As of January 2022 inflation is increasing at an annual rate of 7.5%.  The immediate cause is blowout Congressional spending on the pandemic for two years in a row.    Two $3 trillion annual deficits back-to-back was excessive stimulation, even in a pandemic.

The Federal Reserve is now poised to respond by raising interest rates.  There are estimates that short term interest rates will need to rise to between  3% and 4%, from .25% today, to get inflation back to the previous 2% target range.

This will force interest rates up all across the economy, from business borrowing to home mortgage rates.  It will create a huge recessionary force which will slow down economic growth.  But, in addition, the Federal Reserve has now built up, through quantitative easing, bond holdings of close to $9 trillion.  As these bonds mature, and are turned over, their interest rates will increase.  This will dramatically raise interest expenses for the bond owners, making recessionary forces even larger.

Last, but not least, our rapidly growing national debt is financed largely by low-interest treasury bonds, as well as equivalent bonds from other countries like China and Japan.  Of course, interest rates will also begin to rise on these debt bonds, which means that interest payments on our debt will begin to rise by hundreds of billions of dollars per year.

Here is my prognosis for inflation, interest rates and debt in the coming months.  The Fed will presumably begin raising interest rates in March and continue doing so until inflation is “tamed.”  If it takes more than just a few months to do this (likely), then a recession will almost surely be kicked off.  The longer the recession lasts, and interest rates continue to rise, the more likely it becomes that a new financial crisis will develop.

Conclusion.  Our close to $30 trillion, and rapidly increasing, national debt is not sustainable indefinitely.  National leaders, including Congress and the President, must get serious about controlling it.  It will require some economic pain for this to happen.  Perhaps the current buildup in inflation will lead to a resolution of this sequence of events: inflation, interest rates, and reduction of the ratio of debt to GDP in the near future.  If so, we will be much better off in the long run.  Hold on to your hats and your wallets!

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It is easy to predict, with some confidence, a red wave coming in November.   It’s a historical trend, of course.   In addition, the Biden Presidency is struggling and, moreover, inflation will likely still be high in the fall, even if it starts to moderate before then.

But after 2022, things become much murkier.  Who will the Democratic presidential candidate be in 2024?  Will Trump run again?  Lots of things can happen between now and then.

Even though I am an optimist in general about the future of our country, I don’t have any particular insight about how things are going to play out over the coming years.  To have such an insight, in a credible manner, it is necessary to have a framework to base it on.  Here are two individuals who have constructed such frameworks.

• One of them is Ray Dalio, the successful manager of the hedge fund, Bridgewater Associates.  He predicts that we are likely headed into a new civil war, based on his extensive study of world history.  I am skeptical of this prediction even though it is based on a comprehensive theory that he has constructed. (https://www.wsj.com/articles/principles-for-dealing-with-the-changing-world-order-book-review-ray-dalio-trouble-ahead-as-usual-11637335545)

  

• A more compelling framework has been constructed by George Friedman.  He has developed a cyclic theory of American history.  He describes both 80-year institutional cycles and 50-year socio-economic cycles, both of which are coming to a head, i.e. renewing, in the mid to late 2020s. The clashing of these two different cycles, which have renewed separately in the past, is what could cause a storm to occur before the resulting calm.   Of course, things may not happen the way a theory predicts, but still, it’s such an interesting theory that it may have some predictive value.  Mr. Friedman also has a website with frequent postings about ongoing events.

  

• My own view. I put value on underlying historical theories in order to construct a framework for predicting the future.  This is why I pay attention to theories like the two I have just outlined above.  But my own prediction is much narrower than theirs.  I think the resolution to our currently divisive and polarized politics will turn out to be more pluralism and decentralization in our political institutions.  In other words, let the blue states and the red states do things their own way (state’s rights) rather than trying to enforce too much national uniformity.  This is already starting to happen.  The red states want to tighten up voting procedures and restrict abortion rights.  Blue states and cities have bigger crime problems and want more restrictions on gun rights.  We should give them more leeway to do as they see fit as long as they are not violating basic constitutional rights.

