The truth comes out: US is paying dearly for outperformance 

The United States is floating on a giant pumped-up air mattress of excess federal spending and no one has had the guts to say so.  

Not Fed Chair Jay Powell, who wants to keep his job and pretends to be mystified that the economy continues to grow; not Janet Yellen, who exchanged her supposed economic expertise for political boomerism the minute she became Joe Biden’s Treasury secretary. Certainly not the financial media, which is all in for Biden’s reelection. 

Finally, the IMF is saying out loud what has been obvious for more than a year: “The exceptional recent performance of the U.S. is certainly impressive … but it reflects strong demand factors as well, including a fiscal stance that is out of line with long-term fiscal sustainability.” 

That’s a polite way of saying the Biden White House and its Democrat collaborators are spending like drunken sailors and it has to stop. It will not, of course, because in the months leading up to the November election President Biden will be tossing out taxpayer dollars like confetti, hoping to attract voters unhappy with the direction of the country. In case you haven’t looked lately, that’s about two-thirds of the nation.  

Witness Biden’s latest effort to court young voters, by paying the accumulated interest on student debt for tens of millions of borrowers — a program expected to cost an additional $84 billion, bringing the cost of the president’s student loan cancellations so far to almost $560 billion. Not only is the president’s largesse most likely illegal — the Supreme Court has already ruled that earlier handout plans were just that — much of the money will go to households with an average income of $312,000. What about the wealthy paying their fair share, Joe? 

Biden is on the campaign trail boasting that he lowered our debt by $1 trillion, which is untrue; our debt stands at $34 trillion – an all-time record — and is set to explode to $54 trillion within 10 years, according to the Congressional Budget Office. Biden also, laughably, blames Donald Trump for the ramp-up in debt. Again, not true. While it is true that Congress passed with bipartisan majorities substantial relief measures to help keep the economy afloat, Democrats struck out on their own after winning in 2020 and passed trillions more in spending that juiced the economy and ignited inflation.  

The COVID spending surge should have resembled a pig passing through a python; a huge bulge that then tapers off, but it did not. Pre-COVID, in 2018 and 2019, for instance, federal spending came in at or below 21 percent of GDP, as it did during most of Barack Obama’s presidency. Under Biden, spending is running at almost 25 percent of GDP. This is, to quote the IMF, unsustainable. 

Biden also likes to boast that the U.S. is outperforming other large developed countries. Yes, it is, because we have been more aggressive in blowing out our budget. The Tax Foundation, reviewing global stimulus efforts, reported that “The U.S. fiscal response was among the largest of any industrialized country.” European Union (EU) countries, which historically have been more cautious about deficits and inflation, mainly provided loans and other assistance to businesses in order to help them retain workers.  

The U.S., in contrast, sent out 163 million cash payments to households, despite warnings from former Treasury Secretary Larry Summers and others that the huge spend-a-thon would stimulate inflation. The Tax Foundation notes that the outlays “came at a time when the U.S. national debt was already higher (as a share of GDP) than at any time since World War II, and projected to increase dramatically over the next 30 years.”  

The upshot of our outsized federal outlays is that U.S. growth has exceeded that of other countries and inflation is more persistent. The EU just reported that inflation receded to 2.4 percent in March; the U.S. appears stuck above 3 percent. Unusually, the EU may soon cut interest rates even as the Fed stands still.  

Powell has admitted that interest rates may have to be higher for longer because progress on bringing down inflation has ground to a halt. You almost have to feel sorry for the guy; even as he has lifted interest rates aggressively since March 2022, and even though the higher rates have caused some weakness in housing and other rate-sensitive industries, the economy continues to barrel along, pushed by Biden’s massive spending spree. 

At least for now. There are, for sure, signs of stress, and especially among low-income Americans. Wage gains have slowed precipitously, jobs are not quite so plentiful — in part because the flood of people into the nation illegally has filled a lot of the demand — and spending by that cohort has slowed. 

There are other warning signs. The Conference Board reports that consumer confidence about current conditions rose slightly last month but expectations about the future unexpectedly dropped from 76.3 to 73.8. The board notes that, “An Expectations Index reading below 80 often signals a forthcoming recession.” They also report that “consumers in the $50,000-$99,999 income group reported lower confidence in March, while confidence improved slightly in all other income groups.”   

Another headline that raises red flags comes from the NFIB, which surveys small businesses and posted their most recent report under the headline: “Small business optimism reaches lowest level since 2012.”    

Jay Powell will come under increasing pressure to cut rates as we approach the election. There is no rationale for doing so, with unemployment below 4 percent and the economy recording good growth. Investors are changing their forecasts to accommodate higher inflation and rate expectations, and markets are selling off in response. This will not help Joe Biden’s reelection bid. 

Ironically, Biden’s boasts are true; the U.S. is growing faster than its rivals, but the cost of that growth – excess spending – may haunt his campaign.  

Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company.