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Debt destroys the economy
Burrows & Bramal, 6-10, 25, Dr. Mathew Burrows is the Counselor and Program Lead of the Stimson Center’s Strategic Foresight Hub. Prior to joining Stimson, he had a distinguished career in the State Department and the Central Intelligence Agency (CIA), the last ten years of which he spent at the National Intelligence Council (NIC); Dr. Josef Braml is the Secretary General of the German Group and the European Director of the Trilateral Commission—an influential global platform for dialogue between America, Europe, and Asia. Previously, from 2006 to 2020, he worked at the German Council on Foreign Relations (DGAP). Both are authors of the recently published book World To Come: The Return of Trump and The End of the Old Order, How to Stop America’s Coming Financial Crisis, https://nationalinterest.org/feature/how-to-stop-americas-coming-financial-crisis
A financial crisis triggered by the ever-compounding national debt could be closer than you think. Big vessels, such as the US government, are difficult to change course. This is the reason why the Treasury Department’s RMS Titanic may soon crash. With the national debt surpassing $36 trillion and significant refinancing risks looming in 2025, immediate policy interventions are essential to avert a financial catastrophe. Faith in Trump’s TACO (“Trump Always Chickens Out”) brinkmanship may not been enough to stem investors’ growing disenchantment with American profligacy. The Debt and Deficit Iceberg The United States is structurally committed to high spending and low taxation, with both parties reluctant to enact meaningful reform. The fiscal system is unsustainable, with both the state and its citizens living well beyond their means, borrowing to sustain consumption and ego-driven expectations. Since 1970, the budget deficit has persisted, except for a four-year period between 1998 and 2001. But the 2007–2008 financial crisis—when the government bailed out banks and expanded the money supply—saw the budget deficit jump. Then, it took another hit during the COVID-19 pandemic when most Americans received cash payments to help them survive the economic downturn. Similarly, the US national debt has nearly doubled in a decade, from under $24 trillion in 2014 to nearly $36 trillion in 2024, exceeding its historical peak following World War II. The debt-to-GDP ratio will reach 122 percent by 2034. The United States has had five consecutive years of budget deficits exceeding $1 trillion, and in the last six months, its deficit has grown to more than $1.3 trillion. Trump’s budget for 2025–26 has not been finalized. Still, despite his proposed sharp cut in discretionary spending, the boost of defense expenditures and extension of current tax cuts are estimated to add around $5 trillion over 10 years to the existing budget deficit. Republicans and Democrats share equal responsibility for the deficit. Examining the presidents from 1913 to the end of the federal fiscal year 2024, one study found that Republican presidents added $1.39 trillion per four-year term, compared to $1.22 trillion added by Democratic presidents. Among recent presidents, Trump, during his first term, was far and away the most significant contributor to the US debt, with his first term adding $7.1 trillion. Obama came in second with $5.6 trillion, and Biden came in third with $2.8 trillion. The Federal government’s generous COVID-19 assistance helps explain the high Trump number, along with his 2017 tax reductions on individuals and corporations. The 3.2 percent post-pandemic growth rate under the Biden administration—the highest of any recent president—was stoked by inflation and helped contain the deficit in 2021–22. Neither the Republicans nor Democrats want to put an end to the party for fear that whoever proposes budget-cutting and higher taxes would be wiped out at the next election. Nevertheless, the United States is already sailing into turbulent fiscal waters: $9.2 trillion in debt is set to mature by 2025, a quarter of the country’s total debt. Much of this was borrowed at low rates and will need to be refinanced at higher yields, putting immense pressure on bond markets. Credit rating downgrades and rising Treasury yields are already signaling market anxiety. Bankers fear the United States is losing its “safe haven” status. The effects of tariffs on the US and global economy are expected to start showing by summer. Financial leaders warn of a potential “treasury-dumping” scenario, where foreign holders lose confidence and offload US debt. The proposed “revenge tax” in the House’s budget package, if enacted, would empower the government to levy higher taxes on foreign individuals and entities with investments in the United States. Technically, this would be considered a default—since the United States would be unable to repay part of its debt. This may decrease the demand for US assets during a period when investors are already reassessing their exposure to the United States. History teaches us valuable lessons: In 2008, Lehman Brothers collapsed almost overnight, and the Federal Reserve and Treasury decided not to bail it out, a decision that faced heavy criticism. Ray Dalio, the hedge fund owner, has likened the current situation to a boat headed for disaster, where everyone knows the crash is imminent but can’t agree on how to avoid it. 