  

Conclusion.  The United States has a long and prosperous future to look forward to, but how are broad trends going to play out?  Of course, nobody knows but it still makes sense to try to imagine reasonable courses of action and, then, to do what one can to push things in that direction.

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We hear so much negativity about America from the mainstream media these days, it is always heartening to hear from more balanced sources.  Do you know, for example, that “only” 1/4 of Americans are either (in total) committed progressives or committed conservatives, while 2/3 of us are “realists” who are spread out on the left, right, and center.  These are the people you can have a sensible conversation with about politics and public policy.

I have recently started meeting weekly, here in Omaha, with a like-minded group of people to study online public policy courses made available by Hillsdale College, a small liberal arts institution in Michigan.  I highly recommend checking out this curriculum and, in particular, subscribing to their free newsletter, Imprimis.

Being connected in this way to Hillsdale College gives me much hope for America’s future.  Here are just a few of the ways:

• We are incredibly fortunate to live in a free country with a strong democratic tradition founded by the ratification of our Constitution in 1788, 234 years ago.
• We are the third-largest country in the world, behind only China and India, with huge natural resources, highly developed by our skilled and hardworking countrymen.
• Our economy is second to none.
• Minorities are making great progress in both economic and social standing.
• The autocratic states, China and Russia, are strong enough to challenge us militarily, but we have lots of democratic allies to help us defend freedom in this struggle.
• Problems such as global warming, as well as inflation and debt are very serious,  but solvable although it may take a major crisis to occur first so that enough people are paying attention.

Conclusion.  Americans are incredibly fortunate to live in such a strong, prosperous and free country.  I believe that most of us understand our privileged position in the world and support policies to both protect our way of life and share our good fortune with other countries who are willing to work with us for the common good.

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I am a non-ideological (registered independent) fiscal conservative and social moderate.   I believe that our biggest domestic problem (by far) is out-of-control national debt.   Our biggest international problem is the rise of China, now our greatest autocratic rival.

Here is how I evaluate the Biden Presidency after a year in office:

• His plunging poll ratings reflect his inability to deal effectively with either the coronavirus pandemic or rapidly rising inflation.  There’s not much he can do about Covid-19.   The red states are handling it better than the blue states that have relied too heavily on lockdowns and mask mandates.   However, it is Congressional blow-out spending, strongly encouraged by Biden, which has tripped off inflation.
• The Federal Reserve is prepared to address inflation by both raising interest rates and reducing its eight trillion dollars in bond holdings (see chart). This will necessarily slow down economic growth and perhaps even cause a recession.   So Biden is faced with a combination of rising inflation and likely economic slowdown.   His favorability ratings could get even worse in the coming months if stagflation (inflation plus recession) takes hold of the economy.

  

• For this reason, it is likely that a red wave will sweep the country in November 2022.   The Republicans will almost surely take the House of Representatives.   If they also take the Senate, then Congress will be able to exercise badly needed fiscal responsibility and significantly shrink federal deficit spending for the following two years.
• GOP Congressional control starting in 2023 still leaves President Biden in charge of the Executive Branch of government until after the presidential election in 2024.  It is very important that he do a good job with foreign policy until then.  His main goals should be clear: dissuade China from trying to capture Taiwan, protect Ukraine from Russian domination, and prevent Iran from acquiring nuclear weapons.   The success of democracy worldwide requires American leadership against our autocratic rivals.   This requires a strongly bipartisan foreign policy, implemented intelligently by a capable chief executive.   We should all hope for President Biden to succeed in this way.

Conclusion.   President Biden is floundering in domestic policy because of too many errors and is unlikely to recover sufficiently in the next few months to avoid a political red wave next November.   But he is still President until 2025 and therefore in charge of foreign policy.   So far his policies towards our biggest competitors: China, Russia, and Iran, are on the right track.  Hopefully,  bipartisan support will continue to prevail on these issues.

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When I was growing up in the 1950s and my brother, sister, and I were getting too wound up, my father would say “Calm down!” in a loud voice.  He was the authority figure and so it worked.

