By Rudy Barnes, Jr.
President Biden has called the economy he inherited from Trump the worst in America’s history, but it’s actually two economies. One has a booming stock market that provides little benefit to the other; and the two economies reveal dangerous income disparities and excessive debt that are getting worse, eroding the middle class and threatening the stability of America’s democracy.
Charles Lane has noted, “The wealthiest 10% of households now own 88% of all stocks and benefitted from an 18% increase in the S&P 500’s total return in 2020.” Policies of the Federal Reserve that promise interest rates near zero and the purchase of corporate debt have attracted investors to the stock market, and both parties support Fed “easy money” policies.
Fed monetary policies have created excessive private debt and an overvalued stock market that provides investors with unsustainable high rates of return. Excessive debt is not only exacerbating economic disparities but it’s also creating a gigantic bubble on Wall Street that threatens an economic collapse; yet both parties ignore the problem.
The Fed already has a balance sheet of over $7 Trillion in private and public debt, and America’s national debt is an astronomical $27.8 Trillion, and certain to grow with President Biden’s budget proposals. If the Fed can’t keep interest rates near 0%, increasing private and public debt will precipitate widespread bankruptcies and an economic and political crisis.
With a record spike in money supply and a volatile stock market that has increased 70% since March, runaway inflation in an overvalued stock market threatens a market crash. The GameStop phenomenon illustrates how social media can fantasize stock values and further distort a dysfunctional and volatile stock market. It’s a bubble that’s likely to burst.
Even if the Fed can keep interest rates low and continue to prop up an overvalued stock market, excessive debt, inflation and increasing economic disparities foretell a looming economic and political disaster. By supporting Biden’s massive stimulus spending bill rather than a smaller targeted relief bill, Americans and their political leaders are ignoring the danger.
Before Trump hijacked the Republican Party in 2016 it promoted fiscal restraint that checked the spending proclivities of Democrats, but today a majority of both parties ignore America’s excessive debt and vie over which party can spend the most on stimulus relief. In America’s prodigal politics, there seems no limit on government spending and excessive debt.
The storming of the Capitol on January 6 may be a precursor to a major insurrection like the Boston Tea Party of 1773. It was instigated by an angry middle class that had become hostile to its government. James Carville once observed, in politics it’s all about the economy. With increasing economic disparities and a national debt that defies repayment exacerbated by continued profligate spending, America’s ugly politics are likely to get even uglier.
Laurence Summers sees the Biden Stimulus as admirably ambitious, but warns of big risks. “As a massive program moves toward enactment and implementation, policymakers need to ensure that they have plans in place to address two possible, and quite serious, problems. First, while there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability. This will be manageable if monetary and fiscal policy can be rapidly adjusted to address the problem. But given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply. Stimulus measures of the magnitude contemplated are steps into the unknown.” See https://www.washingtonpost.com/opinions/2021/02/04/larry-summers-biden-covid-stimulus/?utm_campaign=wp_opinions_pm&utm_medium=email&utm_source=newsletter&wpisrc=nl_popns.
Brian Hamilton has asserted that America’s soaring debt is a looming disaster “Even as we deal with the economic problems of the pandemic, there's another crisis looming: our national debt. ...The debt crisis is not going away, and the US needs to understand the consequences of increasing the national debt.” Hamilton compares the nation’s debt crisis to global warming. “ Some economists are concerned with the national debt but they always say the problem is off in the future. Unfortunately, a debt-triggered crisis is not something that can be reversed quickly when it becomes an issue. The debt crisis of the United States is similar to global warming — it is an incremental but enormous phenomenon that could trigger disaster at a given point. Simply, dealing with the $27.5 trillion in outstanding national debt would be difficult to do if our lenders (us and people outside the United States) ever consider the reality of our strength as borrowers. Suppose they find the US no longer a reliable borrower? See https://www.businessinsider.com/national-debt-problem-of-free-money-stimulus-checks-covid-relief-2021-1.
