We have heard a lot about Bidenomics, especially from supporters of President Biden who seem to believe that the president’s economic policies have saved America from inflation. Likewise, there are many critics of Bidenomics, who rightfully point out that Bidenomics has not done anything to end inflation.
It is true that inflation has come down substantially under Biden, but he had nothing to do with that. The problem for the president and his supporters is that nobody seems to be able to explain what Bidenomics is all about.
Maybe that is good for the president. It means that he does not have to take formal responsibility for the disaster that his economic policy is actually now, as we speak, bringing upon the U.S. economy.
There are only two components to Biden’s economic policies that makes it materially different from the policies of his predecessors: mass immigration and bad fiscal management:
- Mass immigration has expanded labor supply in the U.S. economy to the point where it is now having a negative effect on wages for American workers;
- Bad fiscal management has raised the cost of the federal government’s debt to such levels that the debt cost itself is now causing new debt.
These two components of Bidenomics are now beginning to interact. As they do, they open the road for America to economic disaster.
We all know about Biden’s open-border immigration policy, so let us start with the fiscal-management component of Bidenomics. In the second quarter this year, the federal government spent $242.5 billion on interest payment to its creditors. This is not only the highest quarterly number on record, but it is also a 50% increase over the same quarter last year.
So far in 2023, the federal government has spent almost $475 billion on interest payments. If the current trend continues, the total cost for the government debt for 2023 will reach—and will probably exceed—$1 trillion.
This debt cost is not only a symbolic threshold, but it is also so large that it has opened up an economic disaster mechanism that, so far, we have only seen at work in countries like Greece. I have repeatedly been warning about this mechanism, as have others. Without saying so explicitly, it was this mechanism that Fitch Ratings had in mind when, on August 1st, they downgraded the U.S. government’s credit rating.
What mechanism are we talking about? In a nutshell, it is a fiscal pipeline that sets in motion a self-fulfilling debt disaster. It brings about a fiscal crisis the likes of which America has never experienced.
To see how it works, let us take a look at the latest numbers on the federal government’s finances from the Bureau of Economic Analysis (the premier U.S. statistics agency under the Department of Commerce). They have just published the complete dataset on the federal government’s outlays and revenue for the second quarter of this year.
It is a sordid read:
- Total federal revenue came in at $1,177 billion, a 6.6% drop from the same quarter last year;
- Total federal spending amounted to $1,624 billion, an 8.4% increase over Q2 2022.
Out of these numbers comes a budget deficit of $447 billion—in one quarter. It is more than 87% larger than it was a year earlier.
The $447 billion Q2 deficit comes on top of the $420 billion from the first quarter. If the current trend in the deficit continues through the second half of 2023, Congress will have borrowed just over $1.8 trillion for the whole calendar year.
Compare this to the projected $1 trillion in interest-rate payments. See where this is going?
I highlighted the trend in the deficit earlier this summer, when I estimated that it would be $1.6 trillion. Since then, many items in the federal budget have proven to cost more, including interest on the debt. As the costs of the interest rate increase, so does the deficit.
This is a very important observation. Our current budget deficit is not the result of a recession; up until now, the U.S. economy has ho-hummed along with low unemployment and GDP growth that, by European comparison, has been at least acceptable. The one variable that drives the deficit is the cost of the interest on the existing federal debt.
That is not to say a recession cannot affect the budget deficit. It can, and it will.
Let us bring in the other pillar of Bidenomics, namely mass immigration. As I reported last week, we are now seeing the first signs of weakening in the U.S. economy. Those signs are not characteristic of a traditional recession, but are traceable back to President Biden’s immigration policy.
Simply put: with his open border, President Biden is over-saturating the labor market. Despite low jobless numbers and high levels of employment, labor supply is currently outpacing labor demand in the U.S. economy. There is no rational explanation for this, except Biden’s mass immigration policy.
The enormous inflow over the southern border has now reached a point where it is beginning to affect the growth rate in the wages that American workers earn. With just a little bit more worker inflow, we will reach the point where wages no longer grow. When we do, household spending will turn from growth to decline; since private consumption accounts for 70% of all activity in the American economy, this quickly has a negative effect on the economy as a whole.
In other words, a recession begins, and when it does, tax revenue falls. When tax revenue falls, the federal government’s budget deficit expands even more. Since personal income provides about 80% of federal tax revenue, the effect on the budget from a decline in household earnings is both strong and immediate. Therefore, when the economy starts weakening later in the fall, it will have the same effect on the federal budget as gasoline has on a fire.