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Continued escalation without agreements may lead to significant withdrawals of international investors, thereby endangering the dollar’s status as an international reserve currency. A more damaging scenario would involve the United States or China rescinding their mutual agreement to lower tariffs before the 90-day pause expires. Without specifying China’s violations, Trump has recently lashed out against China. Trump has intensified restrictions against aiding China in developing advanced semiconductors, and the administration is reportedly expelling Chinese STEM students from American universities. Breaking the existing agreement or either side refusing to negotiate any further concessions would likely frighten investors. A return to a Trump-imposed embargo on Chinese goods could spark a full-blown crisis, combined with worries about unsustainable US budget deficits. China could sharply reduce its holdings of US dollar assets. Once the momentum builds behind a financial crisis, it may be too late for Trump or Congress to intervene. Steering Clear? There is a historic precedent for reducing the deficit. The 1990 bipartisan Budget Enforcement Agreement is credited with lowering the deficit later in the decade. It created two new budget control processes: a set of caps on annually appropriated discretionary spending and a “pay-as-you-go” or “PAYGO” process for entitlements and taxes. In effect, any budget increases were limited. Additionally, Social Security reform will be necessary to prevent its bankruptcy as aging accelerates in the 2030s. Because defense is such a large component of the budget, a cap would probably mean that Trump could not build his “golden dome” or missile shield, which experts already believe may not work but would undoubtedly be hugely expensive. Instead, he and his successors would have to engage in old-fashioned arms control with China and Russia to reduce the nuclear and missile threats. Another financial crisis, like the one in 2008, could devastate the working and middle classes, increase inequality, and set the United States up for another wave of social and political disruption. Trump and Congress must stop gambling and face the reality that the US Treasury is drifting toward a fatal iceberg.
US collapse inevitable
– economy; inequality; unemployed elites; political polarization;
Jesus Mesa, 6-9, 25, The Scholar Who Predicted America’s Breakdown Says It’s Just Beginning, Newsweek, https://www.newsweek.com/peter-turchin-political-violence-donald-trump-barack-obama-riots-2083007, The Scholar Who Predicted America’s Breakdown Says It’s Just Beginning
Fifteen years ago, smack in the middle of Barack Obama’s first term, amid the rapid rise of social media and a slow recovery from the Great Recession, a professor at the University of Connecticut issued a stark warning: the United States was heading into a decade of growing political instability. It sounded somewhat contrarian at the time. The global economy was clawing back from the depths of the financial crisis, and the American political order still seemed anchored in post-Cold War optimism — though cracks were beginning to emerge, as evidenced by the Tea Party uprising. But Peter Turchin, an ecologist-turned-historian, had the data. “Quantitative historical analysis reveals that complex human societies are affected by recurrent—and predictable—waves of political instability,” Turchin wrote in the journal Nature in 2010, forecasting a spike in unrest around 2020, driven by economic inequality, “elite overproduction” and rising public debt. Protests Erupt In L.A. County, Sparked By A protestor holds up a Mexican flag as burning cars line the street on June 08, 2025 in Los Angeles, California. Tensions in the city remain high after the Trump administration called in the National… More Photo by Mario Tama/Getty Images Now, with the nation consumed by polarization in the early months of a second Donald Trump presidency, institutional mistrust at all-time highs, and deepening political conflict, Turchin’s prediction appears to have landed with uncanny accuracy. In the wake of escalating protests and the deployment of National Guard troops to Los Angeles under President Trump’s immigration crackdown, Turchin spoke with Newsweek about the latest escalation of political turbulence in the United States—and the deeper structural forces he believes have been driving the country toward systemic crisis for more than a decade. Predicting Chaos In his 2010 analysis published by Nature, Turchin identified several warning signs in the domestic electorate: stagnating wages, a growing wealth gap, a surplus of educated elites without corresponding elite jobs, and an accelerating fiscal deficit. All of these phenomena, he argued, had reached a turning point in the 1970s. “These seemingly disparate social indicators are actually related to each other dynamically,” he wrote at the time. “Nearly every one of those indicators has intensified,” Turchin said in an interview with Newsweek, citing real wage stagnation, the effects of artificial intelligence on the professional class and increasingly unmanageable public finances. Turchin’s prediction was based on a framework known as Structural-Demographic Theory (SDT), which models how historical forces—economic inequality, elite competition and state capacity—interact to drive cycles of political instability. These cycles have recurred across empires and republics, from ancient Rome to the Ottoman Empire. Peter Turchin Model Turchin’s forecast is based on a framework known as Structural-Demographic Theory (SDT), which models how historical forces—economic inequality, elite competition, and state capacity—interact to drive cycles of political instability. Courtesy Peter Turchin Read more Violence “Structural-Demographic Theory enables us to analyze historical dynamics and apply that