President Joe Biden could find himself in a situation similar to British Prime Minister Liz Truss, as the rising US deficit and high inflation could make investors nervous, sending markets down.
Biden was clear that he was not in favor of Truss’ plan to cut taxes on the rich while spending billions in subsidies.
Like Biden, Truss faced the deadly combination of high inflation and rising interest rates when she signed her “mini-budget” that sent the UK economy into a deadly spiral and forced sterling to plummet.
Investors torpedoed her plan and mortgage rates skyrocketed – forcing her to change almost all of her policies and seal her fate as the shortest-serving prime minister in British history by just 44 days.
Economists told DailyMail.com that while there is no imminent threat of disaster comparable to the UK, the United States is teetering towards a recession that could be just as politically deadly for Biden, especially with the government debt rising.
For Biden, the Federal Reserve’s move to raise interest rates, designed to combat the high cost of living, also drives up the cost of debt — both for the United States and for countries whose debt is pegged to the U.S. dollar. .
About $9.8 trillion or 40% of the U.S. debt currently held by the public will roll over within the next two years, subject to higher interest rates. Impartial Peter G. Peterson Foundation found it.
President Joe Biden could find himself in a situation similar to former British Prime Minister Liz Truss – the rising US deficit and high inflation could make investors nervous, driving markets down
Like Biden, British Prime Minister Liz Truss faced the deadly combination of high inflation and rising interest rates
During the economic downturn caused by the covid pandemic, the US government has spent billions to keep the country on track.
But the bill is coming — just as interest rates are rising, making loans more expensive. That has the potential to scare investors.
There is ongoing debate as to whether the US government has contributed to inflationary pressures through any sort of Biden administration signature programs, whether it be the infrastructure bill, or possibly its new student debt relief program. , whether that might be possible. contribute” to a similar situation in the United Kingdom, said Gustavo A. Flores-Macías, a professor of government and public policy at Cornell University.
Biden has spent billions of dollars as part of his US bailout, infrastructure package, CHIPS bill and his Inflation Reduction Act to try to boost the post-pandemic economy.
He has tried to curb his spending by raising taxes on the rich and cracking down on those who have paid their share.
But the debt is growing fast. Total interest payments on them could be nearly $580 billion this year, up $399 billion from the previous fiscal year.
That’s about the same amount as government budgets for Medicaid.
Some argue that the US is too indebted to escape major financial problems.
“Today the problem we face is that if you fight inflation you’re not just going to have a recession, and the idea that you’re going to have a short and shallow recession — plain vanilla, garden variety — is utterly delusional,” Nouriel Roubini, chief executive officer of Roubini Macro Associates Inc, said in an interview with: Bloomberg News.
“I mean, it’s an illusion because we have debt that we’ve never seen in previous recessions,” he noted.
The fight against the financial problem is the political one. Republicans prefer to win control of the House of Representatives in the Nov. 8 election.
If that happens, Biden could find his plans to fight the debt thwarted by the GOP opposition, especially if the Republicans force a confrontation over the debt ceiling in the coming months.
The US has never defaulted on its debts.
Doing this can be financially disastrous. Fears that the UK would move in that direction under Truss’ ‘mini-budget’ plan led to UK markets, central bank intervention and Truss’ eventual resignation.
Several economists have warned that the United States is facing a situation similar to that of the 1980s, when the country was in recession. That came after a spike in oil prices prompted central banks to raise interest rates to keep inflation in check, sparking a debt crisis with Latin America.
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About $9.8 trillion or 40% of U.S. debt currently held by the public will be transferred within the next two years, subject to higher interest rates, the unbiased Peter G. Peterson Foundation found
The Federal Reserve has tried to curb the rising cost of living by slowly raising interest rates.
“The biggest recession threat here comes from the Federal Reserve’s rate hikes, which are too aggressive; especially as real wage growth has lagged far behind inflation, reaching levels consistent with the Fed’s 2 percent inflation target in the past two months,” said Mark Weisbrot, co-director of the Center for Economic and Policy Research. .
The Fed’s move, which has increased the cost of mortgages and credit card debt for Americans, is also making it harder for developing countries to repay their debt – which is pegged to the dollar.
Flores-Macías warned that this could “bring a boomerang back to the developed world.”
He noted that in the early 1980s, the struggle for Latin America to pay off its debts was linked to the Federal Reserve raising interest rates.
“It became very, very difficult for developing countries around the world to pay off their debts. So that’s just another risk,” he said. “It doesn’t look imminent, but it’s something the US will have to keep an eye on as it could further contribute to the slowdown in the global economy.”
Many think that the United States is heading for a recession in the coming months.
“Next year there will be a recession,” said Steve Hanke, a former member of Reagan’s economics council and now a professor of Applied Economics at Johns Hopkins University.
“It’s baked into the cake,” he added.
Hanke noted, “The average length of the recession in the United States was about 10 months.”
That means it could end in 2024, when Biden runs for a second term.