Janet Yellen, the United States Secretary of the Treasury, has a fascinating role. Her task? Writing checks to cover the nation’s expenses—checks that somehow clear without a hitch. Despite the country’s precarious fiscal standing, this process continues to function, with the Treasury perpetually borrowing money while Washington freely spends it.
Yellen is likely aware that the notion of full faith and credit may be more illusion than reality. The U.S. government’s history of fiscal mismanagement should raise serious doubts about its financial instruments. However, why dwell on past issues when there are ample funds to be gained from the weekly Treasury bill auctions?
During a recent visit to China, Yellen was recognized by a local food blogger indulging in a plate of magic mushrooms. A staff member later confirmed her enjoyment, stating that the restaurant’s team remarked she “loved [the] mushrooms very much. It was an extremely magical day.”
While the effects of these mushrooms on her were not disclosed, they seem to have fueled her persistent misconceptions about the health of the U.S. economy. For instance, during this week’s G20 summit in India, Yellen proclaimed:
“For the United States, growth has slowed, but our labor market continues to be quite strong. I don’t expect a recession. The most recent inflation data were quite encouraging.”
Such comments undoubtedly echo the thoughts of someone under the influence of mind-altering substances. Alternatively, they may reflect a disconnection rooted in decades of professional economist roles at the Federal Reserve and the Treasury.
A Reality Check
The unemployment rate reported by the Bureau of Labor Statistics (BLS) stands at just 3.6 percent, a statistic Yellen could celebrate. However, the quality of jobs emerging does not hold the promise of fostering substantial economic growth.
Higher-paying positions in technology and finance are dwindling, while jobs in leisure, hospitality, and government dominate employment increases. Although these roles are important, they do not generate new wealth or enhance America’s global competitiveness.
While under the influence, Yellen maintained her belief that a recession is unlikely. Perhaps, this very conviction is exactly why one should brace for it.
Her forecasting has not been stellar. For instance, in 2017, she stated that another financial crisis seemed improbable in our lifetime. Yet, since then, the nation has encountered successive financial crises, including the recent bank failures this spring.
In the latest financial news, Bank of America reported a staggering $106 billion in bond losses for the second quarter, an increase of $7 billion. Concurrently, Starwood Capital Group defaulted on a $215.5 million mortgage for an Atlanta office tower. Definitely nothing to lose sleep over, right?
Moreover, Taiwan Semiconductor Manufacturing Company (TSMC), one of the leading chip manufacturers, recently announced a decline in profits for the first time in four years, with revenue dropping 10 percent and net income down 23.3 percent. Wasn’t AI supposed to herald a new era of production?
Regarding Yellen’s ‘encouraging inflation data,’ she may have been referencing the latest Consumer Price Index (CPI) report from the BLS, which indicated that June saw consumer prices rise at an annual rate of 3 percent. This rate is still significantly higher than the Fed’s target, exceeding it by 50 percent.
Additionally, the component related to energy commodities showed a decline of 16.7 percent over the past year. This trend coincided with President Biden’s decision to deplete the Strategic Petroleum Reserve to a 40-year low. Absent such shortsighted policy moves, the current inflation picture would appear far less favorable.
Structural Challenges Ahead
In short, the outlook for the U.S. economy does not align with Yellen’s optimistic perspective. Look beyond the moment’s data reports, and you’ll behold a looming structural crisis of significant magnitude.
Basic arithmetic lays bare the troubling situation the 118th Congress is creating for Americans.
The Treasury Department under Yellen reported a staggering budget deficit of nearly $1.4 trillion for the first nine months of the 2023 fiscal year, a shocking 170 percent increase from the same timeframe last year.
The most startling revelation was that interest payments on Treasury debt exceeded $652 billion during the same period, registering a 25 percent rise year over year.
Rapid increases in interest rates by the Federal Reserve, intended to quell persistent inflation, have driven the cost of Treasury debt to alarming levels. Those attuned to economic trends could foresee this outcome well in advance.
Federal debt has spiraled out of control for decades, but the acceleration of this growth in the 21st century is alarming.
Politicians often propose economic growth as the panacea for Washington’s debt woes, a solution that typically involves borrowing against future earnings to fund present expenditures.
Yet, history shows that economic expansion rarely outstrips the rate of debt accumulation. Instead, the tally of debt continues to climb year after year. It’s simply impossible to eliminate debt through growth when the debt is escalating more rapidly than gross domestic product (GDP).
For instance, the federal debt in 2000 was approximately $5.6 trillion, while U.S. GDP was around $10 trillion. Today, federal debt has surged to over $32.5 trillion, with GDP at about $26.5 trillion. Over 23 years, federal debt has skyrocketed by over 480 percent while GDP has grown by only 165 percent.
The Consequences of Fiscal Irresponsibility
The Peter G. Peterson Foundation recently endeavored to clarify the enormity of the $32 trillion federal debt, a figure that is challenging to grasp. Here are a few startling insights from the foundation:
The $32 trillion debt eclipses the combined economies of China, Japan, Germany, and the United Kingdom. This translates to approximately $244,000 per household or $96,000 per person in the United States. If each household aimed to contribute $1,000 monthly to reduce the national debt, it would take over 20 years to make a dent.
Unquestionably, Washington has amassed an untenable financial burden. What has it constructed with this level of recklessness?
U.S. cities are deteriorating, infrastructure is failing, and the nation finds itself mired in continuous overseas conflicts, all while grappling with issues of social identity.
The political will to rectify this runaway debt has been conspicuously absent. Both parties have engaged in unbridled spending, with no significant attempts to cut expenses. Efforts to achieve a balanced budget have vanished into thin air, and now we may have reached a point of no return.
As previously mentioned, interest payments on Treasury debt are projected to exceed $1 trillion annually if rates continue to climb. This would position interest expenses on par with Social Security, the government’s largest spending item.
Ultimately, such borrowing, combined with rampant spending and skyrocketing interest rates, paints a grim picture for America’s future.
What a spectacle it is to watch this unfold!
[Editor’s note: Are there underlying tensions that could provoke a conflict with China over Taiwan? Are you prepared for such potential turmoil? Discover vital insights in a specially prepared report that you can access here for less than a penny.]
Sincerely,
MN Gordon
for Economic Prism
Return from How Washington Ruined America’s Future to Economic Prism
