Nobody wants to learn lessons from Russia or Turkei, do they? But…

By the time 80,000 Russian troops invaded Ottoman territory in June 1853 at the outbreak of the Crimean War, the imperial finances of the Ottoman Empire were already a complete disaster. The Ottoman Empire had once been the most dominant superpower in the world. But that had been centuries prior in the 1400s. By the mid-1800s, the Ottoman Empire had fallen far behind European powers like Britain and Prussia, and its economy was in such bad shape that it became known as the “Sick Man of Europe”.

So the Crimean War broke out– one of the most pointless and easily avoidable conflicts in history. And suddenly the Ottoman Empire found itself with no money to fight. That’s when British bankers entered the scene… led by Baron Lionel de Rothschild, who orchestrated a £3 million sovereign bond for Istanbul.

The bonds yielded 7.5% initially… (definitely high in those days). But it wouldn’t be long before the Ottoman government had spent all the money and needed to borrow more funds. And the Ottomans kept borrowing even when the Crimean War ended in 1856 (Russia lost). They had become addicted to debt, and bonds were sold in 1858, 1860, 1862, 1863, and 1865. By 1875, the Ottoman public debt was so large that debt service consumed two-thirds of tax revenue. A few years later, they had their own version of a government shutdown… because the Ottoman Empire had no money to pay the salaries of its soldiers and bureaucrats. Not wouldn’t – couldn’t.

Finally, in 1881, the Ottoman government capitulated and signed a treaty (the Muharrem Decree) establishing the “Ottoman Public Debt Agency” (OPDA), an organization controlled by the Empire’s foreign lenders that would have supreme executive control of imperial assets and taxes. The agency hired thousands of tax collectors who shook down Ottoman businesses and citizens… then turned over all the money to European creditors. Tax collectors in ancient Judea had nothing on these guys.

This is an all-too-familiar tale that has been retold in different coin (or fiat money) throughout human history: a once dominant superpower spends irresponsibly and eventually becomes trapped under the burden of excessive debt. Rome, Byzantium, Paris, Buenos Aires, Madrid, Ciudad Mexico – the list goes on and on.

With a $35 trillion  (as of 20 JUL 2024) national debt and $50+ trillion more in unfunded Social Security obligations, the United States is on a collision course with this same destiny. It has been claimed by many that this fate is avoidable. Sure, it is technically possible for the United States to grow its way out of debt– if the federal government would only get its outrageous spending habit under control, and then prioritize economic productivity above all else. Don’t hold your breath. And do not make any bets. The FedGov is now running an annual (fiscal year) debt of $2 trillion. Whether it is Uncle Joe or Dear Kammi or The Donald in office in November, expect that to continue. Even while tax revenues exceed records year after year! In FY 2023, that revenue was $4.5 trillion. (Notice that Uncle Joe and his handlers and shills are not boasting about that!) As recently as 2019, $4.5 trillion would have been more than enough to fund 100% of government expenditures… and even leave a bit of money left over to pay down some of the national debt. And certainly The Donald and his regime weren’t scraping by or skimping (whatever the never-Trumpers claim now).

But under nearly four years of Uncle Joe? They’ve managed to expand the bureaucracy so much that, today, $4.5 trillion is nowhere near enough money to fund government operations. Not even close.  All they have to do to solve this deficit problem is go back to the level of government spending from five years ago. (Admittedly a very un-libertarian idea.) It shouldn’t be that hard. But don’t think that even if the GOP controls 1600 and both houses of Congress that is going to happen.

Second, they have to prioritize economic productivity. This is critical. If the economy were to grow by 3% each year (after adjusting for inflation) instead of 1% to 2% each year, then the national debt would easily melt away over the next 20 years. Instead for the last four years only inflation and the shenanigans of the stock market have shown economic growth. So…

Today the national debt is more than 120% of the US GDP– the highest level EVER, including during WW2 when the Fedgov was fighting Germany and Japan.

But if spending were to get under control, and economic growth average 3% again (similar to the 1980s and 1990s), America’s debt-to-GDP ratio would fall to less than 50% over the next two decades. The national debt would be a non-issue. (Not that the GOP is  making it one this year, near as I can tell.)

Again, this shouldn’t be hard. Stop passing idiotic regulations. Stop punishing critical businesses. Stop undermining capitalism. Stop behaving like the Dems – with lots of help from the GOP – have been doing for a lot more than just four years. But this is not the sensible path that the FedGov is presently on. Instead, people in charge are accelerating to the bottom as quickly as they can. Even when a credit rating agency issued a dire warning about deteriorating US government finances, the White House responded with genuine confusion. They simply couldn’t understand why anyone would think there was a problem. 

These people are clueless. So it’s naive to assume that they’re going to fix anything. They are all fat, dumb, and happy. At least about the economy.

But the economy, the national debt, and the insane deficit are not just the Fifty States’ problem and not just DC’s. It is the world’s problem. Why????

Back when the Ottoman Empire defaulted in the late 1800s, its imperial debt was huge relative to Ottoman tax revenue and the Ottoman economy. But it was a small bit of global GDP at the time– less than 1%. So even when the Ottomans defaulted, it didn’t cause a global crisis. (Though it was one of many factors that led to the Great War.)

That’s not the case with the United States. The national debt is nearly a THIRD of global GDP. Plus, the dollar is still the world’s most dominant reserve currency. (Despite the best efforts of Russia, China, and the Saudis.) This means that nearly every sovereign government and central bank on the planet has exposure to the US dollar and US government debt. A default on the national debt, therefore, would be catastrophic to the global economy and financial system.

Weirdly, America has a unique opportunity to tell the world right now, “It’s our debt, but it’s your problem.” Will Trump?

On its current trajectory (“led” by Uncle Joe, a default is inevitable… we just don’t know what form: Defaulting on foreign creditors? Defaulting on domestic creditors? Breaking promises to taxpayers (like Social Security)? Or defaulting on the obligation to maintain a sound currency– inflation? (Actually, based on the last 18  months, inflation is a given. Question is how high? Zimbabwe or Argentina, anyone?) As US leadership has and continues to ignore this obvious fate, everyone else on the planet has to work on devising an alternative financial system and reducing their exposure to US dollars. Not just our enemies.

The result? In only ten years, the FedGov – and many States – could be left powerless. Just like the Ottoman Empire in the late 1800s. Now if our glorious leaders were as clever as they think they are? They would use the threat of default to call for a global financial system reset. Now, while America is still relatively strong and in a position to demand favorable terms. Forget clever, of course. Or sense, or even enlightened self-interest. 

Even with strong majorities by the GOP in Congress, presumptive winner Donald Trump is going to face never-Trumpers in the GOP, and Congresscritturs too stupid and self-centered and arrogant to do anything except drive the national debt higher and higher to feather their own nests.

At the expense of the rest of us, and the world.

As a final clincher: the Muhharem Decree was in 1881: by 1920, less than four decades later, there was no Ottoman Empire.