From: allin
The health of the United States economy, particularly its Gross Domestic Product (GDP) growth, has been a subject of debate, with concerns raised about the impact of government spending on reported figures [09:55:00].
US GDP Growth Overview
In Q3, real GDP grew by 2.8% annually, adjusted for inflation [05:02:40]. This growth rate is considered brisk when compared to other Western countries, such as Japan (0.7%), Australia (0.2%), Germany (0.2%), and Canada (0.5%) [05:15:30]. A growth rate between 2% and 3% is generally seen as the sweet spot for mature economies [05:31:00]. Above 3% can signal overheating, while below 2% indicates stagnation [05:33:00].
Despite the positive top-line numbers, factors such as the federal debt, annual interest payments, and the number of government employees raise questions about the true nature of economic growth [06:16:00]. The federal debt stands at 1 trillion in annual interest payments [06:16:00]. Approximately 25 million people work for the government across federal, state, and local levels [06:30:00].
The Role of Government Spending in GDP
A significant point of contention is that the reported US economic situation and inflation may be distorted by government consumption [09:55:00]. Over the past two and a half years, much of the economic growth under the Biden Administration has been attributed to government consumption [09:50:00]. This suggests that private industry has been “standing on the sidelines” [10:01:00].
One analysis indicates that 85% of a recent quarter’s GDP was induced by the government [12:16:00]. This means that if government spending were backed out, the true growth of the economy would be significantly lower, effectively flat or even contracting [10:55:00]. This aligns with observations from companies reporting “softening demand” across various sectors [10:19:00].
As Chamath Palihapitiya explains:
“If you look at the print today, it would actually tell you that things are pretty okay and that we are not sort of near an unsustainable turning point. However, if you back out the percentage of government consumption that is included in GDP, you start to see a very different picture, which is that over the last two and a half years, all of the economic gains under the Biden Administration have largely been through government consumption. What that means is that private industry has been standing on the sidelines somewhat.” [09:16:00]
The proportion of federal net outlays as a percentage of GDP has increased into the 20s, compared to high teens in previous eras [11:36:00]. This measure is distinct from total gross government spending, which includes quantitative easing (QE) and represents a broader impact on the economy [11:49:00].
Economic Implications
The high level of government debt and spending has several significant economic consequences:
Interest Rates and Debt Servicing
Despite the Federal Reserve cutting short-term rates, long-term rates (like the 10-year Treasury) have not decreased, staying around 4.3% [14:38:00]. This is partly due to the vast amount of debt that needs to be serviced by the bond market, with a lack of buyers for treasuries, including China selling off its positions [15:00:00]. The prime rate hitting 8% makes mortgages and existing debt much more expensive [15:31:00].
Impact on Banks and Real Estate
Commercial banks hold trillions of dollars in loans and bonds on their balance sheets that are now significantly underwater due to rising interest rates [17:15:00]. These “unrealized losses” are currently higher than they were in 2008 [17:55:00]. For example, commercial real estate loans, typically 5-7 years, will need to be refinanced at much higher rates, potentially making many buildings underwater or without equity value [20:50:00].
Deleveraging or Inflation
The dilemma for the economy is either a painful deleveraging process or significant inflation [23:56:00]. If interest rates remain high, individuals and businesses will be forced to reduce their debt, leading to a negative impact on the economy [24:58:00]. The alternative is for the Fed to monetize the debt by buying bonds, which would inject more US dollars into the market, causing widespread inflation [24:10:00].
Addressing the Debt Problem
The current situation is described as a “compounding problem” that, if unaddressed, could lead to a “cataclysmic economic collapse” [22:31:00]. The market suggests that without drastic action to reduce spending and deficit levels, the US dollar and the creditworthiness of the United States are challenged [22:56:00].
However, cutting government spending is politically difficult due to entrenched special interests and legislative dynamics [26:57:00]. Some argue that reducing government spending is not recessionary and would benefit the private sector by freeing up resources and reducing bureaucratic obstacles [26:27:00]. Others suggest that the federal government’s core functions may eventually be limited to entitlements and defense, with other discretionary spending cut due to lack of funds [27:57:00].