A new moment is brewing for the US economy and the world

After nearly 15 years of cheap money fed by the Federal Reserve at zero interest rates, resulting in speculative bubbles of colossal proportions, it seems the lights have come on. A crisis in financial markets (especially credit markets) can be caused by a sudden and systemic collapse in asset prices – usually after a prolonged period of speculative investment, excessive leverage and excessive financial risk-taking.

The US may be on the brink of such a moment. It is a process that moves slowly, slowly and takes us decades back. Fixing the US fiscal, after the global financial crisis of 2008-09, was put off for a later date by politicians, central bankers and government officials.

Instead of taking the painful but necessary steps of allowing more over-leveraged and high-risk banks and financial firms to fail, and the economy, to suffer short-term pain and then move on, the US government and the Federal Reserve took huge increase in money supply and unproductive government spending.

Same recipe

The same recipe that had been followed during the financial crisis (ie, money printing and fiscal overreach) was used again in 2020 in response to the pandemic. And since the monetary authorities had only one tool in their toolbox, the weight of money supply growth, it was the best solution.

As the saying goes, when “the only tool you have is a hammer, every problem looks like a nail”. In both cases (the financial crisis and COVID), the US Congress went on a massive spending spree, not realizing that excessive and repetitive spending inflated the deficit and debt, causing them to spiral out of control and risk destroy the next generations.

While the most serious collapse of the bubble – a monetary Great Reset – was avoided in 2008-09, the underlying conditions were not resolved. The monetary and fiscal measures taken at the time only postponed the crisis, further inflating the huge bubble destined to burst.

We are still living in this bubble, as evidenced by the all-time highs in stock markets and cryptocurrencies. Speculation in many asset classes—from real estate to memecoins—is out of control.

Given the growing size (in both nominal and real terms) of the US debt, a financial crisis in 2024 or 2025 will have far more significant consequences than anything that happened at the time of the financial crisis 15 years ago.

On the eve of the 2008 crisis, US federal debt to GDP was about 64%, the same level as in 1995. This allowed for some flexibility. In the most recent quarter, the debt-to-GDP ratio is now almost double that, at 122%. Based on this index, the United States is now among the 10 most indebted countries in the world – along with Venezuela, Greece, Italy and Japan.

The US national debt level, approaching $35 trillion, now requires more than $1.1 trillion in interest payments annually to service.

And that number doesn’t include the national debt or unfunded liabilities like Medicare and Social Security, which now monopolize the federal budget, limiting anyone’s ability to shrink the deficit through cuts in discretionary spending.

For 2024 the deficit moves to $1.7 trillion, swelling the existing cumulative deficit of $22 trillion since 2001. The deficit matters in part because high deficits relative to GDP are strongly correlated with persistent inflation.

As of 2020, the United States has the highest deficit levels (as a percentage of GDP) since World War II. These deficits produced high inflation, but were reversed into budget surpluses shortly after the end of the war. This was made possible by a productivity miracle in the mid-twentieth century. The United States of 2024 has no equivalent productivity boost.

Artificial Intelligence

Artificial intelligence is a bright spot, yet other tech industries (specifically cryptocurrencies), energy and mining industries are being chased offshore by regulatory interference. Manufacturing is attempting a comeback, but only accounts for 11% of GDP.

Bureaucratic, fiscal, monetary (the US dollar remains too high to be competitive) and other obstacles remain. The multitude (as a percentage of GDP) of financial advisors, lawyers, and accountants cannot be the revolutionary army needed to make the American economy great again.

When that moment arrives, the US government will have no way to deal with it – short of resuming quantitative easing and other forms of money printing. However, with bond markets in turmoil, investors will become increasingly reluctant to buy more US debt.

Foreign buyers have already started to reduce their exposure and now represent only 30% of the value of US Treasuries, up from 45% in 2013. If this trend of selling suddenly accelerates, the United States will be forced to raise money through the markets and the Fed’s QE.

This will be extremely inflationary stuff – even as economic conditions weaken and unemployment begins to rise. The US Treasury and Federal Reserve have already committed to a “whatever it takes” approach to crisis management.

When that time comes, and the bond markets collapse, “whatever it takes” will primarily be a liquidity drain (more money created out of thin air) for the banking system. As a result, the United States will be forced to accept significantly higher levels of inflation – the alternatives are very stark.

The US government, as the issuer of the world’s reserve currency, cannot go bankrupt. There is a practical limit to how high the tax rate can go. His only alternative is the hidden tax of ever-higher inflation.

To avoid this outcome, US productivity would have to rise dramatically so that the debt-to-GDP ratio is back in line – this seems impossible. The higher the debt-to-GDP ratio, the greater the anchor-like drag on the national and global economic ship.

Please follow and like us:

TRUST ECONOMICS

Trust Economics is a specialized independent economic research, analysis and consultancy business. Our team provides ingenious analysis in the macro & micro economic field, in the field of financial market, regional and sectoral analysis equally, forecasts, consultancy, specialized studies-research/projects from its headquarters in Athens, Greece.

You may also like...

Popular Posts

Leave a Reply

Your email address will not be published. Required fields are marked *

error: Content is protected !!