Most of us realize that the news over the next 3 months will be dominated by the upcoming presidential election and how it will determine the course of the country for the subsequent 4 years. Many of the policies that should be undertaken by whichever administration takes power should be crafted to alleviate the negative trends that have persisted since the last election. I will highlight the major issue the next administration must address to provide stability going forward.
Uncontrolled Federal Spending – The current National Debt stands at $35 Trillion with an additional $1 Trillion added every 100 days. Our unfunded liabilities, Social Security, Medicare etc., total $217 Trillion while total US National Assets stand at $210 Trillion. How did this happen? To help alleviate the detrimental effects Covid had on the economy, the US government embarked on a spending spree unseen since WW2. M2 Money Supply (the measurement of the nation’s money supply) accelerated just after the Biden administration took office, as the Federal Reserve printing of money fed the economy, and an increase in inflation soon followed, peaking at ~9% in 2022.
In response to the increased spending and subsequent higher inflation levels interest rates naturally spiked, which makes borrowing money more expensive; unfortunately, there are no free lunches. 30-Year Fixed Mortgages are holding steady at ~7% after spiking to almost ~8%. We are in a situation of high mortgage rates and high existing home prices which has pushed favorable buying conditions to an all-time low according to the University of Michigan survey. Similarly, commercial real estate has not been immune to the negative macro trends, as commercial real estate is the biggest source of global distressed bonds and loans primarily driven by underperforming office assets.
Not only does government spending need to be reduced to push down inflationary pressures to the economy, but it also needs to be reduced to keep the US as the reserve currency for the world economy. Being the reserve currency gives the US a unique economic tool other nations simply do not have; it allows the US to print money without risking higher inflation due to the demand of US dollars by other nations, corporations and investors. If other nations perceive the US as a risky investment, they could start unloading US assets such as Treasury bonds and/or create agreements to settle trades in non-US dollars. Furthermore, interest payments on the national debt recently eclipsed $1 trillion, becoming the largest outlay of the federal budget.
There are few ways to adequately address this problem. The obvious solution is to cut government spending, but if history is a guide neither political party has the political will to make meaningful cuts. Another solution is to raise taxes, but this unfavorable approach is not likely during an election year, especially with families and businesses already struggling. I believe our best hope is that an increase in productivity due to continued regulation reform coupled with minor budget cuts will spur economic growth and increase revenues, which in turn will lead to lower deficits.
