News Analysis
Amid a continuing rise in inflation, excessive federal spending, and growing public alarm about the state of the economy, the Nov. 8 midterm elections may represent one of the last opportunities to attain a legislative majority willing and able to reverse catastrophic fiscal policies pushing the country toward an implosion similar to the debt crisis that befell Greece in 2009, according to one economic expert.
Inflation continues to play a destabilizing role and exert worsening strains on voters. The latest figures indicate that in September, the core personal consumption index, excluding food and energy, rose 0.5 percent compared to August, marking a 5.1 percent increase over the course of 2022. During the same month, Americans’ income had risen 0.4 percent, unadjusted for inflation, while their overall spending went up 0.6 percent.
In June 2022, inflation hit 9.1 percent, its highest peak since November 1981. The annual rate, for the year leading up to September, stands at 8.2 percent, with the next reading scheduled for Nov. 10.
These figures are largely the result of an expansionist monetary policy on the part of the Biden administration that has resulted in too much money chasing too few goods, some economists say. The federal government’s aggressive buying of Treasury bonds has provided banks with a surfeit of liquid cash to loan out to borrowers.
But in the view of one expert, the most troubling figure of all, and the harbinger of even more severe economic woes to come, absent a sharp reversal in fiscal policy, is the federal debt-to-GDP ratio, which currently stands at 125 percent, meaning that the government’s debts vastly exceed the entire value of goods and services produced by the country in a year.
Ivan Pongracic, a professor in the economics department at Hillsdale College in Michigan, finds the figure especially concerning when compared to the figure of 56 percent in 2000.
“We’ve seen the ratio more than double in the last 20 years, which is astonishing. The federal government is spending a quarter of all income generated in this country. The federal budget is about $6 trillion at this point, and GDP is about $22 trillion,” Pongracic told The Epoch Times.
Legislative Priorities
If the Republican Party does well in the midterms and retakes the House and Senate, one of its urgent tasks will be to stabilize the debt-to-GDP ratio, Pongracic said. This should be at the top of any fiscal agenda if lawmakers wish to avert a full-blown debt crisis, but a plan of action will require reversing the current state of apathy about the rise in debt to such hitherto unimaginable proportions, Pongracic believes.
“Now it’s at 125 percent, so it’s just grown completely out of control, and I think everybody’s gotten quite blasé about it. People just think the dollar is the world’s reserve currency, and we can just keep borrowing without limit,” he said.
Part of the issue is that Americans have not experienced a Greece-style default in the past and some may have been lulled into a sense that debt can continue to grow without serious consequences.
“How much further we can go with this level of debt, nobody knows, but at some point, if we continue down this road, some confidence will be lost in the U.S. government’s ability to service the debt, meaning pay off the debt as it comes due and continue to pay off the interest. If we get to that point, it would lead to an economic crisis, as we saw with Greece, which had about a 150 percent debt-to-GDP ratio before they had a massive sovereign debt crisis,” Pongracic stated.
Some people may simply not be informed enough about the economy to see such parallels, or they imagine that the United States enjoys a firewall thanks to the sheer size of its economy, but such assumptions are naïve at best and dangerous at worst, in Pongracic’s view.
“People say, the United States is not Greece, Greece is a tiny country, and the dollar is the world’s reserve currency, so you can’t compare the two. But it’s a matter of perceptions on the part of the lenders to the government, the bondholders. If the bondholders sense that the government will not repay its debt on schedule, we end up with a sovereign debt crisis,” he said.
“If the government can’t continue to borrow, it will, in a very short time, have to restrict its spending to [what it receives in] tax revenue, and that would mean sudden dramatic cuts in the budget. This would be a harsh time to have to deal with, it would lead to an economic crisis,” he added.
The problem with such a skewed debt-to-GDP ratio, he elaborated, is not simply that the government owes a lot of money. The costs of servicing the debt are increasingly difficult for the federal bureaucracy to manage, and it must continually dip ever deeper into its operating budget to pay the interest on the debt, Pongracic said. In the 2008 crisis, and over the period from 2001 through 2022 more generally, this was not so hard to do because interest rates were at record low levels, and the same applied to the interest on government-issued Treasury bonds, he explained.
The picture today is entirely different, with the interest rate on benchmark Treasury bonds having doubled from two percent to four percent.
“Not only is the debt increasing, meaning larger interest payments, but the interest rate on that debt is rising also. So the government will have to start spending a larger and larger part of its budget on just servicing the debt, and it will have to make difficult choices on where to cut its budget,” said Pongracic.
State of Denial
With few exceptions, the administration and lawmakers are in a state of “complete denial” about the worsening economic picture and are acting as if spending on any number of programs and continue without limit indefinitely, Pongracic said.