understanding to current trajectories,” Turchin said. “It’s not prophecy. It’s modeling feedback loops that repeat with alarming regularity.” He argues that violence in the U.S. tends to repeat about every 50 years— pointing to spasms of unrest around 1870, 1920, 1970 and 2020. He links these periods to how generations tend to forget what came before. “After two generations, memories of upheaval fade, elites begin to reorganize systems in their favor, and the stress returns,” he said. One of the clearest historical parallels to now, he notes, is the 1970s. That decade saw radical movements emerge from university campuses and middle-class enclaves not just in the U.S., but across the West. The far-left Weather Underground movement, which started as a campus organization at the University of Michigan, bombed government buildings and banks; the Red Army Faction in West Germany and Italy’s Red Brigades carried out kidnappings and assassinations. These weren’t movements of the dispossessed, but of the downwardly mobile—overeducated and politically alienated. “There’s a real risk of that dynamic resurfacing,” Turchin said. A ‘Knowledge Class’ Critics have sometimes questioned the deterministic tone of Turchin’s models. But he emphasizes that he does not predict exact events—only the risk factors and phases of systemic stress. While many political analysts and historians point to Donald Trump’s 2016 election as the inflection point for the modern era of American political turmoil, Turchin had charted the warning signs years earlier — when Trump was known, above all, as the host of a popular NBC reality show. “As you know, in 2010, based on historical patterns and quantitative indicators, I predicted a period of political instability in the United States beginning in the 2020s,” Turchin said to Newsweek. “The structural drivers behind this prediction were threefold: popular immiseration, elite overproduction, and a weakening state capacity.” According to his model, Trump’s rise was not the cause of America’s political crisis but a symptom—emerging from a society already strained by widening inequality and elite saturation. In Turchin’s view, such figures often arise when a growing class of counter-elites—ambitious, credentialed individuals locked out of power—begin to challenge the status quo. “Intraelite competition has increased even more, driven now mostly by the shrinking supply of positions for them,” he said. In 2025, he pointed to the impact of AI in the legal profession and recent government downsizing, such as the DOGE eliminating thousands of positions at USAID, as accelerants in this trend. This theory was echoed by Wayne State University sociologist Jukka Savolainen, who argued in a recent op-ed in The Wall Street Journal that the U.S. is risking the creation of a radicalized “knowledge class”—overeducated, underemployed, and institutionally excluded. “When societies generate more elite aspirants than there are roles to fill, competition for status intensifies,” Savolainen wrote. “Ambitious but frustrated people grow disillusioned and radicalized. Rather than integrate into institutions, they seek to undermine them.” Peter Turchin Peter Turchin forecasted a spike in unrest around 2020, driven by economic inequality, elite overproduction, and rising public debt. Courtesy of Peter Turchin Savolainen warned that Trump-era policies—such as the dismantling of D.E.I. and academic research programs and cuts to public institutions—have the potential to accelerate the pattern, echoing the unrest of the 1970s. “President Trump’s policies could intensify this dynamic,” he noted. “Many are trained in critique, moral reasoning, and systems thinking—the very profile of earlier generations of radicals.” Structural Drivers Turchin, who is now an emeritus professor at UConn, believes the American system entered what he calls a “revolutionary situation”—a historical phase in which the destabilizing conditions can no longer be absorbed by institutional buffers. Reflecting on the last few years in a recent post on his Cliodynamica newsletter, he wrote that “history accelerated” after 2020. He and colleague Andrey Korotayev had tracked rising incidents of anti-government demonstrations and violent riots across Western democracies in the lead-up to that year. Their findings predicted a reversal of prior declines in unrest. “And then history accelerated,” he wrote. “America was slammed by the pandemic, George Floyd, and a long summer of discontent.” Minneapolis City Council Police Reform Vote A police officer points a hand cannon at protesters who have been detained pending arrest on South Washington Street in Minneapolis, May 31, 2020, as protests continued following the death of George Floyd. AP Photo/John Minchillo, File While many saw Trump’s 2020 election loss and the January 6 Capitol riot that followed as its own turning point in that hectic period, Turchin warned that these events did not mark an end to the turbulence. “Many commentators hastily concluded that things would now go back to normal. I disagreed,” he wrote. “The structural drivers for instability—the wealth pump, popular immiseration, and elite overproduction/conflict—were still running hot,” Turchin continued. “America was in a ‘revolutionary situation,’ which could be resolved by either developing into a full-blown revolution, or by being defused by skillful actions of the governing elites. Well, now we know which way it went.” These stressors, he argues, are not isolated. They are systemwide pressures building for years, playing out in feedback loops. “Unfortunately,” he told Newsweek, “all these trends are only gaining power.”
