Low quality economic growth is masking the looming debt crisis. It is a chimera that enables us to pretend that everything is fine, at just the moment when it clearly isn’t.
One year ago, the prevailing consensus among economics and market analysts was that the U.S. would enter recession at some point in 2023 on the back of rising interest rates and tightening credit. March’s banking crisis seemed to confirm that the worst was yet to come.
And then, suddenly, nothing happened. Not only was there no recession, but growth in the U.S. economy accelerated, with Real GDP (gross domestic product after adjusting for inflation) doubling from just over two percent in each of the first two quarters of 2023 to 4.9 percent in the third quarter.
At the same time, middle and working class Americans feel excluded from any benefit coming from this reported economic growth. According to a November 2023 Financial Times poll, the majority (55 percent) of Americans feel financial worse off. The perception is to some degree skewed on party lines. Some 82 percent of Republicans say they feel they are worse off financially, while only 31 percent of Democrats admit they feel worse off. Yet nearly half (46 percent) of Democrats say they’ve seen “no change,” to their financial condition under “Bidenomics,” leaving only a quarter of Democrats who believe that Biden’s economic policies have made things better for them.
Putting aside the political differences, why do so many Americans feel worse of in a growing economy?
The answer is Americans’ rapidly shrinking wallets, i.e., their diminished purchasing power that results from inflation. While it is true that headline inflation (CPI) moderated to 3.2 percent in October, down from 3.7 percent in each of August and September, prices in some important categories, especially housing and transportation, continue to increase at high single digit rates (6.7 and 9.2 percent respectively) in October. More fundamentally, Americans have now endured three years of price inflation. Prices may have started to grow more slowly, but with a few exceptions they have not gone down. And certainly not to 2020 or previous levels.
Since 2020 Americans have lost nearly twenty percent of their purchasing power. In other words, what then cost $1.00 now costs $1.21. Prices in critical categories such as energy remain over 70 percent higher than three years ago. Indeed, two decades of “moderate” inflation—caused by the trebling of the monetary base—has resulted in Americans losing 45 percent of the value of their dollar since the turn of the century. With this slow but steady bleeding out, it’s no wonder that most Americans are feeling financially anemic.
The other possible reason most Americans don’t believe that they are better off is because of the source of GDP growth. Cutting through the rhetoric, Bidenomics is primarily fiscal stimulus, i.e., increased government spending on programs like the Inflation Reduction Act, the Infrastructure Bill (that had little to do with actual infrastructure), and the CHIPS Act. Supporting the five percent GDP growth was a 7.0 percent increase in federal government spending and an 8.2 percent increase in national defense spending in the third quarter. Consumer spending lagged at 3.6 percent.
While government defense spending on Ukraine and the Middle East and massive entitlement spending at home may contribute to GDP growth, it comes at a cost. In 2023, this cost included a $1.7 trillion deficit, which was funded with new debt carrying a nearly five percent interest rate. With total national debt nearing $34 trillion and annualized debt service costs (i.e., interest payments) now at $1 trillion, we are heading for a confrontation with market realities. Buyers of our debt are growing increasingly anxious about their real (after inflation) returns, just as our demands for more new debt are expanding. This supply-demand gap will require higher for longer nominal rates in the five percent range. This in turn will accelerate the growth in interest costs for the federal government, and the issuance of trillions of dollars in more debt to pay for it in the coming months.
In other words, low quality economic growth is masking the looming debt crisis. It is a chimera that enables us to pretend that everything is fine, at just the moment when it clearly isn’t. The idea that we can grow our way out of trouble and out of debt while continuing to run trillion dollar deficits is a fantasy. Stronger medicine is required.
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