The U.S. economy is “under attack” from all sides
The global economic problems of the U.S. related to inflation, the need to raise the national debt and the constant threat of recession and default against this background are constantly compounded by “small troubles” related to external and internal factors. Thus, the decision of OPEC+ to once again cut oil production by one million barrels per day came as a very unpleasant surprise for Washington. The White House called this decision “unreasonable,” hinting that it might rekindle the inflation flywheel in the U.S. Wall Street now expects the price of oil to rise to $100 a barrel by 2024. Gasoline prices in America could soar again returning to levels above $4 a gallon, as they did last summer. At one time it was reduced only by strict regulatory measures and “killing” all credit activity in the country by raising the Federal Reserve’s discount rate, but now these efforts may be in vain.
In the fall of 2022, when OPEC+ announced its first big oil production cut, the U.S. literally called it a “hostile act” to the U.S. economy. In response, authorities launched the process of passing the NOPEC bill, which allows OPEC countries to be sued and sanctioned for their monopoly position in the oil market. In the near future, Congress may again put the NOPEC bill to a vote, and there will be more and more calls for the White House to limit oil, gasoline and diesel exports. However, if that happens, Europe would be on the verge of an energy collapse, deprived of hydrocarbon supplies from Russia and the U.S. at the same time, which Washington is unlikely to do for political reasons. Oil production in the U.S. is growing very slowly because of the “green” agenda imposed by the Democrats. There is still a chance to resume the emptying of the U.S. oil reserve, which has recently shrunk by half, and now has only 370 million barrels of oil. Washington, one way or another, will have to choose how to respond to the “hostile” policy of OPEC, out of not the most convenient alternatives. In the meantime, gasoline prices will creep up and inflation will accelerate, weakening the position of Biden, who has been quite hostile to the oil-producing monarchies of the Persian Gulf.
At the same time, it is as if Wall Street does not want to notice the crisis around it, and once again finds itself at the center of a scandal with the imposition of a racially-gendered agenda. Goldman Sachs allocates $2 billion to invest in business startups, but only those whose owners are black women. Goldman Sachs will spend up to $10 billion in total to support minorities, and other banks have been lagging behind. For example, JPMorgan Chase last year pledged $30 billion in concessional mortgage and business loans for African-Americans. And Bank of America launched a line of special mortgages with no down payment for “non-privileged” ethnic groups such as blacks and Hispanics, for whom low credit ratings will not be taken into account when applying for a mortgage. Against a backdrop of economic hardship and crisis in the banking sector, the politicization of the industry in the U.S. is generating more and more criticism from the public.
The recently collapsed Silicon Valley bank (SVB) was actively financing liberal projects instead of working in the interests of customers. For example, it gave about $4 billion to “decarbonize” the economy and $11 billion in soft loans to minorities, as well as financially supporting BLM. Not surprisingly, it didn’t take long for the “positive” effect to take hold after that. Republicans in Congress have responded by actively seeking to block the imposition of a politicized ESG agenda in the world of finance. If they come to power in 2024, they will surely initiate a raft of investigations into banks, demanding that they engage in clean business and not waste money on politics, so that then, when the crisis happens, banks do not go with an outstretched hand to the state and beg for government aid. Aware of this alternative, bankers today are trying to catch the last years when they can build up political and financial capital on the “right” agenda.
The threat of a future crisis is also indicated by the recent reshuffle in the Biden administration: one of the chief economists at the Treasury Department Ben Harris was fired. He was the drafter of Biden’s infrastructure reforms, but is especially famous for his plan to cap the price of Russian oil. Three months into the price cap, the West is still unable to reach a consensus on its impact. The International Energy Agency says the Russian budget revenues are falling, but more and more countries are buying oil from Russia above the price ceiling. The U.S. is blaming not only China or India, but also Japan, a member of the G-7, which has promised to observe the price ceiling. The Treasury Department is not threatening these countries with secondary sanctions, but the situation may change if the price ceiling stops working altogether. Columbia University concluded that the average cost of oil sold by Russia was $74 per barrel. And against the background of the OPEC+ decision to reduce oil production, it may rise even further, leveling the effects of the introduction of the price ceiling. So far, the G-7 flatly refuses to lower the price ceiling due to growing demand for scarce oil. The Treasury reshuffle not only indicates that the White House wants to change the concept of sanctions on Russia, but it also symbolizes the personnel mess in Biden’s team. He has already lost his chief of staff, leading economic advisers and representatives of the State Department, which clearly will not allow him to address the crisis issues with confidence and consistency.