Structural economic factors mean downturn now
Vivekanand Jayakumar, Ph.D., is an associate professor of economics at the University of Tampa, 6-7, 25, The Hill, A bond market meltdown might be inevitable, https://thehill.com/opinion/finance/5336348-us-fiscal-sustainability-at-risk/
The recent surge in yields on long-dated U.S. Treasurys has generated concern in some circles. Jamie Dimon, the CEO of JPMorgan Chase, recently warned that the bond market is likely to crack as a result of spiraling government debt levels. “I just don’t know if it’s going to be a crisis in six months or six years, and I’m hoping that we change both the trajectory of the debt and the ability of market makers to make markets,” he said. Others remain more sanguine and observe that interest rates have in fact normalized close to their pre-2008 global financial crisis levels. In the aftermath of the financial crisis, both real and nominal rates were stuck at unusually low levels for about a dozen years. But, since 2022, we have seen both policy and market rates edge toward their pre-crisis levels. With interest rates reverting back to their historical norms, is the current wariness surrounding the long end of the yield curve among key investors warranted? To evaluate the validity of such fears, it is worth reviewing sU.S. fiscal history. During the past 45 years, the U.S. has had to deal periodically with the “twin deficits” problem — the near-synchronous widening of the fiscal deficit and the current account deficit. In the past, bipartisan policy compromises pushed through by enlightened political leadership have helped America avoid a debt/currency crisis. In the early 1980s, the Reagan-era tax cuts contributed to a decline in U.S. government revenue that was not offset by cuts on the spending side and this led to a widening of the budget deficit. Meanwhile, the high interest rates associated with the Paul Volcker disinflation episode led to a sharp appreciation of the U.S. dollar and contributed to a deterioration of the trade and current account balances. This simultaneous deterioration of budget and current account balances gave rise to the twin-deficit hypothesis and highlighted the potential interconnectedness between fiscal deficits and trade deficits. Emergence of “twin deficits” during the early 1980s generated significant concern in policymaking circles and led to concrete measures on both the fiscal front (in the form of the Tax Reform Act of 1986 and the Budget Enforcement Act of 1990) and on the exchange rate stabilization front (in the form of multilateral agreements such as the 1985 Plaza Accord and the 1987 Louvre Accord). In the Clinton era, further steps (such as the 1993 Omnibus Budget Reconciliation Act, the reduction in military spending associated with the post-Cold War peace dividend and the 1996 Personal Responsibility and Work Opportunity Reconciliation Act) were undertaken to improve the U.S. fiscal outlook. During the fiscal 1998 through fiscal 2001 period, the federal government even ran budget surpluses. Concerns regarding the “twin deficits” reemerged during the George W. Bush era as fiscal and current account imbalances worsened. Prior to the 2008 global financial crisis, economists worried that the spike in budget and trade deficits was serious enough to threaten a dollar crisis. Following the collapse of Lehman Brothers in September 2008, however, there was a dollar shortage abroad and the U.S. currency actually strengthened. Furthermore, as household consumption collapsed and personal saving rate rose, the U.S. current account markedly improved in the post- global financial crisis era. During the Obama era, the 2011 Budget Control Act and the artificially suppressed borrowing costs (via Fed’s quantitative easing and near-zero interest rate policies) helped ease the fiscal burden. Over the past five years, both the budget and trade deficits have deteriorated sharply. Budget deficits have exceeded 5 percent of GDP since 2020 and projections indicate deficits will remain elevated, raising concerns about fiscal sustainability. Critically, government borrowing costs have risen sharply since 2022. Historian Niall Ferguson has suggested that America’s superpower status may be threatened as the U.S. government now spends more on interest payments than on defense. Unlike prior episodes, the current cycle of deteriorating external and fiscal imbalances is significantly more worrisome as the country appears to be beset by institutional decay and political ineptitude. Domestic and foreign investors in U.S. Treasurys are starting to fret about the absence of fiscal rectitude even as government debt-to-GDP ratios reach levels last observed in 1946. Additionally, illogical and inconsistent policies on the trade and foreign policy front raise the prospect of a so-called “moron premium” being applied to U.S. assets. Legislative threats to tax foreign capital is raising alarm and will likely push up the cost of borrowing even further. Such actions are also fueling concerns about the pre-eminent reserve currency status of the U.S. dollar. Any diminishment of dollar’s exorbitant privilege will affect U.S. fiscal sustainability. Unlike the 1990s, there is currently no political consensus on reining in fiscal profligacy and restoring fiscal sanity. Harvard’s Ken Rogoff recently noted: “To be sure, this isn’t just about Trump. Interest rates were already rising sharply during Biden’s term. Had Democrats won the presidency and both houses of Congress in 2024, America’s fiscal outlook would probably have been just as bleak. Until a crisis hits, there is little political will to act, and any leader who attempts to pursue fiscal consolidation runs the risk of being voted out of office.” The late great MIT economist Rudiger Dornbusch once quipped: “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.” Recent spikes in bond market volatility and long-dated Treasury yields suggest that the moment of fiscal reckoning may finally be approaching.
