If you just look at the US stock market for a measure of US economic strength, the economy doesn’t look so bad. Sure, the S&P Index is down approximately 15% from the record high made in January of this year, but our country has weathered bigger problems and bigger market declines in the past. The Federal Reserve has always ridden to the rescue with an Easy Money policy, and Congress and many Presidents have always been willing to spend our way out of any difficulty. Will it really be any different this time?
We increasingly think so. First of all, the US federal debt is now much bigger, both in absolute terms and as a percentage of US GDP. As a country, we are spending way more than we are raking in with taxes. In the last twenty or so years, we have simply borrowed our way to prosperity.
We have been able to do so because the US dollar is the world’s currency of trade. Everything has been settled in dollars, but now the times are a changing! We note that:
In 2018, the Central Bank of Russia got out of US assets and scaled back its dollar exposure back.
Over the past few years, Russian and China have been increasing their gold reserve while reducing its US Treasury reserves Russia’s Gazprom has signed an agreement to start switching payments for gas supplies to China to yuan and rubles instead of dollars. Russia has forced European customers to open ruble bank accounts with Gazprombank and pay in Russian currency if they wanted to continue receiving Russian gas.
Earlier this summer, the senior Russian Minister in charge of the Eurasian Economic Commission (EAEU), led a committee to plan a new trade currency for the Eurasian Economic Union. The new currency is to be comprised of a mixture of national currencies and commodities. The ambition is for it to become an Asia-wide replacement for the dollar.
Why is this a problem? For one thing, as the use of other currencies increases, the demand for US dollars will inevitably decrease, and that should at some time translate into a weaker dollar, and a higher level of inflation. Secondly, and more importantly, less US dollars in foreign hands should lead to less demand for US treasuries. That, in turn should mean higher US interest rates.
So how are we going to finance the huge US debt that pays for all our social programs and for the defense of our country. The answer, we believe, is that we will increasingly be forced to finance it internally, and that leads us to a second big problem.
In the 9/12/22 publication of Barron’s Magazine, there is an excellent article entitled “The Labor Crunch May Be Here To Stay.” In sum, Senior labor economist Ron Hetrick predicts that the average annual growth of the US prime working-age population will slow sharply. As a result, ”by 2100, as much as two-thirds of the country could be out of the workforce and financially dependent on the remaining third.”
We don’t care what side of the political aisle you are on – that won’t work. In the future, we won’t be able to borrow our way to prosperity anymore. We desperately need to get our financial house in order!
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