So far this year it has emerged clearly that our only clear path out of rising debt and deficits in the US economy is via Growth. The other options of higher interest rates, spending cutbacks, higher taxes (aside from tariffs), have not materialized. If the US economy does not grow faster than normal, it's likely the fiscal challenges we face now will only get worse.
What is the best way to grow the economy? It is not one thing, but a combination of strategies focusing on increasing productivity, human capital, and investment. Key methods include investing in infrastructure and technology, fostering a skilled workforce through education and training, promoting entrepreneurship and innovation, encouraging consumer spending and business investment through stable monetary and fiscal policies, and improving the overall business environment by reducing barriers and providing incentives.
Over the next year we will see if the past months of policy changes will deliver. The big questions are:
1. Will the Fed lower rates and will this stimulate money supply? The era of FREE money is unlikely to return.
2. Will regulations be modified sufficiently and intelligently to speed up productivity? And home building?
3. Will the US Bond market remain attractive? If not, expect mortgage rates to remain elevated or rise. Lower rates could fuel the housing market, a massive driver of US spending and GDP.
4. Will tariffs be a one-time price bump or will local manufacturers seize the opportunity to raise prices to boost profits thereby fueling inflation?
5. Will mass deportations impact the labor market, especially for the jobs that Americans don't want to do? If we want to build lots more, how do you do so with fewer laborers? Some jobs cannot be replaced by A.I.
6. Will manufacturing grow in the US and will the goods made here cost more than the market is willing to bear?
7. Will A.I. and robotics replace higher paying jobs as well as more mundane task jobs?
8. Will unaffordability for the majority fuel more political instability and divisions?
As we enter a new era of potentially lower borrowing costs, will this drive growth the way it did in 2020-2024 and inflation? The 2020 US GDP was $21 trillion and ended 2024 at $29 trillion, up 33% in 5 years! Inflation eroded lots of this growth and usually rises during extreme growth cycles due to a surge in demand and pressure on production capacity. Corporations will continue to grow and remain profitable which is achieved by either selling more, cutting costs and/or raising prices.
The 2020-2024 period enriched the wealthier more than any other period in recent history. (The top 1% added $15 trillion, over 41% of the US debt!) The period ended with lots of angry consumers who had lost buying power (when there is extreme demand and growth, prices usually rise too). Who likes earning more only to discover you can buy less with those dollars? Those without assets felt poorer than in 2019, whilst those who owned homes and equities grew their wealth dramatically, yet they too felt poorer in a world where feelings matter more than facts. One thing we did learn in 2020/21: when you place additional buying power into the hands of the majority of people the economy soars (as does inflation). Someone who earns $50k usually spends that additional $1,000 instantly while someone who earns $500k may not. What we don't want is slow growth and elevated inflation (stagflation!). Never easy to get the balance right!
