29.09.2022

Why is the US in a dire crisis?

The US is in the longest and worst crisis in history. Never before has a rise in government spending coincided with a cycle of raising rates. What could be the consequences?

The United States is in the worst crisis in its 242 years of existence. This opinion is shared by one of the authors of econimica.blogspot.com.

He makes such a statement, based on the ratio of US government debt to GDP.

Of course, if we rely on statistics on the labor market, market dynamics, and so on, we can conclude that the financial crisis ended in 2013, but federal spending is still significantly higher than tax revenue, which means that the ratio of debt to GDP is constantly growing. Moreover, the growth of debt to GDP is also confirmed by the forecasts of the United States Budget Office (CBO).

In fact, if the economy were as strong as the American authorities claim, then the growth of spending and budget deficit would cease as interest rates increase. But in our case, we have the opposite picture, which, by the way, looks just frightening.

We see a rise in federal spending amid rising rates. Since these expenses are financed by new loans, the cost of these loans increases. By the way, this is the first time in the United States.

The diagram below will show that each deficit period was accompanied by periods of austerity, when federal spending was limited and the economy flourished.

However, since 2001, based on the dynamics of public debt to GDP, the United States has been in the longest crisis.

The rapid growth of spending and public debt to GDP accounted for in the post-war periods, and this is understandable. However, after the 1980s. America grew and matured, but the government and the Central Bank did not want to notice this change. The graph below will show the ratio of government debt to GDP along with the dynamics of the total US population and the growth rate of this indicator (yellow line).

The worst is that since 1968 the federal government spent a total of about $ 74 trillion to increase annual GDP to the current $ 20 trillion.

In other words, it is $ 53 trillion in the form of unsecured liabilities: the money has already been spent. And to fulfill obligations, new bonds must be issued.

It is worth adding that foreigners have less and less desire to finance America. According to the latest data from the US Treasury in April, foreign investors reduced their investments in treasuries by the maximum amount since January 2016. And Russia completely halved them. By the way, no one has ever in history sold at once half of all American government bonds available in reserves.

Zerohedge

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