Lots of excitement in The United States about upcoming elections. Many of the most enthusiastic are backing what might be called “outsider candidates” — Trump on the (far) right and Sanders on the (far) left. As usual, from my perspective of an ex-patriate Investment Banker-cum-University Lecturer, I tend to see things differently from my stateside compatriots.
Specifically when it comes to Bernie Sanders. Don’t get me wrong — I do like much (most?) of what he says regarding social inequality in America. And the need to act. But its the proposed policy solutions that trouble me.
Mr Sanders proposes a Roosevelt-style New Deal, aiming to pump some $14.5T into the US economy by ”spending on infrastructure, youth employment, increasing Social Security benefits and expand family leave”. Some enthuse that not only would unemployment drop, poverty would drop and GDP would surge to 5% or more, albeit without providing details. Still others argue unemployment would drop below 4% while wages would grow by 2.5% .
All good stuff. But here is why it will never happen, and its pretty simple: the current occupant of The White House spent all the money. The chart below (source CBO, 2016) shows US debt / GDP from 1790 to 2000. You’ll see that when Roosevelt launched his New Deal The United States ran a debt / GDP ratio of roughly 48%. In other words, America had plenty of borrowing capacity.
The chart below shows US debt / GDP from 2000 to 2016. It is well above 100%. The “economic recovery” is fake — its been created by excessive borrowing. Its almost as through you or I max out the credit cards to artificially create an aura of prosperity. Its neither sustainable nor realistic to create prosperity by borrowing excessive sums of money.
In fact many argue as China is a net seller of US Treasuries as are many other nations America will soon have to pay it’s own way. In other words, America won’t be able to borrow from developing nations any longer, as they have their own problems to solve. America will not only have to live within its means, but pay back principal as US Treasuries mature.
Imagine that. America paying down its national debt?
That would truly be a New Deal.