With High Debt and Deficits, a Gangbusters Economy and Impending AI Job Displacement, the Fed should consider Hiking Rates another 25 bps
In a couple years, the United States should experience a complex and rapidly changing economic landscape. Looming on the horizon are potent threats that could converge to trigger an economic collapse by 2027: unsustainable budget deficits and widespread job losses driven by advances in artificial intelligence (AI). Additionally, prior collapses have been met with continually unprecedented economic stimulus. The well may have run dry, and these challenges could lead to significant economic instability. It’s better to get our house in order now.
The U.S. federal budget deficit, according to the CBO, is projected to be $1.6 trillion in fiscal year 2024, $1.8 trillion in 2025 and $1.6 trillion by 2027. As a percentage of GDP, that’s 5.6% of GDP in 2024, 6.1% in 2025 and 5.2% in 2027. So these deficits are more than double a reasonable economic growth rate.
Per the CBO: “Since the Great Depression, deficits have exceeded that level only during and shortly after World War II, the 2007–2009 financial crisis and the coronavirus pandemic.” And these are the good times.
As the national debt grows, so do the interest payments required to service it. In Fiscal Year 2023, net interest payments totaled approximately $658B. It’s already the second highest budget outlay after social security at $837B.
And Reinhart and Rogoff argue that when debt in advanced economies exceeds 90 percent of GDP, bad things happen. We are well over 120%. Many use the argument of Japan being over 250% with negligible consequences, but the buck stops with the U.S. as the world’s premiere reserve currency that underpins all the markets.
Perhaps we should tap the breaks a little on the spending before it’s too late.
The AI part:
And just while technological advancements have historically driven economic growth, the rapid rise of AI poses unique challenges. AI has the potential to significantly enhance productivity, but it also threatens to displace millions of workers across various industries.
VC Kai-Fu Lee says that about 40-50% of all jobs in 3-8 years will be replaced by AI – mainly white collar.
Clearly, advanced robotics and AI systems should be able to perform repetitive tasks with specialized knowledge more efficiently than human workers. And the Harvard Business Review says that unlike the implementation of electricity where it took time and job displacement wasn’t a factor, AI will hit fast: “AI is different because companies are integrating it into their operations so quickly that job losses are likely to mount before the gains arrive. White-collar workers might be especially vulnerable in the short-term.”
So a very bad combination could develop if the deficit isn’t taken care of before we endure large job losses. If we don’t, perhaps the bond vigilantes will price things out for us later.