In a recent interview on the “Back to the People” podcast, Luke Gromen, a renowned macroeconomic analyst, delivered a stark analysis of the U.S. economy. Speaking with Nicole Shanahan, an American lawyer and vice-presidential running mate to Robert F. Kennedy Jr., Gromen outlined the severe challenges facing the U.S. economy, from the imminent debt crisis to the long-term effects of inflation.
1. The Debt Crisis: An Imminent and Unavoidable Threat
Gromen’s analysis of the U.S. debt crisis forms the cornerstone of his discussion. He warns that the United States is on the brink of a debt spiral, a scenario where the government’s interest payments on its debt outstrip its revenue, leading to a downward economic spiral that is difficult to escape. This situation is exacerbated by decades of fiscal mismanagement, marked by relentless borrowing and a failure to address structural deficits.
Gromen paints a vivid picture of the current situation, explaining that the U.S. government’s “true interest expense” – which includes entitlements like Social Security, Medicare, and Medicaid, along with gross interest on the national debt – is now nearly 100% of federal receipts. This means that almost all of the government’s income is being consumed by these obligations, leaving little room for other critical expenditures.
“We are right at the precipice of a debt spiral in the United States of America, and that’s a problem for everybody else as well,” Gromen warns. The implications of this are dire. If the U.S. were to enter a recession, the situation could quickly escalate as tax revenues decline and the government is forced to borrow even more to cover its obligations.
Gromen uses a striking analogy to illustrate the potential impact on U.S. Treasury bonds, which have long been considered a “safe” investment. “You’re going to get every dime back in Treasury bonds you own, but it’s going to go from buying you a diamond necklace to a cubic zirconia necklace to crackerjacks on a string that you used to make for your mom at Christmas time when you were in first grade,” he says. “That’s what Treasury bonds are going to do, and that’s just how these things work out.”
This analogy underscores the erosion of purchasing power that could result from persistent inflation and the broader economic challenges facing the U.S. economy. For Baby Boomers, who hold a significant portion of their wealth in Treasury bonds, this could mean that their savings will not stretch as far as they had anticipated, effectively forcing them to bear the cost of their healthcare and other needs in ways they hadn’t planned.
Gromen also notes that the U.S. is already facing disruptions in the Treasury market, which could force the Federal Reserve to intervene by buying up Treasuries or cutting interest rates. However, such actions would likely fuel inflation, further eroding the value of Treasury bonds and the dollar itself.
2. The Illusion of Full Employment
Gromen challenges the widely held belief that the U.S. is near full employment. While official figures may suggest that the job market is strong, Gromen argues that these numbers do not reflect the true state of the labor market. He points out that many Americans are underemployed, working part-time jobs when they need full-time work, or holding down multiple jobs just to make ends meet.
Moreover, the official unemployment rate does not account for those who have dropped out of the labor force altogether. Gromen highlights that U.S. tax receipts have been flat over the past two years, despite reports of job growth. This stagnation in tax revenue suggests that the quality of jobs may not be as high as the employment numbers indicate.
“If things were Star Spangled awesome, we wouldn’t be flat versus two years ago in tax receipts,” Gromen explains. This discrepancy indicates that many Americans are not experiencing the benefits of a supposedly strong labor market, casting doubt on the overall health of the economy.
3. The Federal Reserve’s Dilemma
The Federal Reserve’s role in managing the economy is critical, and Gromen discusses the challenges it faces in the current environment. The U.S. Treasury market, which underpins global financial stability, is showing signs of strain. If the market begins to falter, the Fed may be forced to step in to prevent a broader economic collapse.
However, Gromen warns that the Fed’s options are limited. If it intervenes too aggressively by cutting interest rates or resuming quantitative easing (QE), it risks reigniting inflation. On the other hand, if it does too little, it could allow the Treasury market to destabilize, leading to a financial crisis.
“The real event here is that the Fed is going to have to cut rates because the U.S. government can’t make its interest payments unless the Fed cuts rates, weakens the dollar, or resumes QE,” Gromen explains. This situation puts the Fed in a difficult position, as any action it takes could have significant negative consequences for the economy.
4. Inflation: A Double-Edged Sword
Inflation is a major concern, and Gromen outlines the potential consequences of the Fed’s actions. He argues that the U.S. may be forced to choose between two bad options: accepting higher inflation or facing a severe financial crisis.
Inflation erodes the value of money, making everyday goods more expensive and reducing the purchasing power of consumers. However, Gromen suggests that allowing inflation to rise may be the only way to reduce the real value of the national debt, which has ballooned to unsustainable levels.
“The fiscal situation is so bad that the only way out of this is a very brief period of extremely high inflation, where you basically crush the real value of bonds and the real value of retirees on fixed incomes,” Gromen states. While this approach could help stabilize the economy in the short term, it would come at a significant cost to savers and retirees, particularly those who rely on fixed incomes.
5. The Intractability of Entitlements
Entitlements, such as Social Security and Medicare, represent a significant portion of the U.S. budget and are politically sensitive. Gromen and Shanahan discuss the difficulty of cutting these programs, particularly given the expectations of Baby Boomers, who are a large and politically powerful demographic.
Gromen suggests that while younger generations may be more open to rethinking entitlements, Boomers are resistant to any reductions in benefits. “The Boomers are going to pay for their healthcare one way or another,” he says, emphasizing that the current system is unsustainable and will likely require significant changes in the future.
6. Potential Solutions: Inflation or a Wealth Tax
To address the fiscal crisis, Gromen explores several potential solutions. One option is a significant devaluation of the dollar by revaluing gold, which could help reduce the national debt. However, this approach would likely lead to a period of extremely high inflation, with significant negative consequences for savers and retirees.
Another option discussed is a one-off wealth tax on the richest Americans, which could help reduce the deficit. However, Gromen acknowledges that this would be politically difficult to implement, as the wealthy would likely resist such a measure.
7. Geopolitical Considerations
Gromen also examines the global implications of the U.S. fiscal crisis. He notes that foreign central banks have been reducing their holdings of U.S. Treasury bonds and increasing their reserves of gold. This shift suggests a loss of confidence in the dollar as the world’s reserve currency.
Since 2014, global central banks have sold U.S. Treasuries on net, adding around $500-600 billion in gold reserves instead. This trend highlights the growing concerns among international financial players about the sustainability of U.S. debt and the future of the dollar.
8. The Future of U.S. Economic Policy
Looking ahead, Gromen predicts that the Federal Reserve will be forced to cut interest rates significantly to address the fiscal crisis. He suggests that this is the only politically viable option left, given the difficulty of cutting entitlements or defense spending. However, this move would likely lead to higher inflation, further eroding the value of the dollar and Treasury bonds.
“Every time we’ve had a crisis in my professional career, we’ve had the choice to do something hard or something easy, and we have beaten on that easy button. Now, there’s no easy button left,” Gromen reflects, underscoring the gravity of the current economic situation.
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