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Trump destroying
(a) Economy (trade)
(b) Global democracy
(c) US leadership (isolationism)
Dan Perry is the former Cairo-based Middle East editor and London-based Europe-Africa editor of the Associated Press, former chairman of the Foreign Press Association in Jerusalem, and the author of two books, 6-6, 25, The Hill, Trump is forcing US allies to cobble together a post-America world order, https://thehill.com/opinion/international/5334887-trumpism-challenges-global-order/
As President Trump and his allies dismantle the global system America once championed, the rest of the world faces a choice: either brace for chaos and kiss the ring, or forge, at least temporarily, a new order that promotes democratic principles but largely excludes the U.S. while leaving the door open for a future, less-bullying America to return. This would have been unthinkable not long ago. But Trumpism’s assault on two essential pillars of the postwar global consensus — multilateralism and liberal democracy — is making it necessary. These pillars helped expand prosperity, reduce war, and uplift billions. They were indispensable in facing challenges like pandemics, cyberterrorism, and climate change. Trump and his imitators seek to replace them with something cruder, based on the reasoning that America is the strongest: economic nationalism and elected autocracy, with each country fending for itself and every man for himself. Multilateralism means sovereign nations working together, within rules-based institutions, to address problems. Trump has rejected this outright. His administration undermined the World Trade Organization, the United Nations, the Paris Climate Agreement, and NATO, the very embodiment of the alliance — not to mention the World Health Organization, from which he withdrew against all logic. Though the U.S. dominates NATO militarily, it contributes just 16 percent of the common budget — about the same per capita as Germany — and does not unilaterally control the alliance. This has irked Trump, who has declared NATO “obsolete,” lied about the U.S. share and shown disdain for its collective commitments. Jeffries declines to embrace Musk amid the billionaire’s feud with Trump With respect to world trade, Trump’s tariff war rests on the notion that imports are somehow inherently harmful. The Peterson Institute for International Economics estimated his tariffs on China, Canada, and Mexico would cost the average U.S. household over $1,200 per year. Historically, tariffs have caused major damage. The Smoot-Hawley Tariff Act of 1930 worsened the Great Depression by triggering retaliation. Only after World War II, with the General Agreement on Tariffs and Trade and later the World Trade Organization, did global trade recover. Today, international trade exceeds $25 trillion annually and average tariffs are down to 2.5 percent. Trump’s unilateralism has threatened all this. These global institutions are part of a bulwark against a return to nationalist chaos. They were created after World War II to prevent World War III. One should recall the maxim about forgetting the lessons of history. Trumpism also redefines democracy as a contest of popularity: You win an election, and you rule without constraint. It dismisses civil liberties, judicial independence, and press freedom. This mirrors the ideologies of Viktor Orban in Hungary, Recep Tayyip Erdogan in Turkey, Narendra Modi in India, the Law and Justice Party in Poland, and increasingly, Benjamin Netanyahu in Israel. According to Freedom House — which Trump has undercut by slashing foreign aid — 2024 marked the 19th consecutive year of democratic decline, with rights worsening in 60 countries. This worldview sees rules as weakness and ideals as naïveté. Trump’s America doesn’t want to lead the world — it wants to dominate or isolate from it. That’s a dereliction of the American role in promoting liberty and truth. The appeal of illiberalism is no mystery. Across the world, fascist forces have weaponized wedge issues amplified by social media and simplistic populism. Immigration, for instance, is both an economic necessity and a cultural flashpoint. Progressive overreach, inequality, and instability have fed public anger. But liberal democrats have failed to explain how autocrats actually harm the very people they rally. If Trump’s America walks away from its postwar responsibilities, the world should call his bluff. Done wisely, this could help Americans recognize the strategic failures of the populist right. Trump’s global strategy involves supporting anti-democratic takeovers around the world. Now, core NATO countries are boosting defense spending and cooperation, anticipating that U.S. leadership can no longer be counted on. If Trump pulls out, a new alliance may emerge. But other possibilities — economic and political — are just as vital. One idea is a broad, low-tariff economic bloc of countries committed to not weaponizing trade. They could cap tariffs at 10 percent, resolve disputes through arbitration, and signal that interdependence still matters. This bloc wouldn’t need to exclude non-democracies. It might include the EU, UK, Japan, Canada, Mexico, Chile — even China or India, if they play by the rules. When Trump abandoned the Trans-Pacific Partnership, its remaining members formed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, now covering 15 percent of global GDP. Although the U.S. alone accounts for about 10 percent of global exports and 13 percent of imports, it is not irreplaceable. A united bloc would render bilateral extortion tactics ineffective. The message: we will not be divided and conquered. Another option is an alliance of liberal democracies committed not just to trade, but to civil liberties, press freedom, and minority rights. Think of it as an expanded EU — or what America used to represent. This would exclude countries like Hungary, Turkey, India, and Israel under its current coalition — and possibly also the U.S. under Trump. The alliance could support election security, regulate social media, encourage academic exchanges, and promote joint infrastructure and cybersecurity. It would be a sanctuary for truth in an age of disinformation. It would affirm that democracy is about values, not just elections — and that those values lead to prosperity and legitimacy. This is the fight we are in. If clarity requires sidelining the U.S. for now, so be it.
