• German government debt is set to explode higher
• This is intended to fund a major re-armament
• There is a way, however, to keep costs down and inflation low

The German language is known for its sometimes quite long compound nouns. Götterdämmerung translates into English as “Twilight of the Gods”. That’s the title of Richard Wagner’s final Ring Cycle opera. It tells the tragic story of the betrayal and murder of the hero Siegfried, the self-immolation of his love Brünnhilde and the recognition by the Gods that they, too, are doomed.

As it happens, Germany is setting itself up for a tragedy entirely of its own making. Last week, the presumed new chancellor, Friedrich Merz, announced plans to vastly expand the military and fund it by repealing the current debt limit and issuing as much as €1 trillion of new debt.

German government bond yields soared on the news by over 0.2%, dragging other European countries’ bond yields higher in their wake. The European bond market vigilantes have been re-awakened, it would seem.

Source: Koyfin

And for good reason. Most EU-member governments have huge, accumulated debt burdens. Prominent forensic financial accountant Bob Lyddon believes those debts are actually understated through what he calls “shadow borrowing”.

Germany has traditionally been amongst the more fiscally conservative EU member states. No longer.

Germans have long envied their neighbours to the south, with their sunnier and warmer Mediterranean climates, vineyards and beaches. Well, it might not be possible for Germany to change its climate and natural landscape but it can certainly become as fiscally profligate as the “Club Med” if it so chooses.

Given the dire military situation in Ukraine and apparent US unwillingness to continue carrying so much of Europe’s defence burden, not only Germany but most EU-member countries are planning to expand and modernise their defence capabilities.

Of course, that’s going to be expensive. EU taxation is already historically elevated, primarily to fund their generous social welfare programmes. So, the politically expedient way to pay for more defence is with more debt rather than even higher taxes.

Yet, as mentioned above, debt burdens are historically elevated too. How will all that debt be serviced?

If history is any guide, with some combination of inflation and devaluation.

The fact is economic resources are limited. If you’re going to divert more of those to defence, then that’s going to leave less for food, clothing, shelter, luxuries and everything in-between. Less supply implies higher prices.

Now, if Germans and other Europeans were to become more productive and thereby expand the available resource base, then a large increase in defence spending wouldn’t necessarily be inflationary. But I see no evidence of that.

Indeed, the reality is quite the opposite. EU energy costs have surged due to the underwhelming output of wind and solar power and the loss of affordable Russian gas supplies. For the past two years the economic buzzword in much of Europe has been “deindustrialisation”.

Thus, Europe’s ability to expand its defence capabilities today is probably somewhat less than what it was in the past.

So, what to do? Two words: go nuclear. Literally.

Prior to last week’s big debt announcement, I wrote about how Germany, if it desired, could kill two birds with one stone by going nuclear.

It will be interesting to see what the new German governing coalition decides to do. At a minimum, it’s likely to be far more nuclear power friendly than the one it replaces. But will it support the development of an EU nuclear deterrent?

Regardless, European demand for nuclear power, whether for peaceful or deterrence purposes, is only going to increase from here.

Whether it goes nuclear or not, Europe urgently needs to address the de facto ending of any possible “free riding” under a Pax Americana. The first step is to address the severe imbalance of military power vis-à-vis Russia. A nuclear deterrent would be perhaps the most effective means of doing so.

In his victory speech following the recent German elections, Mr Merz mentioned the need for greater German and EU independence from the US. But to achieve that requires not only a credible independent military deterrent but also energy security, reliability and affordability.

Expanding nuclear capacity could help salvage Germany’s failed Energiewende by providing a stable alternative to costly and unreliable wind and solar power, while also reducing dependence on cheap Russian gas or expensive liquefied natural gas (LNG) imports.

And a credible German nuclear deterrent would be far less costly than an equally credible increase in the size of its conventional forces, one that could realistically go toe-to-toe with the mighty Russian military machine.

Germans may now begin to speak as much or more about a Sicherheitswende (security transition) as the Energiewende.

It should be no surprise that, alongside rising European bond yields last week, European defence stocks continued to rally. Rebuilding Europe’s defences is going to result in elevated demand for defence for the foreseeable future.

But investors should also see an opportunity in uranium and nuclear power. My colleague, James Allen, is currently recommending several companies well positioned to potentially benefit. And he has one close to home in particular, right here on British shores, that he’s sharing more about here.

Until next time,

John Butler
Investment Director, Fortune & Freedom

PS If you’d like to see Bob Lyddon’s work on “shadow borrowing,” you can do so here.

