Two cheers for Bidenomics, but America is pushing its luck

By Ambrose Evans-Pritchard

The fiscal scale of Bidenomics is larger than Roosevelt’s New Deal in the 1930s by a wide margin. It is larger than Johnson’s guns and butter in the 1960s, or Reagan’s military rearmament in the 1980s. We are witnessing an extraordinary experiment in US economic policy.

The US budget deficit surpassed $US1.6 trillion ($2.5 trillion) over the first 10 months of this fiscal year, far higher than forecast earlier this year. It is running near 8 per cent of GDP on a quarterly basis.

President Joe Biden’s Bidenomics is an extraordinary experiment in US economic policy.
President Joe Biden’s Bidenomics is an extraordinary experiment in US economic policy.Credit: AP

The Biden administration is financing this with a high-risk expansion of federal borrowing at the top of the economic cycle, when unemployment is hovering near half-century lows at 3.8 per cent and the US economy is operating near full capacity.

Bumper tax revenues ought to be flattering the fiscal profile at this late stage of the cycle. The latest figures are evidence of a frighteningly high structural deficit. It is fair to assume that borrowing will go through the roof in the next US recession.

This unfunded blitz in the West’s anchor economy is certainly unorthodox – almost Chinese in its state-capitalist character – but is it making the US a stronger or a weaker country? The jury is out.

Let us not forget that Ronald Reagan’s twin deficits and supply-side ideology were deemed reckless adventurism by most of the economic establishment on both sides of the Atlantic.

This unfunded blitz in the West’s anchor economy is certainly unorthodox – almost Chinese in its state-capitalist character – but is it making the US a stronger or a weaker country? The jury is out.

We can see in hindsight that his exorbitant spending on Star Wars missile defence and 14 aircraft carrier battle groups was a geopolitical masterstroke: it fed an arms race that bankrupted the Soviet Union – with the help of an oil price slump – long before it came close to bankrupting the US.

America won the Cold War without a shot being fired and on terms overwhelmingly favourable to the Western worldview. It was cheap at the price. Reagan’s debts were buried and forgotten beneath the peace dividend of the 1990s.


Bidenomics has met similar disdain from Harvard economists: “The least responsible macroeconomic policy we’ve had in the last 40 years,” said Larry Summers, the New Keynesian high priest.

He predicted that Bidenomics would lead to stubborn 1970s inflation and that it would take a harsh recession to bring prices back under control. That has not happened. Pandemic inflation has fallen as fast as it rose, and without a spike in unemployment.

It has been a textbook supply-side response, just as the Biden White House always argued. But unlike Reagan’s variant of tax cuts and deregulation, Biden is conjuring supply by drawing people into the labour market.

He is scattering state largesse to “derisk” investments in order to pull in private capital and revive the US manufacturing base. There is nothing left-wing about it. Profits are privatised: losses are socialised.

Joe Biden is fighting two wars, a big one against Xi Jinping’s wolf warrior Leninism and a smaller one against Putin, and he is going beyond Donald Trump’s erratic trade wars by pulling all the levers of economic nationalism.

He is mobilising $US280 billion on semiconductors, nanotechnology, and quantum computing under his CHIPS and Science Act, aiming to reestablish secure supply chains in critical technology. He is spending $US42 billion on fast-broadband, under Buy America rules. He is building a “battery belt” – at breakneck speed, and mostly in Republican districts – to head off China’s bid to control the world’s EV lithium market.

His Inflation Reduction Act is a Manhattan Project to stop China running away with the energy revolution and achieving clean-tech supremacy. To the extent that this cuts CO2 emissions, all the better. It is billed at $US370 billion. The open-ended tax credits could push the figure closer to $US1.2 trillion.

This is the “good” side of Bidenomics. The bad side is that nothing serious is being done to rein in runaway appropriations on almost everything. Medicare costs have risen by 17 per cent over the last year. “Reckless spending is the culprit,” says the House Budget Committee.

Publicly funded middle-class welfare remains untouchable. Over the last three decades ring-fenced entitlements have risen under both parties from 50 per cent to 75 per cent of all US federal spending, double the level in the welfare paradise of Sweden.

The debt accumulation over the last fifteen years alone has been comparable to the cost of two world wars and the Great Depression combined. The International Monetary Fund says gross debt-to-GDP ratio was 62 per cent in 2007. It will be 122 per cent this year, and 138 per cent by 2028, with deficits near 7 per cent as far as the eye can see.

Fitch Rating says the ratio of debt interest to tax revenue will reach 10 per cent by 2025, the level where it starts to create a snowball effect. That is a key reason why it has downgraded the US to AA+.

Ballooning debt issuance is already crowding out the US bond market. Yields on 10-year Treasuries have punched to levels unseen since mid-2007 over recent weeks, even as inflation plummets. Investors are finally starting to choke on US fiscal incontinence.

Torsten Slok from Apollo Global says the US government must refinance $US7.6 trillion of debt over the next year, amounting to 31 per cent of total outstanding issuance.

Joe Biden is […] going beyond Donald Trump’s erratic trade wars by pulling all the levers of economic nationalism.

The Global South holds three-quarters of the world’s $US12 trillion of foreign exchange reserves (59 per cent held in US dollars). Stephen Jen from Eurizon SLJ Capital says these countries were stunned by the US decision to freeze Russia’s dollar reserves and have taken the lesson to heart.

“The reaction was a mix of shock and fury. They couldn’t believe that it could happen to the official reserves of a major country,” he said.

The Global South still has to buy and hold US dollar assets because there are few other places to park serious money. But it does not have to buy so much US government debt. China has cut its (declared) holdings by $US103 billion over the last year. It is probably rotating into stocks and private equity.

Jen thinks the US Federal Reserve will be forced to abandon quantitative tightening and relaunch QE [quantitative easing, buying bonds] in order to soak up the debt and hold down borrowing costs. “I don’t see how the market is going to absorb the sheer volume of supply without the Fed,” he said.

America’s trump card is that the rest of the world is in equally bad shape or worse. China’s credit-driven development model broke down a decade ago and the delayed consequences are becoming clear, though I suspect that Western commentary has lurched too far from China worship to China doomism.

Europe is stumbling from one lost decade to another. The European Central Bank has long been acting as a fiscal agent for Club Med governments, and the eurozone still has no joint fiscal and tax-raising institution to sustain its currency. Anybody who thinks the eurozone debt can viably replace US Treasuries as the world’s ultimate safe asset needs their head examined.

Joe Biden will probably get away with his Rooseveltian adventure, and perhaps it is a necessary reindustrialisation of America after 30 years of globalist insouciance.

Britain emerged from the Napoleonic Wars with sovereign debt near 200 per cent. It remained the leading economic power of the early 19th century nevertheless because it excelled in technology.

Yet America is undoubtedly pushing its luck. Even a global hegemon can go bust.

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