For the last twenty years, deficit spending for the U.S. government has become natural and as reliable as the sun coming up. But, in the latest debt ceiling debacle, there may be more than political theater at stake. If the U.S. must continue to print money and/or run deficits just to maintain its standard of living, hyperinflation risks increase. While Republicans and Democrats love spending (no single party is to blame for America’s $31 trillion national debt), the current ceremonial game of ‘debt ceiling chicken’ is just that.

Soon enough, one party will blink… and the debt ceiling will increase.

What investors and the U.S. government should be weary of is a prolonged or steep recession. In that environment, tax revenues would decline significantly, forcing the Treasury and the U.S. government to run even larger deficits, potentially triggering hyperinflation. While it seems ludicrous to many – if one forgets we are talking about the U.S. (the global superpower) and solely focuses on the numbers, the reality is sobering…

The U.S. government last ran a budget surplus in 2001. If the country can’t get its spending under control, the odds of a hyper-inflationary scenario increases. The only way there is little to no risk of hyperinflation is if the U.S. economy stays robust and continues to grow by $1 trillion or more annually. If it can do that, which is a very tall order, tax revenues would continually rise, rates can remain around these levels, and the deficit spending would not be as large on a percentage basis. But, there is a catch. The U.S. economy, ironically, needs higher than normal inflation to do it. Bit of a tightrope act.

US M2 Money Supply Declines

Herein lies the trick of inflation. As everything becomes more expensive, GDP rises without real growth – allowing the government to pay off old debt with inflated (less valuable) currency. Inflation is a debtor’s best friend. The money supply is vital when considering if hyperinflation will happen. After peaking at 21.74 trillion in March of 2022, the US M2 money supply is down to 21.21 trillion and has fallen for five consecutive months.