But are we not already in a recession? After all, the federal government is already suffering a decline in tax revenue. Its first-quarter collections were 4.9% lower than they were in the first quarter of 2022; in the second quarter, revenue was down 6.6% over the same period last year.
A superficial look at these numbers do indeed suggest that we are in a recession. However, this does not compute when we cross-check with the labor market. So far this year, on average, there have been 2.8 million more people working compared to last year.
I still expect the strong labor market to weaken in coming months, but the fact that it has not done so yet this year is an important refutation of a recession causing the decline in tax revenue in the first half of this year. More likely than not, we are witnessing a statistical mirage, with 2022 tax revenue topping out as it did in the wake of the pandemic recovery. Simply put: tax revenue for last year was unusually high, with revenue so far in 2023 being more within normal parameters for this level of economic activity.
Then there is the spending side of the federal budget:
- In the first quarter this year, the federal government spent $1,610 billion, nearly 9% more than the same period last year;
- In the second quarter this year, the federal government spent $1,624 billion, which tops the same period last year by 8.4%.
The main cause of this increase is—you guessed it—interest payments on government debt. In the first quarter, those outlays increased by $81.4 billion year to year, which was 61.5% of the total spending increase; in the second quarter interest payments rose by $80.4 billion, a full 64% of the total increase in federal outlays.
Bluntly: the cost of the U.S. government debt is now the primary cause of new debt.
I cannot stress enough how bad this is. When investors in sovereign (government) debt realize that the federal budget deficit is now on debt-driven autopilot, they will draw the only rational conclusion: Congress has lost control over its own finances.
A situation where debt costs create more debt is a classic trigger point for fiscal crises. This means that the American economy now has reached the point that we all hoped it would not reach. It is the same point that Greece came to when its debt cost was eating up the government budget in 2009-2010. The result is all too painfully etched into the economic history of our time.
But wait—there is more. Not only is the Biden administration ignoring the debt, but the U.S. Treasury, which is responsible for managing the federal debt and therefore presumably responsible for keeping its costs as low as possible, is actively contributing to the rise in the debt costs. When it sells new debt, it does so in such a way that the interest costs for the debt are maximized.
Yes, you heard that right. The U.S. Treasury is borrowing money in such a way that it has to pay the most for every dollar it borrows.
The evidence is there for anyone to see. It is published by the U.S. Treasury on a daily basis and shows that
- The interest rate on U.S. debt has risen dramatically in the past year; and
- The increase has been stronger on short-term debt, maturing in one year or less, than on longer-term debt.
A rationally minded debt manager would sell new debt with longer maturities, in order to borrow at the lowest possible cost. However, as I explained already back in June, the Treasury is doing exactly the opposite. As of September 7th, the estimated composition of the federal government’s debt was as follows:
- $6,762 billion worth of debt maturing in one year or less;
- $20,246 billion worth of debt maturing in 2-10 years; and
- $5,928 billion worth of debt maturing in 20-30 years.
This means that 20.5% of the debt was short term in nature. This is a substantial increase over the start of the 2023 fiscal year on October 1, 2022, when the share was only 15%.
Since then, the Treasury has sold just over $2 trillion in new short-term debt. This is just over $200 billion more than the increase in the debt itself!
In short: the U.S. Treasury is actively replacing long-term debt as it matures with short-term debt. This is a bad idea generally, but it becomes outright incomprehensible when we add that every dollar borrowed under short-term conditions comes at an interest rate of 5.1% at the Treasury auctions, while, e.g., debt maturing in 7 years cost less than 4.2% at its latest auction, and 10-year debt still sells at less than 4%.
The entire stock of U.S. debt currently outstanding costs the Treasury only 2% per year. While the rates are higher on newer debt, this nevertheless shows that there would have been substantial cost savings to be had if the Treasury had consistently stuck to longer-term maturities when selling new debt.
In a nutshell, on President Biden’s watch, the U.S. Treasury has actively driven up the cost of the federal government’s debt. It has done so to the point where that debt cost now accounts for almost two thirds of the federal government’s spending increases. This has now opened the dangerous mechanism of a self-propelling debt spiral—a deadly threat to the future of the U.S. economy.
Add to this the immigration-driven weakening of the economy as a whole, and we have the inevitable legacy of Bidenomics: a depression that could surpass the 1930s in terms of economic and social destruction.
