Money makes the world go round.
From Wall St to Main St, every radio station and cable news channel here in America is speculating about what the current economic crisis means and its impact will be.
It is no surprise of course; the US has a fascination with money.
Always has.
Making money, spending money and, lately, printing money.
The US economy, while by far the strongest in the world, is also saturated with debt.
And while the debate about inflation and interest rates rages, the real challenge is that debt.
Last week, total US national debt – what the country owes itself and other parties – stood at an eye-watering $31.1 trillion. A record high.
Debt happens.
At times of war, natural disaster and recession, it tends to spiral upwards.
During COVID, the US Federal Government spent billions in virus aid and economic relief. Everyone got a check in the post whether they needed it or not, businesses had their employees’ wages subsidised, loans became grants, and repayment was excused.
Some aid was vital, but billions also went to big companies who rolled it into profits, dividends surged, and stock market prices continued to rise.
Of course, all this comes at a cost. Servicing that kind of debt doesn’t come cheap.
The U.S. spends more than $965 million per day on interest payments. Money that could be spent on a multitude of other priorities.
The Congressional Budget Office (CBO) reported the budget deficit for fiscal year 2020 – the difference between what we spent and what we earned – was more than triple that of 2019 and the largest % of GDP since 1945 when post-war rebuilding and employment had to be paid for.
We have reached the threshold where debt is now equal to the size of the economy.
So, if the US owes all this money, are we worried? Apparently not.
According to the US Treasury, the national debt is “composed of distinct types of debt, similar to an individual whose debt may consist of a mortgage, car loan, and credit cards”.
When asked, the Treasury was quick to point out the nation has carried significant debt since it was founded. For example, some of the nation’s first debt was money borrowed from the French during the American Revolutionary War. Probably still owe them some.
For years, the national debt, the enormous numbers involved, and the seeming indifference shown too it by leaders meant Americans didn’t much care, and the issue was the domain of pointy-headed economics policy nerds.
The Treasury nonchalantly declared: “Simply put, the national debt is similar to a person using a credit card for purchases and not paying off the full balance each month”.
Reason to panic? Martin Lewis’ head would explode.
And while wars in Afghanistan, Iraq, countering post 9-11 terrorism, 2008’s sub-prime banking crisis, Hurricanes Michael and Katrina, and COVID have all lead to huge spikes in debt, so do the policy choices of our political rulers.
“Personal and corporate tax cuts, stimulus programs, increased government spending, falling tax revenue caused by widespread unemployment, all generally account for sharp rises in the national debt” the Treasury concludes.
Their indifference was palpable.
With interest rates so low, US government – like its citizens – went on spending sprees with borrowed money. The government didn’t even bother to refinance its debt at these lower rates, perhaps believing this was the new ‘low rate’ norm.
So who holds this debt?
The national debt is split into two different types: debts that one government agency owes another, and those held by the public.
Intra-government debt accounts for about $6.5 trillion of the total but the other $25 trillion is held by the public in the form of Treasury securities, bills and bonds, The Federal Reserve owns most of this publicly held debt – about 40%.
Foreign governments, banks and private investors hold about $7 trillion, and state and local governments and others hold the rest.
It is good news that the Federal Reserve owns so much debt. While the Treasury pays interest on this debt, the good folk at the Federal Reserve return the cheques uncashed. Imagine how grateful you would be if your mortgage holder acted like that!
But what of the rest? Including private investors and governments, the top three foreign holders of US federal debt are Japan, China and the United Kingdom.
Based on latest estimates, Japan holds approximately 16.8% of all foreign investment in U.S. publicly held federal debt, China holds 13.8%, and the United Kingdom holds 8.4%.
And while ‘Official Foreign Investors’ – the Treasury’s name for foreign governments – hold $4.16 trillion, ‘Private Foreign Investors’ – regular folk and businesses – hold $3.6 trillion in US Treasury debt and financial instruments.
The concept of this much debt in foreign hands carries a lot of negative connotations. The huge debt the U.S. government owes Chinese lenders has been the subject of countless debates for decades.
While fear of the Chinese Communists is always a great headline grabber, The main reasons Chinese lenders bought up so many US Treasury bonds and securities is simply economic.
But what if China’s new leader – set to be elected at next week’s Chinese Communist Party Congress – decides to call the debt in?
Well, it’s pretty unlikely, and in real terms nearly impossible, given the staggering of long dates of maturity of US debt securities.
What’s more, as the dollar is the most in-demand asset out there serving as the world’s reserve, and with citizens of nations with collapsing currencies like Turkey, Sudan, Argentina and Britain wanting to hedge against further loss of value, there are plenty of others likely to step in to service the market, including the friendly people at the Federal Reserve.
So, with fiscal policy – how the money gets spent – seemingly out of control and monetary policy – how much money is available – dramatically reduced – what can be done?
Economists and policymakers are increasingly aware this is not a sustainable situation. Their nervousness is also creeping into the political discourse and ‘The Debt’ is being talked about again.
The Biden Administration is wedded to huge spending programs, $485 billion for the showcase Inflation Reduction Act.
America has to start putting its financial house in order.
One solution may be to open the borders.
Politically risky, but the truth is immigrants to the US open new businesses at twice the rate Americans do and would employ more labour and pay much needed new taxes.
A rapid increase in population would also create new demand for housing, automotives, household appliances and more, and secure existing businesses and service providers and their tax contributions.
What about raising taxes?
No political party dares talk about huge tax hikes in election season.
Or we could raise the retirement age.
Making people work well into their seventies increases the tax take from their income and delays the pay out on expensive Social Security checks. Young Boomers and Generation X would go crazy!
Or perhaps the answer is to rewrite the tax code
Loopholes cost the Treasury nearly $1.5 trillion every year.
But maybe the answer is to embrace inflation.
Currently the media and politicians are preoccupied with reducing inflation by boosting interest rates.
But there are contrary views: “An increase in the price level (inflation) directly reduces the real value of government debt,” says the Federal Reserve Bank of St. Louis.
“Surprise inflation transfers wealth from holders of U.S. government debt – who include both Americans and non-Americans – to U.S. taxpayers.” the bank added.
Interesting.
While everyone is worried about rising inflation, it appears it is good for bringing down the ratio of debt to gross domestic product, a key responsibility of the Fed. And lower interest payments make servicing personal and government debt more affordable too.
No doubt there are some inflation policy hawks out there, who will be arguing that, to protect the dollar on the global stage, a period of sustained inflation, may be the medicine we all have to take.
And rather than look for a monetary policy solution, the administration needs to change fiscal policy first.
That would mean a UK style policy U-turn from Joe Biden, scrapping student debt forgiveness and huge chunks of the Inflation Reduction Act spending commitments.
The politics of this would effectively end his chances of a second term, and one thing politicians rarely do is sacrifice themselves for the common good.
But America has been living beyond its means for decades.
It looks like the bill has finally arrived in the post.
