Why the biggest threat to the economy has nothing to do with inflation
Is there such a thing as too much good economic news? At first glance, the optimistic emanations from the White House about the economy might seem at odds with Fitch Ratings’ recent downgrade of our country’s credit.
In fact, Fitch Ratings’ downgrade is due, in large part, to that good economic news that has removed much of the pressure from the Biden administration and Congress to take action now to forestall big future financial problems.
You also see, if you read Fitch’s explanation of the downgrade, that it sliced the U.S. credit rating to AA+ from AAA at least as much because of the ongoing partisan knife fighting in Washington as because of economics. Let me explain.
Whatever you might think of President Biden, there’s no question that the massive federal spending programs that are the core of Bidenomics are working well at stimulating the U.S. economy, growing the gross domestic product and—most importantly—helping keep unemployment mega-low.
However, the Fitch report makes it clear that, although things are going great economically today, the combination of the huge budget deficits being generated by Bidenomics combined and the refusal by both Democrats and Republicans in our Nation’s Capital to mitigate long-term financial problems by acting now, is putting the financial future of our children, our grandchildren, and future generations at risk.
On the surface, the idea that the U.S. government can possibly default on its debt, which is denominated in dollars, seems absurd.
A failing company or a deadbeat country like Argentina might default on its debt because it can’t raise the dollars it needs to pay interest and repay principal on what it owes to third parties. But that’s not a problem for the U.S. because the trillions of U.S. debt are denominated in U.S. dollars, and our country can create as many dollars as needed to pay interest and repay principal on that debt.
Fitch declined my request to discuss its ratings downgrade, but its report points to what I consider the real essence of the downgrade: the biggest immediate threat to the ability of the U.S. to repay its debt is political, not financial.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” it reads. “The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”
The credit downgrade primarily involves the federal debt limit, which—ironically—was enacted in 1917 to make it simpler for the government to borrow money rather than needing Congressional approval for each individual debt issue.
However, the debt ceiling has been weaponized by Republicans, who caused a crisis in 2011 when Barack Obama was president, which led to Standard & Poor’s downgrading the U.S. credit rating; didn’t say boo when Donald Trump was president and added almost $8 trillion to the debt; and recently held the economy hostage again, taking the U.S. to the brink of debt default.
I think that the way to end this problem is for the White House to ignore the debt ceiling when the hostage negotiation starts. Rather than give in to Congressional bullying, the administration should do a private placement of debt with a cash-rich lender such as Qatar or Saudi Arabia, breach the ceiling, and tell the blackmailers to go pound sand.
However, that’s not what the Biden administration did when the Republicans were threatening to block borrowing and risk a federal debt default earlier this summer. It’s unlikely to happen any time soon because it requires imagination and daring, which aren’t Biden’s strong points.
And the recent good economic news could contribute to the problem. The economy, which was in ghastly shape during the COVID-19 epidemic, has recovered well and is growing nicely. Inflation has fallen and seems to be pretty much stabilized. The “recession is coming this year” predictions are largely gone. Optimism rules.
And the stock market is having a terrific year. As of market close on Friday, U.S. stocks were up more than $6.36 trillion, or about 17% for the year, based on the FT Wilshire 5000 total stock market index.
With good news all over the place, you can see why politicians aren’t willing to risk their reputations and careers by calling for sacrifices today to mitigate problems that aren’t in today’s news.
But if you look at the numbers dispassionately, as Fitch has done, you see that today’s huge and growing budget deficits and looming problems involving Social Security, Medicare, and our aging population, pose huge problems for the future.
The only ways to deal with these problems are to increase federal revenues by raising taxes, and by asking people to sacrifice to slow the growth in spending, especially on Social Security.
But that would require our leaders to act like grown-ups, take risks, and cooperate. And until there’s a crisis, I can’t see that happening.