catastrophic.

US Stocks At Massive Risk

As we speak, U.S. equities are three standard deviations higher than global stocks—a level never seen before in history. It's even higher than the Nifty 50 bubble of the late 1960s. Today’s valuations are even more extreme than the dot-com bubble just before its collapse. Over the past 20 years, money has been flowing out of global stocks and into the U.S., but can this continue? Sure, it could—for a while. But it can’t go on forever, or the U.S. stock market will eventually account for 100% of the global market, which is mathematically impossible.

The higher bond yields climb on the 10-year Treasury, the greater the chance of a selloff. We could see a major retracement as reality sets in. What could impact bond yields in the U.S.? The amount of borrowing and the looming trade war. If Trump takes radical action, like imposing a 25% global tariff, we could see panic in the bond markets. However, beyond this sudden shock, the long-term picture is inflationary. U.S. debt will continue to climb, and there’s no way to cut spending at this point. The combination of higher rates and out-of-control deficits is what will eventually push us over the edge.

The interest expense on the debt is projected to hit 4.1% of GDP by 2024, which is only sustainable if, and this is a big if, Trump can stimulate enough economic growth. If that doesn't happen, the U.S. economy will drift closer and closer to eventual default, and at that point, the situation may spiral beyond his control. How will the world react to his trade tariffs? Will China retaliate and initiate its own economic war? We don’t know yet.

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