Democratic presidential nominee Vice President Kamala Harris, left, speaks at a campaign rally in Kalamazoo, Mich. on Oct. 26. Former President Donald Trump, the Republican presidential nominee, right, speaks during a campaign rally in Greensboro, N.C. on Oct. 22.The Associated Press
John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
Despite being the most dramatic, consequential and probably expensive campaign in living memory, what’s striking about the three months since Kamala Harris replaced Joe Biden as the Democratic nominee for U.S. president is how little the race has changed. Tuesday’s election will be determined not by which candidate is the more popular, since the country is split right down the middle between Ms. Harris and Republican nominee Donald Trump, but by which party turns out its voters. Since we can’t say who’ll be more motivated, we can’t predict that answer.
But what may be predictable is something that barely arose during the campaign. There’s a good chance the economic backdrop facing the next president will turn markedly less favourable during his or her term.
Not that anyone mentions this. Instead, with the U.S. economy on a roll, far outstripping any of its G7 partners in growth, the widespread assumption is that the good times will continue, enabling the next administration to forge ahead with ambitious economic plans. However, this optimism overlooks the big cloud hanging over the American economy.
The country’s national debt has been rising for years, having increased sevenfold since the turn of the millennium. Absent that, the U.S. economy might well be stuck in the same funk as the rest of the G7. Since 2020, the economy has added $6.6-trillion (all figures are U.S.) to its annual output – which sounds impressive, until you set that against the $11.6-trillion it’s added to its national debt.
For all the bold innovations occurring south of the border – advances in artificial intelligence, the expansion of semi-conductor development, the adoption of renewable energy – this looks like a country that is spending tomorrow’s earnings today. But spend it will. The Congressional Budget Office forecasts a continued rise of the national debt. Hovering around 100 per cent of GDP today, on its current path it’s expected to reach 166 per cent of GDP by mid-century, and continue upward thereafter. Remarkably, though, neither candidate has any plans to change that. If Ms. Harris wins the election, her economic plans are expected to add a further $3.5-trillion to the national debt; if Mr. Trump wins, that figure would rise to an eye-watering $7.5-trillion.
Debt needn’t be a problem if it’s boosting national output. Investment to raise long-term growth can pay for itself, a balance the new British Chancellor is trying to strike in her borrowing plans. The problem is that most new U.S. debt doesn’t raise output or the state’s wealth as it once did. Whereas in the 1960s, each dollar of national debt added nearly $10 to national output, today it works out to around 50 cents, a net loss. Meanwhile, throughout the long run-up in debt over the past two decades, the government’s net worth has continued declining.
How long can this kind of party last? To judge from the prevailing view in markets, the answer would seem to be forever. Although bond yields have risen sharply, most analysts dismiss concerns that the so-called bond vigilantes are calling time on American profligacy. They point to the strengthening dollar as proof that the world still wants U.S. assets. After all, with interest rates on U.S. government debt higher than most other developed countries, there’s money to be made, which suggests the Treasury can keep issuing bonds and still find willing buyers.
Harris vs Trump: Stocks to watch as White House race enters final stretch
Instead, the narrative that has taken hold is that a “Trump trade” has begun as the odds on a Trump victory rise and investors shift out of bonds and toward those assets that are expected to benefit from his return to the White House – stocks, crypto and his own media company, which has bounced back from the grave into which it had been settling.
Unlike other countries, whose governments must always ensure their fiscal plans don’t panic bond markets, the United States enjoys the “exorbitant privilege” of holding the world’s biggest reserve currency and main medium of international exchange. No matter how spendthrift it becomes, the rest of the world will have no choice but to keep parking its money stateside, not least because no obvious alternative to the dollar exists.
However, this complacency could itself be the danger. The continued rise of gold suggests that global investors are in fact starting to look elsewhere to park their money. Meanwhile, as economist Hyman Minsky argued, and the 2008 financial crisis showed, it’s precisely after long periods of stability, when investors have concluded that no dangers are afoot, that they are most likely to erupt. When they do, they tend to explode.
The U.S. might be able to keep living on debt for years, even through another presidency. Equally, one morning, it could suddenly wake up to its next Minsky moment. For as Stein’s Law has it, if something can’t go on forever, it won’t.