The current fiscal situation in the United States is causing concern among economists and credit rating agencies. Notably, both Fitch and the Federal Reserve have expressed worries about the country’s debt and its potential impact on the economy. Fitch has downgraded U.S. debt and foresees a recession in the last three months of this year and early next year. While the Federal Reserve initially made a similar forecast but then reversed it in July, predicting slower growth and potential recession avoidance.
The growing national debt is a significant issue that could lead to potential consequences down the line. If the pace of debt accumulation continues, there might come a point in the not-so-distant future when the government will have to borrow so much each year that even if the budget appears balanced in terms of income and expenditure, borrowing for debt service would outpace economic growth. This kind of situation, akin to what Greece faced, is problematic. While the U.S. can print money to pay its debts, selling bonds to finance debt will lead to inflation. Instead of defaulting on bond payments, the U.S. might resort to inflating its way out of the debt, effectively eroding the real value of the obligations.
The rise in gas prices is an example of the inflationary pressures that are being felt. Gas prices have gone up significantly since President Biden’s earlier statement on prices coming down. The current average for regular gas is $3.80, up from $3.68 a week ago. This inflationary situation is compounded by massive government spending. Inflation tends to go through cycles, and there is a likelihood that it may continue to rise, posing further challenges for the economy.
While inflation has been rising, it might become even more alarming in the coming months, particularly during September. Gasoline prices are expected to be very expensive by then, and inflation data for August and September is likely to reflect the impact of rising costs. This situation will necessitate action from the Federal Reserve.
Beyond gas prices, inflation is affecting various sectors, including the middle aisles of grocery stores. Packaged goods companies have been raising their prices, and inflationary pressures extend to meat prices as well. The drought’s impact on grain harvests may further exacerbate food price pressures both domestically and globally.
Overall, the fiscal stress, rising debt, and inflationary pressures are critical warning signs that require close attention. Market participants, including stock market traders, need to be cautious and aware of these economic developments as they navigate the current landscape.
G. Allan Collins