Higher inflation hurts the poor and causes a rate hike
Jeff Cox, 5-22, 24, CNBC, Federal Reserve minutes indicate worries over lack of progress on inflation, https://www.cnbc.com/2024/05/22/fed-minutes-may-2024-.html
Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2 percent objective,” the summary stated. The minutes also showed “various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.” Federal Reserve officials grew more concerned at their most recent meeting about inflation, with members indicating that they lacked the confidence to move forward on interest rate reductions. Minutes from the April 30-May 1 policy meeting of the Federal Open Market Committee released Wednesday indicated apprehension from policymakers about when it would be time to ease. The meeting followed a slew of readings that showed inflation was more stubborn than officials had expected to start 2024. The Fed targets a 2% inflation rate, and all of the indicators showed price increases running well ahead of that mark. “Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2 percent objective,” the summary said. “The recent monthly data had showed significant increases in components of both goods and services price inflation.” The minutes also showed “various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.” Several Fed officials, including Chair Jerome Powell and Governor Christopher Waller, have said since the meeting that they doubt the next move would be a hike. The FOMC voted unanimously at the meeting to hold its benchmark short-term borrowing rate in a range of 5.25%-5.5%, a 23-year high where it has been since July 2023. “Participants assessed that maintaining the current target range for the federal funds rate at this meeting was supported by intermeeting data indicating continued solid economic growth,” the minutes said. Since then, there have been some incremental signs of progress on inflation, as the consumer price index for April showed inflation running at a 3.4% annual rate, slightly below the March level. Excluding food and energy, the core CPI came in at 3.6%, the lowest since April 2021. However, consumer surveys indicate increasing worries. For instance, the University of Michigan consumer sentiment survey showed the one-year outlook at 3.5%, the highest since November, while overall optimism slumped. A New York Fed survey showed similar results. Stocks held in negative territory while Treasury yields were mostly higher following the minutes release. Upside inflation risk? Fed officials at the meeting noted several upside risks to inflation, particularly from geopolitical events, and noted the pressure that inflation was having on consumers, particularly those on the lower end of the wage scale. Some participants said the early year increase in inflation could have come from seasonal distortions, though others argued that the “broad-based” nature of the moves means they shouldn’t be “overly discounted.” Committee members also expressed worry that consumers were resorting to riskier forms of financing to make ends meet as inflation pressures persist. “Many participants noted signs that the finances of low- and moderate-income households were increasingly coming under pressure, which these participants saw as a downside risk to the outlook for consumption,” the minutes said. “They pointed to increased usage of credit cards and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans.” Officials were largely optimistic about growth prospects though they expected some moderation this year. They also said they anticipate inflation ultimately to return to the 2% objective but grew uncertain over how long that would take, and how much impact high rates are having on the process. Immigration was mentioned on multiple occasions as a factor both helping spur the labor market and to sustain consumption levels. Market lowering rate-cut expectations Public remarks from central bankers since the meeting have taken on a cautionary tone. Fed Governor Waller on Tuesday said that while he does not expect the FOMC will have to raise rates, he warned that he will need to see “several months” of good data before voting to cut. Last week, Chair Jerome Powell expressed sentiments that weren’t quite as hawkish in tone, though he maintained that the Fed will “need to be patient and let restrictive policy do its work” as inflation holds higher. Markets have continued to adjust their expectations for cuts this year. Futures pricing as of Wednesday afternoon after the release of the minutes indicated about a 60% chance of the first reduction still coming in September, though the outlook for a second move in December receded to only a bit better than a 50-50 coin flip chance. Earlier this year, markets had been pricing in at lease six quarter-percentage point cuts.