A Lot More Ruin

Bill Bonner, writing from Baltimore, Maryland

Of greatest interest to us among Donald Trump’s long list was his promise to balance the budget.

“And in the near future, I want to do what has not been done in 24 years: balance the federal budget…We are going to balance it.”

Many are the minor issues, imbecilities and annoyances of modern American government. But a $36 trillion debt is something else. If we don’t stop the smoke; we’ll see the flames later.

Mr. Trump can deport all the rapists and murderers he wants. He can seize the Panama Canal… or force us to speak English. But if he doesn’t get control of federal spending, and bring income in line with out-go, it will be wake-up time for the whole MAGA dream.

Which is not to say the world will come to an end. Nations flirt with bankruptcy for decades. They inflate. They issue junk bonds. They sell their gold, neglect their highways and auction off their national parks. The dollar has lost 85% of its value since 1971. So, there’s still 15% left. “There is a lot of ruin in a nation,” said Keynes. Today, we look to see how the ruin might be avoided.

A conventional politician, such as Joe Biden, wouldn’t have a chance. Working through the myriad parasites in Washington and Wall Street, every initiative to cut spending… reduce the federal payroll… or bring the US back to basics, would be endlessly and hopelessly blocked.

Biden followed along on the course set by his predecessors (including Donald Trump himself) and the elites. That course leads to the two worst things that can happen to a mature empire – bankruptcy and war.

Big Man governments may or may not be better suited to avoiding them. So far, there is little sign of a major course correction. In the key policies – fiscal and military – Trump II looks little different from previous administrations. But it would be nice to be surprised.

After all, the Big Man can do what the democrat can’t. He doesn’t need to consult members of congress (whom he knows to be in the pockets of various lobbies). He doesn’t worry about hurting feelings or retirement plans at the FTC, FBI or SEC. He doesn’t bother to follow the Constitution too closely either; some inner voice tells him what needs to be done. And he is a ‘get it done’ kind of guy. In a hurry. Decisive.

But there’s a problem at the heart of Big Man government. The US economy includes more than 330 million people. Each one of them has goals of his own… and wishes to use his time and money in pursuit of them. Any diversion – whether it is invading Mexico or getting deported to Mexico – takes time and resources away from him in order to implement the Big Man’s agenda. So, the more energetically the Big Man asserts himself, the less the masses get what they want.

But wait… what if reducing the feds’ interference and balancing the budget were key elements of the Big Man’s agenda? What if the Big Man sought to be big by making the federal government less big? The idea is dazzling… intriguing… and probably nonsense. But lets take a look.

The Committee for a Responsible Federal Budget has already done the math. As it stands today, the US debt is set to grow by $18 trillion over the next ten years. And that assumes that nothing bad happens – no crises, no bailouts, no recessions, no stimmies. The Congressional Budget Office, meanwhile, puts the estimate at $23.9 trillion.

Neither of those numbers include the extension of Trump’s 2017 tax cuts, which are expected to add $4.6 trillion to the debt.

Uh oh… there’s more. The Kansas City Star:

1: “And the next phase of our plan to deliver the greatest economy in history is for this Congress to pass tax cuts for everybody,” he said. The cost of the tax cuts already in his budget passed by Congress $4,600,000,000,000.

2: “No tax on tips,” he said. Cost: $107,000,000,000.

3: “No tax on overtime,” he said. Cost: $866,000,000,000.

4: “No tax on Social Security benefits for our great seniors,” he said. Cost: $1,500,000,000,000.

5: “I also want to make interest payments on car loans tax deductible,” he said. Cost: $173,000,000,000.

6: “We want to cut taxes on domestic production and all manufacturing,” He said. Cost: $250,000,000,000.

7: “We will provide 100% expensing,” he said. Cost: $100,000,000,000.

Wait a minute. These are tax cuts. How could they increase the amount squandered by the feds?

Alas, Elon has spelled it out. “All federal spending is taxation,” said the Great One. And he’s right.

The direct cost of government is what it spends, not what it subjects to income taxes; it will get the money one way or another. These tax cuts – with no corresponding budget cuts – will increase the debt… eventually to be paid via inflation, default, tariffs or some other underhanded levy.

The total cost of all these tax cuts (including the aforementioned 2017 cuts) comes to $7.6 trillion… and brings the total ten-year debt increase to around $30 trillion… with US debt going over $60 trillion sometime over the next ten years.

At that level, the interest alone would be more than all the tax receipts from California to the Mississippi River.

And that’s if ‘nothing bad happens.’

How likely is that?

Regards,

Bill Bonner
Contributing Editor, Fortune & Freedom

For more from Bill Bonner, visit www.bonnerprivateresearch.com