Bravo for Bidenomics, but America is taking a chance

Bidenomic policy drew similar scorn from Harvard economists: “The least responsible macroeconomic policy we’ve had in the last 40 years,” said Larry Summers, the neo-Keynesian high priest.

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He predicted that Bidenomics would lead to stubborn inflation in the 1970s and that it would take a harsh recession to bring prices back under control. This does not happen. Pandemic inflation fell as quickly as it rose, and without an increase in unemployment.

This is a classic supply-side response, just as the Biden White House has always maintained. But unlike Reagan’s variant of tax cuts and deregulation, Biden evokes the supply side by drawing people into the job market.

It disperses state largesse to “de-risk” investments in order to attract private capital and revive the American manufacturing base. There’s nothing left-wing about it. Profits are privatized: losses are socialized.

Joe Biden is waging two wars, a large one against Xi Jinping’s wolf-warrior Leninism and a smaller one against Putin, and he is moving beyond Donald Trump’s erratic trade wars by pulling all the levers of economic nationalism.

He is mobilizing $280 billion for semiconductors, nanotechnology and quantum computing through his CHIPS and Science Act, aimed at restoring secure supply chains in critical technologies. It spends $42 billion on broadband, under Buy America rules. He is building a “battery belt” – at breakneck speed, and primarily in Republican districts – to prevent China from controlling the global market for lithium for electric vehicles.

His Inflation Reduction Act is a Manhattan project aimed at preventing China from running away with the energy revolution and achieving clean-tech supremacy. Since it reduces CO2 emissions, it’s even better. It is billed at 370 billion dollars. Unlimited tax credits could push that figure closer to $1.2 trillion.

This is the “good” side of bidenomics. The bad side is that nothing serious is being done to curb the runaway credits on almost everything. Medicare costs have increased 17 percent over the past year. “Reckless spending is to blame,” says House Budget Committee.

State-funded middle-class welfare remains untouchable. Over the past three decades, entitlements have increased under both parties from 50 percent to 75 percent of all U.S. federal spending, double the level of Sweden’s welfare haven.

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The accumulation of debt in just the last fifteen years has been comparable to the cost of two world wars and the Great Depression combined. The International Monetary Fund says the gross debt-to-GDP ratio was 62 percent in 2007. It will be 122 percent this year and 138 percent by 2028, with deficits close to 7 percent as far as the eye can see. .

Fitch Rating says the ratio of debt interest to tax revenue will reach 10% by 2025, at which level it will begin to snowball. This is one of the main reasons why the US rating was downgraded to AA+.

The surge in debt issuance is already crowding out the U.S. bond market. Yields on 10-year Treasury notes have risen in recent weeks to levels not seen since mid-2007, even as inflation plummets. Investors are finally starting to choke in the face of American budgetary incontinence.

Apollo Global’s Torsten Slok says the US government needs to refinance $7.6 trillion in debt over the next year, representing 31 percent of total outstanding issuance.

Joe Biden (…) goes beyond Donald Trump’s erratic trade wars by activating all the levers of economic nationalism.

Southern countries hold three-quarters of the world’s $12 trillion in foreign exchange reserves (59% of which are held in US dollars). Stephen Jen of Eurizon SLJ Capital says these countries were stunned by the US decision to freeze Russia’s dollar reserves and took the lesson to heart.

“The reaction was a mixture of shock and fury. They couldn’t believe this could happen to the official reserves of a big country,” he said.

The Global South still has to buy and hold US dollar assets because there are few other places to park serious money. But it doesn’t need to buy that much U.S. government debt. China has reduced its (declared) assets by $103 billion over the last year. This is likely a rotation into stocks and private equity.

Jen believes the US Federal Reserve will be forced to abandon quantitative tightening and restart QE (quantitative easing, bond buying) in order to absorb debt and keep borrowing costs low. “I don’t see how the market is going to absorb the sheer volume of supply without the Fed,” he said.

America’s advantage is that the rest of the world is in just as bad a situation, if not worse. China’s credit-driven development model collapsed a decade ago and the delayed consequences are becoming clear, although I suspect Western commentary has gone too far from worshiping China to Chinese cataclysm.

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Europe stumbles from one lost decade to the next. The European Central Bank has long played the role of fiscal agent for Club Med governments, and the eurozone still lacks a common tax and tax collection institution to support its currency. Anyone who thinks Eurozone debt can viably replace U.S. Treasuries as the world’s ultimate safe asset needs a head test.

Joe Biden will probably get away with his Rooseveltian adventure, and perhaps it is a necessary reindustrialization of America after 30 years of globalist carelessness.

Britain emerged from the Napoleonic Wars with a sovereign debt close to 200 percent. It nevertheless remains the leading economic power of the early 19th century thanks to its technological excellence.

Yet America is undoubtedly trying its luck. Even a global hegemony can go bankrupt.

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