Edward Luce has cited America’s dangerous reliance on the Fed with its easy money and fiscal gridlock in Washington as “...the most visible threat to US political stability. The Fed’s quantitative easing boosts wealth inequality by increasing the net worth of those who own financial assets, chiefly of stocks and bonds. The top 10 per cent of Americans own 84 per cent of the country’s shares. The top 1 per cent own about half. The bottom half of Americans — the ones who have chiefly been on the frontline during the pandemic — say they own almost no stocks at all. ...The Fed’s inescapable bias towards asset owners has combined with the financial sector’s preference for size to produce a very skewed recovery. This has benefited big companies, even junk-rated ones, at the expense of small businesses, including financially-sound ones. And it has boosted wealthy individuals over median households. After 2008, the economic recovery coexisted with a so-called “main street recession”. Today we call it a K-shaped recovery. The majority of people are suffering amid a Great Gatsby-style boom at the top.” See https://www.ft.com/content/bcb8d4d9-ca6d-45b7-aafc-9e9ecf672a5b.
U.S. Treasury Secretary Janet Yellen, a former chair of the Federal Reserve, has called for Biden to act big, reflecting long term re-think on government debt, arguing the country’s future economic potential can support more borrowing today and makes the roughly $26.9 trillion in U.S. IOUs seem less formidable. “The interest burden of the debt as a share of (gross domestic product) is no higher now than it was before the financial crisis in 2008, in spite of the fact that our debt has escalated,” Yellen said. “To avoid doing what we need to do now to address the pandemic and the economic damage that it is causing would likely leave us in a worse place ...than taking the steps that are necessary and doing that through deficit finance.” Federal government interest payments are now nearly $600 billion annually, but historically low global interest rates have kept them roughly stable as a share of the country’s economic output since the 1990s. Coming on top of the more than $3.5 trillion borrowed in large part to fund the coronavirus response last year, “when do we hit the point where the thing starts to collapse? Nobody is talking about it in either party anymore,” said Senator John Thune, a South Dakota Republican. See https://www.reuters.com/article/us-usa-economy-debt/yellens-call-to-act-big-reflects-long-re-think-on-big-government-debt-idINKBN29Q1BJ.
On jobless claims at historic highs and Biden inheriting the worst job market of any modern president, see https://www.washingtonpost.com/business/2021/01/21/900000-filed-jobless-claims-last-week-historically-high-level-biden-inherits-worst-job-market-any-modern-president/.
President Biden remained committed to his $1.9 Trillion Stimulus spending bill after rejecting a GOP alternative of $618 Billion. “Speaking on the House Democratic call, Biden acknowledged that some lawmakers, including Republicans, get “hung up” on the price tag when the nation is already facing a ballooning federal deficit and skyrocketing debt. Congress has passed nearly $4 trillion in assistance since the beginning of the pandemic. The economy is expected to bounce back over the next several months, even without more stimulus aid from Congress, the Congressional Budget Office said earlier this week. But employment levels are unlikely to fully recover until 2024.” See https://www.politico.com/news/2021/02/03/biden-dems-call-stimulus-checks-465484.
“President Joe Biden’s coronavirus rescue plan, and two of its key economic provisions, have broad support as Democrats try to push it through Congress, a poll released Wednesday found.
More than two-thirds, or 68%, of Americans support the $1.9 trillion package, the Quinnipiac University survey showed. Only 24% of respondents oppose the measure.” Unsurprisingly, the direct payments to individuals with no targeting of those most affected by the pandemic are most popular. “The poll found 78% of Americans support the stimulus checks, and 18% oppose them.” It seems that few Americans are concerned with increasing the massive national debt so long as they receive a check. See https://www.cnbc.com/2021/02/03/biden-1point9-trillion-covid-relief-plan-has-wide-support-poll-finds.html.
On the GameStop chaos as a bubble in the stock market, see https://www.washingtonpost.com/opinions/2021/01/29/gamestop-chaos-may-be-bubble-what-does-that-actually-mean/?utm_campaign=wp_opinions_pm&utm_medium=email&utm_source=newsletter&wpisrc=nl_popns. On GameStop as a new, destabilizing collision between social media and the real world, see
On how the rich got richer in the pandemic and exacerbated income disparities in America, see https://www.washingtonpost.com/opinions/the-rich-got-richer-during-the-pandemic-we-need-to-claw-back-their-gains/2021/01/25/d17c8a44-5f32-11eb-9430-e7c77b5b0297_story.html?utm_campaign=wp_todays_