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The Hill: This Won't Be the Financial Reckoning We Expected

April 21, 2021
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Article by Thomas Vartanian, former bank regulator, in The Hill

The next financial reckoning is coming, but it is adeptly camouflaging itself. A quarter-century of warnings about the catastrophic consequences of government overspending have lulled us into a sense of false security since the predicted collapse of the U.S. economy has not arrived. The stock market climbs, and post-COVID-19 predictions suggest even better economic results over the next several quarters. As a result, Democrats and Republicans have become comfortable clinging to a spend-what-you-want modern monetary theory that has all but obliterated sound fiscal policy. We foolishly believe that we have found the Holy Grail of economics.

What we have found is self-delusional financial fantasy. There is no free lunch. Larry Summers, the respected former Treasury secretary, indicted the country’s leaders – Republican and Democrat – for piling up mountains of debt and printing money. He called it the “least responsible fiscal macroeconomic policy we’ve had for the last 40 years.” 

Summers will be proven correct, but not simply because of the fiscal mistakes that the country is making. The spark that will ignite this financial reckoning will be the failure of the U.S. to maintain global technological superiority, which is inextricably linked to the country’s economic viability and security. Without an immediate and careful reordering of both U.S. spending habits and technological priorities, the U.S. risks becoming the second-best superpower in the world. Such a fall from grace would trigger a series of unfortunate economic events. 

Long-term economic indicators have indeed raised red flags.

At the same time, the Fed has accumulated an astonishing $7.8 trillion portfolio of mortgage securities and other assets responding to recent financial crises. That is about 10 times the size of its holdings before the 2008 crisis, and the last decade has demonstrated that it is not easy for the Fed to liquidate such a huge portfolio. These problems may pale, however, in comparison to the $6 trillion allocated for COVID-19 relief and the $2 trillion yet to be appropriated for infrastructure, all from funds that neither we, nor our children, and perhaps our grandchildren will ever have. 

This is a troubling long-term economic picture that tends to support the prediction that China will mathematically overtake the U.S. as the world’s largest economy by 2030. If that does occur, it may have geopolitical consequences. 

The time available to adjust our economic and technological priorities is shrinking as .....

To read this article in The Hill in its entirety, click here.

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