US economic leadership remains paramount

With Goldman Sachs warning clients this is the “riskiest debt limit deadline in a decade”, the worst case scenario of not lifting the debt ceiling included much higher unemployment, stock prices plummeting, higher borrowing costs for government and individuals, the US losing prestige as the linchpin of the global financial system, cutbacks to social welfare eservices, and losses to retirement funds given that half of US Treasury debt is held in-trust for future American retirees.

Even if the debt ceiling again increases, something is going to have to give in the near future.

With inflation rising from 1.40% in January to 5.25% by August 2021, and not including rising housing, gold or stock prices, it was argued in June 2021 that the Federal Reserve continues to create asset and credit bubbles that are bound to pop eventually with home prices rising at an annual 12 percent rate and equity market valuations being more than double their long-term average.

While it was noted that the US banking system today was in a much better position to weather a housing market bust than after the GFC, it was believed that a housing market bust triggered by higher interest rates would also burst many other asset and credit market bubbles around the globe because they were fuelled by money printing of the major central banks.

As it stands, solutions will not be easy or even palatable for the many Americans who are well aware that it is the corporations that have benefited most in recent decades as the increasingly transnational nature of the international economy mean that US corporate receipts declined from 3.6 per cent of GDP in 1965 to 1.1 per cent in 2019, before finishing below 0.8 percent of GDP for the 2020 fiscal year.

With the wealthiest 10 percent of American households owning stocks with average related wealth at $US1.7million, the bottom 50 per cent owned stock worth an average $US11,000 either directly or indirectly through funds.

Despite major policy preference differences between Republicans and Democrats, a 2019 article notes that 65 per cent of Americans believe that the economic system unfairly favours powerful interests, including 71 per cent of Republicans earning less than $US75,000 a year (46 per cent of all Republicans) while 76% believed money exerts a higher influence in politics than ever before (including 76% of Republicans).

In the end, no nation can run expansionary policy options forever, especially at times when the economy is stronger, nor should it leave the burden of high debt to future generations or assume that the reserve status of the US currency will last forever.

With an October 2021 article indicating that interest payments on the debt now accounted for nearly 10 per cent of the budget and were expected to rise, this would adversely impact other productive purposes such as medical research and infrastructure needs not to mention social welfare needs.

As argued by Ian Tuft and Peter Wehner, with the latter having served in the last three Republican administrations, the key to addressing high levels of debt was to “successfully manage these balance sheet mismatches through a forced restructuring of liabilities”.

However, this will require political consensus between Democrats and Republicans to better discuss entitlement reforms and the tax structure rather than more of the same with Democrats recently opposing cost-saving entitlement reforms and the Republicans passing huge tax cuts without paying for them.

While it remains to be seen just how the US will fund its future domestic and foreign policy needs, it is highly probable that the US will remain the foremost economic power for some time yet due to its dynamic nature and its position as the world’s major liberal democracy.

At least that is my hope.