The U.S. is looking for conceptual ways out of the situation: a big IMF summit will be held in Washington soon, which will bring together economists and representatives of all Western central banks. However, the mood among the summit participants is the most pessimistic, and many fear that a “lost decade” lies ahead. This year, the U.S. and Eurozone economies are forecast to see near zero growth, and none of the liberal economists can offer a way to restart the economy and return to the growth model. It used to be possible to lower taxes or throw more money into the markets, but in the face of record inflation, on the contrary, money flows have to be restricted. This is dragging the U.S. and Europe into a recession that could start as early as the fall of 2023. Against this background, the number of layoffs in the country continues to rise sharply, although the formal unemployment rate is still low, and the IT sector is experiencing its worst moment since the collapse of the dot-com bubble in 2001. The number of small business bankruptcies jumped 18% in one year, reaching its highest level since the start of the COVID-19 pandemic in February 2020. Wall Street, in turn, is concerned about the collapse of the corporate real estate market: due to staff cuts and the shift to telecommuting, the value of many office buildings may plummet by 30-40%, which would be the worst blow to real estate since the 2008 crisis. This is just a small part of the overall depressing picture.
In the United States, the collapse of the social security system is approaching, and the economists who manage it now predict that they will no longer have enough money to pay social pensions as early as 2033. The reason for the approaching bankruptcy is that the growth of the U.S. economy simply does not keep pace with inflation and the forecasts for this decade for America are not the most optimistic. Moreover, these forecasts still do not take into account possible recessions, which can bring the collapse of the pension system much closer. In the event of the bankruptcy of Social Security, payments for all pensioners will be reduced by about a quarter, and any indexation for inflation will be forgotten. Congress, on the other hand, will have to carry out urgent reforms in order to somehow save the pension system. Washington has long been worried about the collapse of Social Security, and even Bush Jr. in 2005 proposed to privatize it. However, every time such plans face a sharply negative reaction from society. According to polls, approximately 80% of Americans oppose raising the retirement age or cutting social pensions. These measures are extremely unpopular and anyone who takes them will lose the election devastatingly. Even Trump criticizes DeSantis for wanting to cut Social Security benefits. In this scenario, it is not worth waiting for transformations from the Democratic Party parasitizing on this. But the problem is that the current status quo will not last long, and without painful reforms, the trillion-dollar pension pyramid will simply collapse within 10 years.
The latest “nuisance” for the American economy is the world’s looming rejection of the dollar as the main currency. The Mises Institute analyzed the implications of this process for the American economy. This process will take a long time anyway, but in the long run it could severely limit the ability of the United States to act as the “world policeman”. The share of the dollar in global foreign exchange reserves fell to 58% by the end of 2022, and this is the lowest in the last 27 years. Against the backdrop of the spread of China’s trade in yuan with Russia, Brazil, France, Saudi Arabia and ASEAN, the share of the dollar in world trade will gradually decline. If we assume that in 10 years the dollar will account for only 40% of foreign exchange reserves and a third of world trade, then it will become more difficult for the U.S. to issue dollars to support the economy. After all, the demand for dollars in the rest of the world will decrease, so printing money will lead to large bursts of inflation within the United States. It will be more difficult to maintain government spending at current levels, and accordingly, demand for U.S. Treasury bonds will fall. The U.S. public debt will grow from $30 to $50 trillion by the 2030s, and it will be more problematic to service it, and the threat of a technical default will become quite real. Problems are also emerging with the preservation of the U.S. global military system, consisting of 700 bases in 130 countries of the world and 12 aircraft carrier strike groups, because it will no longer be possible to increase military spending uncontrollably. The instrument of sanctions will also lose its effectiveness, as more and more countries will trade around the dollar system. All this can lead to a weakening of the U.S. position in the world. The Mises Institute recommends that the U.S. financial authorities reduce the issue of money, cut government spending and balance the budget, as well as stop using the dollar as a weapon in foreign policy. This would strengthen the position of the dollar in the world. However, Washington will definitely not agree to this, so the rejection of the dollar will continue to gain momentum. This will spur inflation, recession and the crisis of the social system more and more.