Thirty One Trillion and Counting - October 9, 2022

Another strong jobs report in the U.S. puts us another mile down the road that ultimately ends in an abrupt U-turn. The unemployment rate has hit the lowest mark in half a century, and the highest inflation rate in almost as long. A dozen years of economic mismanagement has put us into uncharted territory.

It should come as absolutely no surprise that the economy continues to be hot, with an ever-tightening labor force. Today’s chart shows the dramatic and incredibly Incredibly (did I emphasize that enough?) irresponsible surge in government spending over the last dozen two decades. 

It took the United States 225 years to accumulate around 9 trillion in government-issued debt in the United States. It only took 20 years for that debt to balloon to 31 trillion, a 250% increase. With a GDP of $21 million, we have joined the 100% club, those few nations that have debt that exceeds their annual GDP. Among that list, which includes such economy luminaries as Greece, Italy, and Portugal, the United States is by far the largest in population. We haven’t reached the lofty heights of Venezuela, at 350% Debt-to-GDP ratio, but, in 8th place, we’re working hard to catch up! 

Now, I am all for effective monetary and fiscal policy to nudge a troubled economy in the correct direction. Fiscal policy is very effective when unemployment is very high, and monetary policy is equally effective when inflation rises. 

Everything screws up when radical fiscal policy that more than triples the national in just a couple of decades pushes the unemployment rate into ridiculously low levels, even as it then pushes up inflation. Now, we have an executive branch pushing the economy ever higher at an unprecedented rate while the Federal Reserve is pulling back with the greatest acceleration in interest rates ever. 

Does it occur to nobody that one branch pushing the economy while the other pulls it back just can’t work? I think any schoolchild who has played tug-of-war that the economy will eventually end up mired in mud. 

The problem is that this dysfunction is almost inevitable. There are no adults in the room when Congress and the executive branch is formulating economic policy. There are a lot of children with their hands out for candy, to be sure, but nobody who has to put the kids to bed as they are peaking on their sugar high. Meanwhile, these kids are screaming at each other at the top of their lungs. There is not a lot of effective dialog going on. 

The Fed has been political too. All this dysfunction occurred at the same time as the chairman of the Fed was hopeful he’d be renominated as chair by the President of the United States. He did not get that nomination by telling President Biden what the president did not want to hear. So, until that process was completed safely, there would be no nipping of inflation in the bud. Meanwhile, an inflation hawk, and an excellent female Fed chair candidate was passed over. When asked, Fed Chair Powell denies that there was any appointment politics. Well, then, why did the Fed miss what this blog and others have been concerned about for a year? Labor shortages, supply chain constraints, and excessive fiscal borrowing and spending each implies inflation. Collectively, they imply the biggest inflation in two generations. 

These problems may also compound. Spending commitments have been made, and must now be funded. With deficit funding of the fiscal policy, and with new debt that must be issued as previous borrowing matures, the Treasury will soon find its interest payments soaring as the interest rates they can borrow at more than doubling in the last year or so. 

The other concern is crowding out. High fiscal spending demand for loanable funds will force other borrowers into higher interest rate borrowing. This both raises project costs, and lowers the number of projects that make business sense. In other words, part of the excess governmental spending will be reductions in private sector spending. This is at a time when we really need the private sector to rebuild our electric grid, invest in sustainable power, and develop the new technologies that will ensure the U.S. maintains its position of innovation superiority. 

I still harbor the hope that someday we can actually coordinate our monetary and fiscal policies, especially given the troubling and lasting debt legacy we are leaving our children. At $31 trillion of debt, we are fast moving beyond hope.