I am not an authority figure but I would like to say the same thing to America:  Calm down!  Things aren’t really that bad and, by becoming too excited, we risk making things worse.

Consider:

• The pandemic. The Omicron variant of the coronavirus, infectious but with mild symptoms, should be viewed as the transition from the pandemic state to an endemic state.  The pandemic is turning into a routine flu illness for which we may have to get vaccinated every year, as many of us do already.  You don’t need to get tested unless or until you have flu-like symptoms.
• January 6. The Capitol riot was disgraceful but hardly an insurrection.  Two simple steps can assure that it will never happen again.  Strengthen the Capitol Police Force, which is already being done, and either repeal or modify the ceremonial Electoral Count Act which Vice President Pence was implementing on January 6, 2021.  Hopefully, in the near future, the progressive left will lower the volume of its rhetoric in complaining about this one-off event.
• Civil War. Too much dwelling on insurrection and violence has now led to predictions that the U.S. may be headed into a new Civil War.  This is frankly, ridiculous, with the very strong civil institutions we have in this country.  Fortunately, there are many other voices who are poo-pooing such talk.

  

• Is President Biden a uniter or a divider? Elected President in 2020 along with the thinnest of Congressional support, Joe Biden started out saying that he wanted to unite the whole country.  But in his recent Georgia speech about voting rights, he declared that “the (Senate) filibuster has been weaponized and abused” by the Republicans.  Senators will now “declare where they stand, not just for the moment, but for the ages.”  All this for new Georgia voting procedures which are less restrictive than those in Delaware and New York State!

  

Conclusion.  Democracy is thriving in the United States.  Yes, we are highly polarized but our 234-year-old Constitution (ratified in 1788) is performing brilliantly.  We are the strongest and most prosperous country in the world with huge political and economic influence.  We will likely continue to play our strong worldwide leadership role for many years to come.

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Inflation is now increasing at an annual rate of 6.8% as of November 2021.  The Federal Reserve is getting serious about not only ending new bond purchases (quantitative easing) but also about beginning to raise interest rates as soon as March 2022.  Raising interest rates is, of course, the main tool the Fed has for combatting inflation.

President Biden blames inflation on price gouging by businesses such as meat- packers.  But businesses have to respond to market forces.

The real cause of inflation is that consumer demand is growing faster than usual while supplies are less than normal.  Why is this happening?  It is largely because of actions taken by Congress during the past two years of the pandemic.  In fiscal years 2020 and 2021, deficit spending totaled about $3 trillion each year (see chart).  Much of this spending went to individuals in the form of direct payments into their bank accounts.  Unemployed workers also received an extra federal unemployment stipend of $300 per week which served as an additional disincentive to return to work.  Furthermore, a more generous child allowance also created a disincentive to work.

These cash payments to tens of millions of individuals plus the additional disincentives to return to work helped create the imbalance between (increased) demand and (reduced) supply, exacerbated by too few workers.

There is still a 3.6 million worker gap between February 2020, right before the pandemic started, and the present, December 2021 (see chart). This worker shortage will be harder to make up because the unemployment rate (as of December 2021) has shrunk to 3.9%.  In other words, there aren’t a whole lot of workers now looking for jobs.

The demise (if it holds) of the Administration’s Build Back Better social spending plan will help to get sidelined workers back into the labor market.  The current level of almost 11 million job openings is also a big contributor to the supply chain breakdown.

Conclusion.  Inflation is harmful to the economy for many reasons.  It is a tax on the poor as well as making our national debt problem much more serious.  It has now been kicked off by blowout Congressional spending.  The Federal Reserve will have to intervene forcefully to stop inflation, risking a severe recession in the process.

