The U.S. economy saw a strong recovery in the third quarter of 2023, with GDP growth reaching 52%, exceeding market expectations. However, this growth is not sustainable because it is built on unstable foundations, including excessive spending by consumers, large deficits, inefficient corporate investment, and external imbalances. As the Fed accelerates the pace of interest rate hikes, the U.S. economy will come under more pressure and could fall into recession or stagflation in 2024.
The Fed began its rate hike cycle in 2022 and has raised the federal rate to 4 by the end of 202375% level, which is the highest level since the 2008 financial crisis. The main purpose of the Fed's interest rate hike is to control inflation, as inflation in the US has been high in 2023, with the core PCE** index (the Fed's inflation target indicator) reaching 44%, well above the Fed's 2% target. The Fed believes that the rise in inflation is mainly due to the imbalance and shortage of supply and demand caused by the epidemic, and these factors are expected to gradually subside in 2024, so the Fed has raised interest rates at a more modest pace to avoid excessive tightening of monetary policy and affect the recovery of the economy.
However, the Fed's dovish rate hike strategy is also very risky, as it could lead to a weaker dollar, which in turn could trigger capital outflows, asset bubbles, and financial turmoil. The U.S. dollar is the world's most important reserve currency and settlement currency, and the Fed's interest rate hikes affect the world's currency** and interest rate levels. If the Fed raises interest rates less than the market expects, the US dollar will exchange rate**, which will weaken the dollar's appeal and prompt investors to seek safe havens for other currencies or assets. In this way, the United States will face the pressure of capital outflows, which will lead to a deterioration in the United States' balance of payments, an increase in the cost of debt financing in the United States, and a threat to the financial stability of the United States. At the same time, a weaker dollar will also exacerbate inflationary pressures in the United States, because the depreciation of the dollar will increase the value of imported goods, which in turn will push up the cost of production and consumer prices in the United States. In this way, the Fed is in a dilemma of not being able to stop raising interest rates so that inflation does not get out of control, nor to accelerate rate hikes so that it does not have a recession.
The U.S.** fiscal deficit in 2023 reached nearly 1$7 trillion, an increase of 23% from the previous fiscal year and 6.% of GDP3%。This is the third-largest deficit on record, behind only the two fiscal years of 2020 and 2021. The U.S.** fiscal deficit is mainly due to declining revenues and rising spending. The decline in revenues was mainly due to the tax cuts in 2022 and the economic slowdown in 2023, and the increase in spending was mainly due to higher spending on items such as Social Security, Medicare, and defense, as well as an increase in interest expenses from the Federal Reserve. The U.S.** fiscal deficit has caused the U.S. debt level to rise, and by the end of 2023, the U.S. federal debt has exceeded 33$6 trillion, or 125% of GDP.
Fiscal policy in the United States** has played an important role in responding to the pandemic and the economic crisis, mitigating the impact of the pandemic and spurring economic recovery by providing direct cash assistance and loan guarantees to individuals and businesses. However, there are also big problems in the fiscal policy of the United States, because it has not effectively improved the economic structure of the United States and increased the economic potential of the United States, but has caused waste and mismatch of resources, exacerbated the gap between the rich and the poor and social injustice in the United States, and weakened the international competitiveness of the United States. The fiscal policy of the United States has also lost its flexibility and sustainability because it relies on rising debt and widening deficits, which will increase the debt service pressure of the United States, limit the policy space of the United States, and increase the fiscal risk of the United States. If there is a recession or stagflation in the U.S. economy, it will be difficult for the U.S. to take effective fiscal stimulus measures, and it may fall into a debt crisis.
The strong performance of the U.S. economy in 2023 cannot hide its deep-seated problems, and the U.S. economy has reached a dead end that requires profound reforms to achieve long-term stability and development. The dead end of the U.S. economy is mainly manifested in the following aspects:
First, the growth model of the U.S. economy is too dependent on consumption, and the quality and efficiency of consumption are not high, resulting in insufficient demand and oversupply in the U.S. economy. Consumption in the U.S. economy is largely supported by personal borrowing and transfers, rather than by increased personal income and savings. U.S. consumers tend to buy low-priced imports rather than high-quality homegrown goods, which leads to a lack of domestic production and a deficit in the U.S. U.S. consumers also tend to buy discretionary and luxury goods instead of investing in education, health, and innovation, which has led to a lack of human capital and technological backwardness in the United States.
Second, the level of investment in the US economy is insufficient, and the direction and efficiency of investment are not ideal, resulting in low productivity and weak innovation capability of the US economy. Investment in the U.S. economy is driven primarily by corporate profits and prosperity, not by market demand and a dead-end in policy, which requires profound reforms to achieve long-term stability and development. The reform of the US economy has a bearing not only on the interests of the United States itself, but also on global peace and prosperity. The reform of the U.S. economy is not an overnight thing, nor is it a one-time thing, but a continuous process that requires the joint efforts and cooperation of the United States and society. The reform of the U.S. economy is also not an easy thing to do, nor is it a risk-free thing, but a process full of challenges and crises, which requires the courage and wisdom of the United States and society. Reform of the U.S. economy is a necessary thing and a beneficial thing, and only through reform can the U.S. economy get out of its predicament and move toward prosperity.