When cycles meet part 2. US Internal conflict

The United States is divided in many ways: left and right, rich and poor, urban and suburban, generational divides, etc. The divisions are visible in the everyday lives of citizens. Everyone considers the opinions and actions of the opposing parties to be pathetic at best. The country will become increasingly divided the further this decade progresses without external conflict. Decision-making capacity will be paralyzed if neither party controls Congress, the Senate, and the presidency.

The situation will be resolved one way or the other. In internal conflict, elections, the preparations for them, and the aftermath play a major role. Voter turnout is high. Politics rarely matters as much. Internal conflicts do not only mean civil wars, but also attempts to change the social system.

There are many participants. Let's first divide the main factors into groups: the people, the president and his government, the parties, the Senate, Congress, the Supreme Court, the media, the techno-oligarchs and the Fed. The latter of these tries to hold the strings of the economy in its hands and has not played a direct role in the conflict. It has played a major indirect role in the confrontation. The benefits of its quantitative easing have mostly gone to the wealthy, which has increased the sense of injustice among the people. The poor are not angry for nothing. The Fed's role is to make sure that the administration has money for its projects. Their costs go to the taxpayers. Some of it eventually returns to them.

Today, the biggest confrontation is between the parties. Despite appearances, not all key figures in the parties are divided into left and right. The traditional media is divided into a left-leaning majority. Some techno-oligarchs sympathize with the current administration and do not actually have a political point of view. The Supreme Court is leaning to the right. Its job is to enforce the Constitution. It is not a rubber stamp of the left or the right at this point. You saw that in the aftermath of the 2020 presidential election.

The people are divided into Democrats, Republicans, and neutrals. The people are divided mostly by their ancestry, wealth, and where they live. African Americans are mostly Democrats. Latinos used to be mostly Democrats, but more and more of them are Republicans. Asians are a small minority for now. So they matter little. The white vote is more evenly split between Democrats and Republicans. In big cities, Democrats are in the majority, but elsewhere it is different.

As it stands, Republicans control the presidency, Congress, and Senate. Democrats are in the minority, and Trump’s followers are in the majority. This may take another year, but at the beginning of 2027 the situation will probably be different, meaning that the Democrats will take control of either Congress or the Senate. After this, the changes made by Trump will end for a couple of years. In this case, nothing will happen unless some external threat appears.

The media is trying to shape the opinions of citizens to their liking. An amazing amount of time is spent following them, when you include social media, up to 10 hours a day are spent on them. Of the five largest daily newspapers, the Wall Street Journal and the Chicago Tribune are on the right and the Washington Post is following Trump. The New York Times and USA Today are on the left. Of the largest television channels, ABC, NBC, and CBS are on the left, while Fox and Fox News are on the right. Television is consumed for about 4 hours a day. Most of the most popular news sites on the Internet are on the left.

Younger generations get most of their media exposure through social media owned by techno-oligarchs. Most of them were previously on the left. Now they have moved more to the right and I don't have any exact information about which direction they are going now. They have the potential to brainwash their users better than regular media. They also constantly monitor their users. These entities determine which parties get their voices heard and control the majority of Internet traffic. They decide the outcome of any internal non-military conflict. They are not the primary parties to the conflict.

Ultimately, the internal conflict is about the struggle between freedom and totalitarianism. It is about whether to allow different opinions and ways of life. Both the left and the right seem to favor totalitarianism more or less at the moment. The majority of important actors are now, under the Trump presidency, punks without ideological attachments.

The younger generations are leaning more to the left, so over the decades the country is moving to the left. In the medium term, the situation is different, and the right now seems to be in the majority. The most significant sign of a shift to the left would be an increase in the number of Supreme Court justices. Right now, the situation is 6-3 in favor of the right. The positions are for life, so it will take decades for the balance to change. Without increasing the number of justices, the Supreme Court will operate according to Republican thinking.

The worst possible change to the current situation is a country moving strongly to the left. The states are already clearly leaning to the other ideology. New York practically elected a socialist mayor. California is strongly left-wing, Texas and Florida are right-wing, etc. Companies are increasingly moving their headquarters out of left-wing dominated states. Right-wingers, and especially the rich, are also moving out of left-wing dominated states. Ultimately, the US economy will determine the course of development in the coming years. I am pessimistic about it, so after this election period, the US may be strongly left-wing. In my view, this will depend on whether Trump really takes control of the Fed by appointing one of his henchmen as the new Fed chairman.

When cycles meet, part 1: Introduction and US debt threat

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/

https://www.ecb.europa.eu/press/annual-reports-financial-statements/annual/balance/html/index.en.html