While President Joe Biden on Oct. 21 made public comments about having gotten the federal deficit down from $2.8 trillion in fiscal year 2021 to $1.4 trillion in the current fiscal year, it is important to keep this change in perspective. A deficit of $1.4 trillion is still quite high and much of the decline, Pongracic pointed out, has to do with the phasing out of some programs and policies that the government put to use to combat COVID-19. The decline does not indicate higher levels of parsimony and cautiousness on the administration’s part.
“President Biden is bragging about the largest deficit reduction in history, which is true, but that’s only because it started at such an incredibly high level,” he added.
Besides the example of Greece in 2009, Pongracic said that current trends, and possible outcomes, prompt him to recall what happened to the nation of Yugoslavia following the death of the nation’s leader, Marshal Josip Broz Tito on May 4, 1980.
Tito had used his considerable charisma to woo lenders and borrow huge amounts of money, but following his death, the International Monetary Fund and other creditors demanded repayment of the nation’s debts, Pongracic reflected. This prompted the government to print huge amounts of money with which to pay the lenders, which in the late 1980s led to one of the severest cases of hyperinflation in all the last century, economic collapse, and a civil war in which a quarter of a million people died, said Pongracic.
Can We Reverse Course?
Other economists are largely in agreement with Pongracic about the steps that a hypothetical GOP majority could follow from January onward to lift the nation out of its economic rut, but diverge on the question of how likely such an opportunity is to present itself.
“I think that fiscal, and regulatory, policy can play the primary role in stopping inflation. I believe that President Ronald Reagan’s fiscal efforts in the early 1980s were more important than Chairman of the Federal Reserve Paul Volcker’s,” Brian Domitrovic, a professor of history at Sam Houston State University in Huntsville, Texas, told The Epoch Times, referring to when the Fed brought interest rates up to nearly 20 percent to bring down soaring inflation.
“Fiscal reforms such as marginal tax cuts—and they must be of the marginal variety—and deregulation have large implications in terms of increased production, which leaders to lower prices,” he added.
Gary Wolfram, a colleague of Pongracic’s at Hillsdale College, concurred that a sharp reduction in the federal deficit may be the only way to curb inflation.
“The long-term solution is to reduce the debt by reducing deficit spending,” he said.
The current situation is largely the responsibility of the Biden administration and its profligate habits, as well as its opposition to the pipelines on which the energy sector has long depended, agreed Jeffrey Haymond, a professor of economics at Cedarville University in Ohio. Haymond sees the heavy-handed tendencies carrying over into the financial regulatory space, where guidance from the SEC has a notably harsher tone than under previous presidents.
“The problem is not just Biden, it’s the Biden administration, which is committed to this agenda which is anti-business and anti-production, and the issue is bigger than just the oil and gas industry, it’s exemplified by the Securities and Exchange Commission’s assault on private equity. They’re trying to change the rules on that right now,” Haymond said, alluding to efforts underway on the part of the agency and the Commodity Futures Trading Commission to tighten the reporting requirements for investment advisers and give regulators radically expanded powers over the private funds space.
Manufacturing Crisis
The administration has also assured itself continued oversight over large sectors of the economy and citizens’ lives through Secretary of Health and Human Services Xavier Becerra’s announcement on Oct. 13 that COVID-19 still constitutes a public health emergency, Haymond noted.
“The continuation of the COVID-19 emergency allows them to dole out more benefits to people on Medicaid, leading to more people not being able to go back into the workforce, because they’re making more money, effectively, by being on the dole. Stopping the emergency would force them to get a job and actually be producers and not just consumers. Biden says he wants to lower the unemployment rate, but the reality is that labor force participation is abysmal,” he added.
In aggregate, these policies contribute to an overregulated and hyper-profligate nation sliding rapidly deeper into debt, with economic collapse a real possibility, unless opposition lawmakers can curb the worst tendencies and rein in deficit spending. But even in the best-case scenario, this is an uncertain prospect, Haymond believes.
“Nobody thinks that the Republicans are going to get 60 votes in the Senate. They might get 52 or 53. But they really need 67 because Biden will veto any change to spending plans,” he said.
But Republicans should be in a position to block new legislation that would make matters even worse. With 53 votes, they ought to be able to stop nominees put forward by the Biden administration and curtail some of the worst excesses, Haymond said.
The Epoch Times has reached out to the White House and Democratic National Committee for comment.
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Michael Washburn is a New York-based reporter who covers U.S. and China-related topics. He has a background in legal and financial journalism, and also writes about arts and culture. Additionally, he is the host of the weekly podcast Reading the Globe. His books include “The Uprooted and Other Stories,” “When We’re Grownups,” and “Stranger, Stranger.”
