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Ambrose Evans-Pritchard: America's Faustian pact with runaway debt is coming due
By Ambrose Evans-Pritchard
The Telegraph, London
Tuesday, May 30, 2023
The Republicans have capitulated on the U.S. debt ceiling. This averts the risk of abrupt fiscal tightening in a slowing economy that has yet to digest the most aggressive monetary squeeze in over 40 years.
The putative accord between the White House and Congress does not even try to address the larger threat to America's economic model and hegemonic status.
The Congressional Budget Office says the U.S. is on course for fiscal deficits of 7% of GDP as far as the eye can see.
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Sacred entitlements remain untouchable. Middle-class welfare – ie. consumption – will continue to eat up an ever-greater share of the budget. It is this that is leading to slow fiscal ruin.
The gross debt-to-GDP ratio was 62% in 2007 (IMF data). It will be 122% this year, and 138% by 2028, with no sign of reaching a plateau. By then it will have overtaken Italy.
It is a sobering thought that the US is racking up as much debt-to-GDP accumulation over 20 years as it did over two world wars and the Great Depression combined.
You can blame it on the Lehman crisis and Covid, overlaid with Trump's unfunded tax cuts and Biden's unfunded multi-trillion fiscal spree, but behind that lies a structural rot across most of the federal budget.
China's fiscal deterioration has been just as bad. The difference is that China funds its own borrowing (for now) from high internal savings. Foreigners have some $25 trillion of net debt claims on the US government and US corporations.
America's net international investment position has gone from near balance a generation ago to minus 62% of GDP. Part of that is the distortion of the strong dollar. A big chunk is not. America is selling the family silver to live. (So is Britain.)
"It is alarming to us, and should be to other investors, too. What is even more alarming is the lack of concern on the part of the U.S. policymakers," said Stephen Jen from Eurizon SLJ, who advises Asian sovereign wealth funds.
"Foreign investors should not be blamed for starting to wonder if the US Treasuries and the dollar are still safe. We believe the U.S. debt problem will have consequences for the markets in the not-too-distant future," he said. ...
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