This article was kindly published by The Bruges Group
The USA is bust.
Not officially of course and as Francis Underwood (I know, it was Urquhart first but humour me) would say, “You could say that; I couldn’t possibly comment”.
With Federal Government debt in excess of $30Trillion and debt servicing alone of almost $600Bn per annum, the country is ill prepared in every conceivable way for a protracted period of soaring inflation and rising interest rates.
To put that into context, the military hardware left behind in Afghanistan was around $85Bn. That would have serviced the debt interest for just under 52 days.
The headline figure has doubled since 2011 and trebled since 2008. To put that into context when expressed as a measure of US Gross Domestic Product:
- 2008 National Debt $10.03Trn – 68% of GDP
- 2011 National Debt $14.79Trn – 95% of GDP
- 2021 National Debt $29.62Trn – 124% of GDP
Investors become concerned about Sovereign Debt default above 77% of GDP, which the US has remained above since the financial crisis.
Inflation is officially at 7.5% as at January 2022 but is realistically expected to pass 10% in the coming months. Printing more money will further fuel inflation but? That’s tomorrow’s problem.
The Federal Reserve’s solution? Keep the presses rolling and print more money.
And therein lies the problem. With the US, debt is so eye watering that it is always tomorrow’s problem. The debt was last paid off in 1835 by President Andrew Jackson. There have been a lot of tomorrows since.
As at May 2021, the Federal Reserve had $8.76Trillion of Quantitative Easing purchases on its Balance Sheet.
The 3 leading foreign holders of US National Debt are:
- Japan – $1.3Trillion
- China – $1.07 Trillion
- UK – $647Bn
Interest rates remain anaemic. The Fed Funds rate is 0.25% but pressure is mounting for a succession of increases to increase the rate to 1.25% in the coming months.
For consumers high on personal debt, exacerbated by sustained record low interest rates and inflation, defaults on a 2008 scale are a question of when not if. Those attracted to mortgage teaser rates which will expire during 2022 are in for the sort of shock UK consumers are beginning to feel over energy prices as bills begin to hit mats.
Despite Joe Biden’s “tough” sanctions on Russia, the US imports 22Million barrels of oil a month from the Bear, almost 8% of total oil imports.
Oil has spiked to over $96 a barrel at the time of writing, slightly off from the day of the full scale invasion of Ukraine but compared to 22 months ago, when it went negative ($-37.63 a barrel), it will inevitably push gasoline pump prices towards $4 a gallon ($3.87 a gallon at the time of writing).
Perversely, the dollar remains the world’s go to “defensive” currency in terms of crisis. The GOD (Gold, Oil & Dollars) economy is upon us again as Putin rampages through Ukraine amidst geopolitical and macroeconomic turmoil that few in truth predicted.
So what are the options for Joe Biden? They are limited and none would be popular.
Increasing taxation will further hit consumers hit by rising interest rates and inflation. Wealth taxes have already been imposed on top earners.
Cutting public spending is extremely unlikely given his $6Trillion budget for the fiscal year which commenced on 1st October 2021 was forecast to increase the deficit by at least $1.3Trillion a year, every year for the rest of the 2020s and by 2031, total spending will reach $8.2Trillion.
The only other option is to stick with the “Tomorrow Plan”. Which is exactly what I expect Biden to do.
It is imperative that the Republican Party does not get derailed by any short term boost to Biden’s approval ratings arising from Putin’s invasion of Ukraine.
The developed world is now into greater geopolitical flux than at any time since the fall of the Berlin Wall and an economic dashboard reading only red ink for the foreseeable future.
Whilst it is possible that Putin may invade NATO countries that were previously part of the Soviet Union, there is little appetite for boots on the ground amongst the US public or Congress after the calamitous departure from Afghanistan which arguably precipitated the emboldened Putin’s act of war.
Watching Biden being forced to deliver prepared speeches via autocue in response to Putin’s latest violation of international law is painful.
Biden is palpably unfit for office in every conceivable way and looks paralysed by the sheer weight of responsibility upon his shoulders.
With the exception of its military capability, the US is viewed as an inexorably fading force in terms of global influence and economic might, not least by rogue state actors and the 46th President is still 8 months away from the mid-terms alone.
That is an awful lot more tomorrows. And that’s before we mention China who are sizing up Taiwan with daily encroachment into their air space.
The paradigm of power has moved substantially East of the Greenwich Meridian. Don’t expect it to return anytime soon. One thing is certain: it won’t be tomorrow.
© justchrisdavies 2022