Twelve months ago, the general consensus among economic and market experts indicated an expectation that the United States would experience an economic downturn in 2023 due to increasing interest rates and credit tightening. The banking crisis in March appeared to validate these concerns.
However, unexpectedly, the anticipated downturn did not materialize. Contrarily, the U.S. economy not only avoided a recession but also experienced accelerated growth. The real gross domestic product (GDP), adjusted for inflation, surged from slightly over 2 percent in the initial two quarters of 2023 to 5.2 percent in the third quarter.
Simultaneously, there is a sense of exclusion from the reported economic growth among middle- and working-class Americans.
According to a November survey by the Financial Times, the majority (55%) of Americans express a feeling of financial decline. This perception is somewhat influenced by political affiliations. A significant 82% of Republicans claim a worsened financial situation, contrasting with only 31% of Democrats acknowledging the same sentiment. However, nearly half (46%) of Democrats report “no change” in their financial circumstances under the economic policies associated with the Biden administration, leaving only a quarter who believe that President Joe Biden’s economic strategies have positively impacted their financial well-being.
Setting aside political distinctions, the question arises: Why do a considerable number of Americans perceive a decline in their financial situation amid a growing economy?
The explanation lies in the diminishing purchasing power of Americans, reflected in their rapidly shrinking wallets, primarily attributed to inflation. While headline inflation, as indicated by the consumer price index, eased to 3.2% in October from 3.7% in both August and September, certain crucial categories such as housing and transportation continued to experience substantial single-digit increases (6.7 and 9.2%, respectively) in October. Fundamentally, Americans have faced three consecutive years of price inflation. While the pace of price growth may have slowed, with a few exceptions, prices have not decreased, certainly not returning to the levels observed in 2020 or earlier.
Since 2020, the purchasing power of Americans has diminished by almost 20 percent. To put it differently, what used to cost $1 now requires $1.21. Prices in crucial sectors, like energy, have surged by over 70% compared to three years ago. In fact, a period of two decades marked by what is deemed “moderate” inflation, resulting from the tripling of the monetary base, has led to Americans witnessing a 45% devaluation of their dollar since the beginning of the century. As a consequence of this gradual yet continuous erosion, it is not surprising that a majority of Americans perceive themselves to be financially weakened.
Another potential reason for the skepticism among most Americans regarding their improved financial status is linked to the origin of GDP growth. Stripping away the rhetoric, “Bidenomics” is primarily centered around fiscal stimulus—namely, increased government expenditure on initiatives like the Inflation Reduction Act, the Infrastructure Bill (with limited association with actual infrastructure), and the CHIPS Act. Driving the 5% GDP growth was a 7% surge in federal government spending and an 8.2% increase in national defense spending in the third quarter, while consumer spending lagged behind at 3.6%.
While government spending on defense for Ukraine and the Middle East, coupled with significant entitlement spending domestically, may contribute to GDP growth, it does not come without a cost.
In 2023, this cost manifested as a $1.7 trillion deficit, financed by new debt carrying an interest rate of nearly 5%. With the national debt approaching $34 trillion and annualized debt service costs (i.e., interest payments) reaching $1 trillion, a reckoning with market realities is imminent. Investors holding our debt are growing increasingly concerned about their real (after inflation) returns, precisely as our need for more debt continues to grow. This widening gap between supply and demand will necessitate maintaining higher nominal interest rates, around 5% or so, for an extended period. Consequently, this will expedite the growth in interest costs for the federal government and lead to the issuance of trillions of dollars in additional debt to cover those costs in the months ahead.
In essence, the facade of low-quality economic growth is concealing an impending debt crisis. It presents a false image that everything is stable precisely when it is becoming evident that it is not. The notion that we can spur our way out of trouble and reduce debt while persistently running trillion-dollar deficits is a fallacy. A more robust and decisive approach is required.
Source: The Epoch Times
By. Pham Thanh Bien
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