The United States' Fiscal Health Is Poor
The United States fiscal situation is similar to a sick patient that refuses to help himself by correcting unhealthy behavior. The root cause of the United States’ ailments is out-of-control deficit spending which has led to elevated price levels, moral hazard, a hollowing out of the middle class and a variety of other fiscal, monetary and cultural evils.
The Federal Reserve is complicit in harming the U.S. Economy in an effort to perpetuate the illusion of economic growth. The Fed has run awful monetary policies such as QE, ZIRP and the BTFP each of which engender moral hazard and cause price levels to explode (weakening the Dollar), while simultaneously monetizing a variety of fiscal policies such as the CARES Act (itself an abomination), and Biden’s Inflation Act (to name two), which have the same deleterious impact on the U.S. economy and culture. The Fed is supposed to be a check against out-of-control fiscal spending. Instead, Fed Chair Powell would regularly appear before Congress with then Secretary Mnuchin (the two would regularly fist bump) and now Secretary Janet Yellen. The Fed and Treasury ought not be friendly. These two agencies ought to be in natural conflict. Instead, the Fed and Treasury have ignored natural law in order to keep the magic show going. The star of the show is debt-funded economic growth supported by a fiat currency whose purchasing power erodes every time the Fed prints or that banks lend through our fractional reserve banking system.
My fear is that the Fed will take Fed Funds to 0-2% next year and that price inflation will return. Real world price inflation was far worse than the 9% July 2022 CPI figure as the CPI calculation is not an apples-to-apples price comparison on goods and services, but instead assumes that consumers rotate down to less expensive goods. This rotation, or “substitution” is how the CPI calculation is managed down. John Williams’ ShadowStats showed that inflation peaked at approximately 18% using the apples-to-apples methodology that was used to calculate inflation during the 1980s. However, that 18% figure seems low, probably because of that fact that the BLS uses surveys in part to build its CPI models, it is not as though the BLS has 100% real-time, real-world pricing data, or anything close to it.
The Fed does not have control over the long end of the Treasury yield curve. If the United States finds itself in another 2020-2022 situation where both fiscal and monetary policy rapidly grow the money supply, I believe we could see a 10% yield on the 10-year Treasury. It sounds unthinkable, but if I told you that Trump and Biden would grow M1 by more than 400% in two years, you would have thought me crazy. A world with a 10% yield or greater on the 10-year would shut fiscal spending and economic activity down as the U.S. cannot afford to pay an elevated interest rate on the $35 Trillion in Treasury debt outstanding.
Taxes will increase in 2025 and at some point in the next decade Social Security will have to be trimmed or cancelled in the same way that companies have cancelled defined benefit plans over the past 30 years.