There will be few texts about the triple threat for the USA that has formed. After these texts, there will be no new texts for a while.
Introduction
Cycles overlap, but they do not always proceed at the same pace. The end of the cycle of a leading economy often follows a long debt cycle. Of the phases of the psychological cycle, the Crisis often strikes when the leading economy changes. The end of the bursting of an Unraveling can coincide with the moment when the bubble of the long debt cycle bursts. In addition, the High of the psychological cycle begins at the same time as the emergence of a new world order. Short debt cycles develop at their own pace during longer cycles and are of little importance.
We are living in a moment when the most important phases of long cycles related to the national economy and order meet. The United States is in the phase of a long debt cycle, in which the country is either heading towards insolvency, a rapid decline in the value of its currency because faith in paying off debts by printing new money is running out, or a slow and long withering away. The Crisis phase of the socio-psychological cycle is moving towards a solution that will be over in 10 years. The country is full of internal conflicts that will be resolved before a new social order emerges.
The country will drift into a civil war-like state if the divided people do not find a common external enemy. The most likely external enemy is China, as it strives for the position of a leading economic country. That will probably pass in the next decades. The United States can try to change this development with a military conflict with China. A large-scale war on either country's soil is unlikely to occur. Fighting in eastern China would not be a surprise. In this and the following articles, I will discuss the United States' debt problem and possible internal and external conflicts in the country. There are three threats to the US social order: The debt problem, the internal conflict and the external one.
The first part of the triple threat, the debt problem.
A significant reason for both internal and external conflict can be found in how the collapse that marks the end of a long debt cycle is handled. It will not happen in an instant. It may take a couple of decades. The debt crisis in the United States has not been completely resolved. The worst problems have been dealt with in the banking sector since the collapse. The handling of the Great Recession has increased the level of conflict because it treated different social classes differently. The richest tenth of the population has benefited more from the solution and the additional government debt than others. The debt problems have moved from banks to other financial parties.
Government deficits have grown, and so has the debt mountain. Before the Great Recession, the US government debt was just under 70% of GDP. Now it is over 120%. The debt was financed by growing the Fed’s balance sheet. There is no end in sight to the growth, as the annual deficit is just under $2 trillion, of which interest accounts for about half. This deficit does not include growing pension liabilities or the deficits of municipalities and states. There are signs that the government will participate in at least part of the deficits of the above-mentioned entities. Debt management is made easier by the fact that the vast majority of the debt has been incurred by domestic actors.
Companies are also in debt. Excluding the financial sector, their combined debt and that of households is over 100% of GDP. At the same time, their balance sheets have weakened. Fortunately for companies, current interest rates on debt are low. The same is partly true for households. It is not worth taking out new mortgages unless you have to, because average interest rates are much lower than those on new loans.
In practice, all the undesirable side effects of money printing mentioned in the section on the long debt cycle have materialized, and the fundamentals of the US economy are weakening. It has not collapsed because interest rates on debt are not yet too high in the short term and the benefits of being a reserve currency have not worn off. One reason for this is that all major economies suffer from similar problems. The ECB's balance sheet is also full of government debt. China has also switched to printing money. The buyers of government bonds have long been central banks.
Bond purchases were mainly seen after the Great Recession as an increase in asset class prices in the United States and elsewhere. Significant consumer price inflation was not seen before the pandemic was dealt with. Permanently higher inflation is a threat to the US private sector. It could be beneficial for the government if it remained in the single-digit percentage points. The probability that the US federal government would withstand the current debt rate for decades is small. Debt inflation could also increase internal tensions in the country too much. Although the richest tenth is doing better economically than ever, the rest are potentially in the worst situation in decades.
The situation changed partly after the pandemic for a short time, because due to its economic effects, money was distributed directly to consumers. First, increased unemployment benefits were distributed. After this, direct income transfers began to be made in the budget. Tax increases for high-income earners were proposed for financing, but they did not pass. This also significantly increased inflation. In the end, low-income earners became poorer because they misused the money they received.
One of the main questions is whether the current debt mountain will remain a permanent phenomenon. I do not know whether the current administration can find a sensible solution to halve the deficit to about a trillion dollars a year. I think it is unlikely that the current measures, i.e. tariffs and government savings, would achieve this end of the deficit through economic growth. Productivity growth has not been sufficient so far since the Great Recession. It would be a surprise to me if it improved in the near future. It is, however, the best option for solving the debt problem. The current deportation of immigrants does not help. It increases the need for productivity growth.
I do not see the insolvency of the government as a problem in the medium term, i.e. 5-7 years. Solving it earlier requires less drastic measures, but I do not see their probability as high. After the middle of the next decade, the situation may be different. There may be temporary threats of insolvency related to the debt ceiling. I don't believe in a meltdown of government bonds anytime soon, because other countries would suffer more. There is no alternative to the dollar as a reserve currency now. That would require a complete overhaul of the global financial system. Its importance would decrease as the euro and other less used reserve currencies grow. Debt accumulation could be seen as an intensification of internal conflict.
Sources:
https://www.federalreserve.gov/releases/z1/dataviz/z1/nonfinancial_debt/chart/