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Although I am mostly an optimist about the future of the United States, I do recognize that there are immediate serious problems that need to be addressed.  For example:

• The Omicron variant of the coronavirus. Right now the Omicron variant is surging in the U.S. and around the world.  It is highly infectious but also has quite mild symptoms especially for those who are vaccinated, as are 80% of U.S. adults.  Moral: get vaccinated, go about your business, exercise reasonable precautions, and stop worrying about catching Covid-19.
• Global warming is a serious problem, but we need to respond to it in a realistic manner. Although carbon emissions are decreasing in the U.S. and Western Europe, they are increasing worldwide.  Developing countries are the biggest culprits (especially China) because of their massive use of coal in order to industrialize.  In short, the world needs to de-carbonize, not de-fossilize.  This means emphasizing nuclear energy as well as carbon capture and storage.  We won’t start making (worldwide) progress on global warming until we adopt such a realistic strategy to do so.
• Inflation and debt. Right now the annual inflation rate in the U.S. is 6.8% (in November 2021).  If it continues much longer at this rate or higher, the Federal Reserve will be forced to raise interest rates.  The higher they go, the more likely it is that our rapidly increasing national debt (now about $28 trillion) will trip off a new fiscal crisis.  Until annual deficit spending (which is what creates debt in the first place) is greatly reduced, such a new fiscal crisis will loom on the near-term horizon.  This problem, of course, can be solved if only there is a national will to do so.
• Political polarization. Besides inflation, this is our country’s biggest political problem at the present time. The red states and blue states take very different approaches on many major issues such as abortion and gun control.  The solution is to stop expecting national consensus on our most divisive issues such as these and to let the states go their own way, as long as they act in ways that are consistent with the U.S. Constitution.

Conclusion.  The reason I am optimistic about our country’s future is that our most serious problems, as described above, are not only solvable in theory, but are likely to be resolved by our very strong and firmly established democratic traditions and procedures.
Americans are incredibly lucky to live in such a strong and prosperous country with such widely accepted democratic norms.  We are more than capable of resolving our current serious problems.  I believe that America has a long and glorious future to look forward to.
Much more later on the particulars of how all of this is likely to unfold!

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A couple of weeks ago I wrote that Americans are too pessimistic about the future and listed many ways in which things are going well in the U.S.  Of course, I also included one very negative trend: our rapidly increasing national debt and the possibility that the current surge in inflation could lead to a new fiscal crisis in the near future.

But, setting aside debt and inflation for now, consider some particulars on the positive side:

• The Pandemic is weakening into endemic status.  The Omicron variant is more infectious than the delta variant, but the symptoms are also much milder, especially for those who are vaccinated.  The pandemic is not going to just disappear someday but more likely will settle into a low-level steady-state like the ordinary common flu, which is dealt with in a routine manner that does not disrupt society.

  

• The U.S. is not abandoning Ukraine which wants to be free and identifies with the West. Russia is threatening to invade and, obviously, the West does not want war.  But the U.S. is not abandoning Ukraine, either.  We are still providing anti-tank missiles (starting in 2018) and are also currently providing military advisory support.  It is very important for the U.S. to be visibly supporting freedom and democracy around the world, wherever they are under threat.

  

• Israel and the U.S. are pursuing a common policy on Iran.  Israel has promised to support a strong nuclear deal with Iran that would permanently limit its ability to assemble a nuclear weapon.  The U.S. is willing to restore the 2015 accord that President Trump abandoned – with Israel’s support – but only if it is “longer and stronger” than the original agreement.  Iran has so far resisted such a new agreement but it is encouraging that the U.S. and Israel are working together on this important project.
• Economic Cracks in the Great Wall of China.  Under Xi Jinping, China’s economy is systematically weakening and Mr. Xi’s priorities offer little hope for a quick turnaround. In fact. The U.S. and its allies could further compound Mr. Xi’s challenges by vigorous enforcement of trade laws, limiting Chinese access to technology and financing from the West, and imposing sanctions against China’s brutal human-rights abuses in Xinjiang and in various parts of the developing world which it is exploiting through its Belt and Road initiative.

  

Conclusion.  I have been quite critical of President Biden’s overall record but he is doing some things right, especially in foreign policy where he is largely continuing policies started under President Trump.  In particular, we now have effective bipartisan policies for dealing with our main adversaries: China, Russia, and Iran.