Economy resilient, recessions don’t lead to downturns and the economy rebounds
Sean Williams, 3-17, 24, Is Wall Street on the Verge of a Crash? The Fed’s Most-Trusted Recession Indicator Weighs In., https://www.msn.com/en-us/money/savingandinvesting/is-wall-street-on-the-verge-of-a-crash-the-fed-s-most-trusted-recession-indicator-weighs-in/ar-BB1k29VG?ocid=hpmsn&cvid=d1ac823318334ec1b357ed7260e3a8dc&ei=14
Even though the stock market doesn’t mirror the performance of the U.S. economy, corporate earnings do ebb and flow based on the health of the economy. Historically, two-thirds of the S&P 500’s drawdowns have occurred after, not prior to, a recession being declared by the National Bureau of Economic Research. Put another way, a recession would, indeed, be expected to decisively knock the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite off their respective perches. While a rapid crash may not occur, meaningful downside would be the expectation. Truth be told, the NY Fed’s trusted recession probability tool is just one of a couple of metrics that appears to spell trouble for the U.S. economy and stock market. In particular, M2 money supply is meaningfully contracting for only the fifth time since 1870, and the Conference Board Leading Economic Index (LEI) is working on one of its longest consecutive declines dating back more than 60 years. All signs appear to point to a sizable downturn for the Dow Jones, S&P 500, and Nasdaq Composite. While this may not be the rosiest of near-term forecasts, patience has a way of righting the ship when it comes to investing on Wall Street. For example, in the 78 years since World War II ended, the U.S. economy has navigated its way through a dozen recessions. Only three of these 12 downturns reached 12 months in length, and none surpassed 18 months. Based on what history tells us, recessions are short-lived events. Conversely, periods of economic growth tend to stick around for multiple years. While there are a few instances of short-lived expansions, there are two periods of growth since 1945 that lasted at least a decade. Statistically speaking, it’s a considerably smarter move to bet on the American economy (and its underlying businesses) to grow over time. It’s a similar story on Wall Street. According to analysts at Bespoke Investment Group, there’s a marked disparity between bear and bull markets in the S&P 500. Last June, Bespoke published a dataset that revealed the length of every bear and bull market in the S&P 500 dating back to the start of the Great Depression in September 1929. The 27 S&P 500 bear markets have lasted an average of just 286 calendar days (about 9.5 months), with the longest enduring 630 calendar days in 1973 to 1974. By comparison, the average S&P 500 bull market has lasted for 1,011 calendar days (roughly two years and nine months), with 13 of the 27 bull markets since September 1929 sticking around for a longer number of calendar days than the lengthiest S&P 500 bear market. No matter what the U.S. economy or Wall Street has thrown investors’ way, patience has always paid off. Eventually, stock market corrections and bear markets are cleared away by bull market rallies. Even if 2024 turns out to be a rough year for equities, it could represent a blessing in disguise for opportunistic long-term investors.