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Almost the entire issue of the January/February 2022 issue of the Atlantic Magazine  is devoted to anti-Donald Trump trash talk.  Consider the titles of several articles:

• Imagine The Worst: how to head off the next insurrection
• January 6 Was Practice
• The Small Lie: to support the Republican myth that our elections are rife with fraud, someone needs to take the fall
• I Remember Conservatism: the rich philosophical tradition I fell in love with has been reduced to Fox News and voter suppression

  

Yes, American democracy had a stress test after the 2020 elections, but it survived brilliantly. The Trump organization filed over 60 lawsuits to overturn election results and not a single one was upheld.  The January 6 Capitol break-in, even though wrongly encouraged by Trump, had no prospect of overturning the results of the 2020 election.

A quick review of Trump’s four years in office:

• 2017 tax reform lowering the corporate tax rate from 35% to 21%.
• Putting three highly qualified conservative justices on the Supreme Court.
• Achieving an unemployment rate of 3.5% for the six months preceding the pandemic
• After the outbreak of Covid-19 in late February 2020, supporting American drug companies in developing effective vaccines at “warp speed”

Compare this record with Joe Biden’s first year in office:

• A disastrous withdrawal from Afghanistan, leaving over 60,000 U.S. allies at the tender mercies of the Taliban.
• Our open southern border. Illegal immigrants, with temporary asylum permits, are now pouring into the U.S.
• Inflation. Because of blowout Congressional spending as well as supply chain bottlenecks caused by millions of absent workers, inflation has now reached an annual rate of 6.8% in November.  Low-income workers are getting hefty pay raises but they are more than eaten away by inflation.

If Trump is a candidate for reelection in 2024, he will surely receive the Republican nomination.  Will he be a viable candidate for reelection?  His poor performance on January 6 is a negative factor.  But Biden’s very poor performance to date, if it doesn’t improve, will give Trump a big boost.  In other words, the outcome of the 2024 presidential election will depend on what happens politically and economically in the U.S. between now and then, not on bogus claims of voter suppression.

Conclusion.  The progressive left should calm down and take more interest in the substance of the Biden presidency rather than Donald Trump’s shenanigans.  This is what will influence the outcome of the 2024 presidential elections.

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There are lots of serious problems in the U.S., both foreign and domestic, and many Americans are pessimistic about our country’s future.

I am, however, mostly an optimist.  I believe we will weather our many problems and continue to enjoy the benefits of being the world’s leading democracy for many years to come.  Consider:

• The pandemic is essentially over. Yes, 800,000 Americans have died from Covid-19 and there are active coronavirus variants such as Delta, Omicron, and perhaps more to come.  But three million Americans die every year and so we’ve had an additional 12% deaths for the past two years.  Overall, our own free-enterprise drug companies have rescued us by delivering effective vaccines in less than a year’s time.
• American democracy is thriving. Our democratic institutions had a major stress test after the 2020 election and survived brilliantly.  There is even a solution on the horizon for polarization and divisiveness.
• The Chinese threat is overstated. China has many problems and its current leader, Xi Jinping, is making lots of enemies around the world.  It is unlikely that China will try to take Taiwan by force.
• The American economy and military are very strong. For example, of the ten top companies in the world, seven are American (two are Chinese and one is Saudi Arabian).
• The American Dream is Alive and Well. Wages for the typical worker have grown by 20% (in real terms) in the past three decades.
• The American way of life is the envy of the world. Thanks to American leadership, freedom, and democracy are flourishing around the world.  And, yes, America is still the envy of the world.
• Inflation and Debt. Although I’m an optimist in general, I despair about our debt problem.  It was already very bad before the pandemic and now it is worse.  And, as we know, inflation is heating up (6.8% annual rate in November).  It is precisely inflation that will kick off our coming debt crisis by forcing higher interest rates and therefore much higher interest payments on our accumulated debt.  This whole sequence of events may now happen sooner rather than later, which is a silver lining in disguise!

Conclusion.  Many things are going well in the U.S. today and Americans should generally be optimistic about the future of our country.  Unfortunately, our debt problem is growing steadily worse.  It may well require a huge new crisis for our national leaders to address it seriously.  Our currently worsening inflation could cause this to happen fairly soon.

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