No alternative to the US dollar
Sargen, 10-13, 23, Nicholas Sargen, Ph.D. is an economic consultant with Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business. He has authored three books including Global Shocks: An Investment Guide for Turbulent Markets, The Hill, This time around, war in Israel shouldn’t upend the market, https://thehill.com/opinion/finance/4252553-this-time-around-war-in-israel-shouldnt-upend-the-market/
Finally, another consideration that mitigates the risk of an oil price spike is the strength of the U.S. dollar, which has appreciated by 10 percent on a trade-weighted basis over the past two years. Moreover, there currently is no viable alternative to challenge the status of the U.S. dollar as the world’s reserve currency. This is in marked contrast to what happened in the 1970s when the dollar was perennially weak as the United States became a high-inflation country. Consequently, OPEC members were motivated to raise the price of oil at that time to recoup some of the loss of their purchasing power resulting from oil being denominated in dollars.
High debt crushes the economy
Jordan Cohen and Dominik Lett, CATO, 2023, Congress Should Worry about Biden’s Emergency Spending Request, https://www.cato.org/blog/congress-should-worry-about-bidens-emergency-spending-request
High and rising national debt suppresses private investment, reduces incomes, and increases risk of a sudden fiscal crisis. Excessive federal debt weakens the economy, which undermines the foundation of America’s military strength. If Congress agrees with President Biden that Ukraine, disaster relief, and border security merits additional funding, it should fund them through regular appropriations and by staying within established spending limits.
The Fed is out of stabilizers/tools to prevent economic downturns
EL-Erian, 11-22, 22, MOHAMED A. EL-ERIAN is President of Queens’ College at Cambridge University. He also serves as Professor of Practice at the Wharton School, Senior Global Fellow at the Lauder Institute, and an adviser to Allianz and Gramercy Funds Management, Not Just Another Recession Why the Global Economy May Never Be the Same, https://www.foreignaffairs.com/world/not-just-another-recession-global-economy
But the longer central banks extended what was meant to be a time-limited intervention—buying bonds for cash and keeping interest rates artificially low—the more collateral damage they caused. Liquidity-charged financial markets decoupled from the real economy, which reaped only limited benefits from these policies. whole The rich, who own the vast majority of assets, became richer, and markets became conditioned to think of central banks as their best friends, always there to curtail market volatility. Eventually, markets started to react negatively to even hints of a reduction in central bank support, effectively holding central banks hostage and preventing them from ensuring the health of the economy as a. All this changed with the surge in inflation that began in the first half of 2021. Initially misdiagnosing the problem as transitory, the Fed made the mistake of enabling mainly energy and food price hikes to explode into a broad-based cost-of-living phenomenon. Despite mounting evidence that inflation would not go away on its own, the Fed continued to pump liquidity into the economy until March 2022, when it finally began raising interest rates—and only modestly at first. But by then inflation had surged above 7 percent and the Fed had backed itself into a corner. As a result, it was forced to pivot to a series of much steeper rate hikes, including a record four successive increases of 0.75 percentage points between June and November. Markets recognized that that the Fed was scrambling make up for lost time and started worrying that it would keep rates higher for longer than would be good for the economy. The result was financial market volatility that, if sustained, could threaten the functioning of global financial markets and further damage the economy.
Wage increases boost consumer spending
Sarah Chaney Camban, 11-24, 21, WSJ, U.S. Recovery Accelerates on Spending, Labor Market Growth, https://www.wsj.com/articles/consumer-spending-personal-income-inflation-october-2021-11637710533?mod=hp_lead_pos2
Wage increases will be a key source of spending power for consumers as they run through savings accumulated from multiple rounds of government stimulus. Americans were saving at an annualized rate of $1.322 trillion in October, compared with $5.764 trillion in March, when a fresh round of stimulus started reaching bank accounts. “We’re seeing the growth baton being passed from the public sector to the private sector,” said Mr. Daco of Oxford Economics. The personal-saving rate, which is saving as a percentage of after-tax income, was 7.3% in October, in line with pre-pandemic levels. The booming job market has been a boon for Caleb Waack’s career. The 28-year-old starts a new job in data engineering for an online mattress firm next Monday, his third since the pandemic began. Mr. Waack said he seized on extra time from working remotely to study up on programming, helping him transition from automotive engineering to consumer goods and, ultimately, to his chosen field of data science. He said he received an offer for his new job within a week of applying, compared with a five-week turnaround time for the role he took in mid-2020. “The labor market is scorching hot,” said Mr. Waack, who lives in De Pere, Wis. “The salary increase is—it’s significant, definitely higher than inflation. It’s an employees’ market, right?” Covid-19 is still disrupting the economy and poses a risk to the outlook. Virus cases have risen this month, and some public-health experts warn that cases could continue to climb as people gather indoors during the winter.