Nice article on US fiscal situation - Why interest rate has to be kept low

Just came across this article from Dave Rosenberg. It highlights the fiscal challenges facing USA. Fed needs to keep interest rate low.... USD status in the world is to be decided....

Reading the article below, feels a bit like Australia as well, except the government is now looking to tax the middle class to oblivion. The rich can always escape.... Ha....

To quote from the article (published in 2025):

" You see how dangerous this is, right? In a balanced economy, workers should be reaping the fruits of their labor. Their real compensation growth should match the labor component of productivity growth that they bring to their employers. From 1980 to 2025, this has not happened. Worker productivity growth has remained constant at +2.0% annually, but their compensation has stayed at just +1.0%. Doesn’t that bother anyone? Access to the services sector in Asia, or being able to sell more beef in the U.K., are more important than this? Really? Does anyone really give a damn? I suggest we do. This gap is not sustainable. And putting the blame on the foreign trading partner is gaslighting at an extreme and dangerous level. It amazes me what short shrift this topic receives.

So, who benefited from the continued expansion in labor productivity if it wasn’t the workers? It was the owners of these establishments. From 1950 to 1980, unit profits in the nonfinancial corporate sector rose at a +2% average annual rate. Businesses and workers shared equally in the productivity gains. But since 1980, unit profits growth has doubled to nearly a +4% average annual rate.

I mentioned above that since 1980, the top marginal corporate tax rate has plunged from 46% to 21%. In the personal sector, the rate is down to 37% from 70%. The share of revenues coming from the personal sector has stayed roughly at 50%, but the corporate share has gone from 13% to 11%.There definitely is something wrong here. And within the personal sector, it would seem to me as though the tax system is simply not progressive enough.

All the while, the tax system, as it has been constructed, cannot support the grotesque levels of public sector expenditures. The U.S. government has not balanced its books in a quarter century and since that time, the level of debt has ballooned by $30 trillion. That is with a T. Federal debt has soared five-fold.There is your answer to the question about the veracity of the Laffer Curve and whether tax cuts end up paying for themselves, as politicians falsely claim to be the case. As a share of GDP, the debt has mushroomed to nearly 125% from 55% when Bill Clinton left office in 2000. In that timeframe, the tax revenue share of GDP has gone from 20% to below 17%. That has to change (and it is foolhardy to believe we can “grow” out of this, even with the AI craze).

How can the forward P/E multiple be at 21x, the VIX at 18, and HY spreads as tight as 300 basis points in this unstable environment? In one word — denial. All the while, this debt blowup has occurred as income inequality reaches unprecedented levels. Instability layered on top of instability. The case for gold is front and center — you don’t need tariff uncertainty to be the prime reason. It’s evident right in the charts below.

There was a very clever way to keep the low end of the income spectrum feeling they could afford the American Dream even as their real wages since 1980 lagged their productivity contribution by half and as the labor share of national income dwindled to record lows. The government deregulated the financial sector and allowed them to plug the proletariat with debt. The outstanding level of debt in the household sector has surged by over 10x since 1980 to $20 trillion. The number of households has only expanded by 70% over this period. In 1970, personal debt (loans and mortgages) was $7,000 per household. In 1980, it went up to $17,000. A decade later, after a proliferation of financial innovation and ever-increasing access to credit, that number rose to $38,000 by 1990. Then to $70,000 in 2000, $120,000 in 2010 (after a debt-laden mortgage boom), $130,000 in 2020, and now $150,000. Insane. You have to have your head examined to be going long any consumer finance company.

In 1970, credit cards were a $5-billion business. Only high-income earners with a credit score could access a card, and they had one American Express card. It was a status symbol. Even in 1980, it was just a $60-billion business. Today? Try $1.3 trillion! Did you know that the outstanding number of credit cards now tops 630 million?? The population of those 18 and older is 258 million! Basically what this means is that each individual has 2 or 3 different credit cards. But you see, this, along with government-insured mortgages, encouraged the personal sector, and particularly those in the low- and middle-classes, to replace the incomes they should have received from their productivity (but — and again, you won’t want to hear this — were diverted to profits) with easy access to credit.

How can this possibly end well? I’m not even sure if there is anything safe to invest in, outside of gold (maybe I should include Bitcoin too, but I don’t own any of it). But now that the Fed has raised rates +400 basis points from the cycle lows and is leaving monetary policy deliberately tight, we are seeing the strains beginning to surface. Delinquency rates have surged on credit cards and auto loans; now that has spread to student debt and even mortgage late-payment rates are edging higher. Consumer confidence for the lowest income cohort has plummeted to all-time lows.

Because young adults are saddled with so much debt, with few job or income prospects, their confidence levels have also plumbed the depths as they confront an additional problem, which is that the dream of owning a home has been just that — a dream. The fact that government policy has promoted so much asset inflation in the form of excessive home prices (and not just the stock market), homeowner affordability today is more stretched than at any other time in the past forty years. A median starter home price today averages out to $342,000 — with median incomes for this group at $68,000 and qualifying income for a mortgage loan at $100,000, how on earth can they ever move out of their parents’ basement? There are 24 million Americans between 25 and 34 still living at home!

As a result, they are getting married later and having fewer kids, which is radically reshaping the country’s population profile and will only be exacerbated by tighter immigration rules. Household formation for 20-somethings is in a fundamental bear market and average family size has fallen to record depressed levels as birth rates and fertility rates have declined to record lows — the vagaries of a debt-fueled surge in home prices that has kept the youth at home longer than ever before. This is a different dilemma than income inequality, to be sure, but is another critical imbalance that I sense is going to upset the apple cart when it comes to social stability.

It’s time to stop this obsession with blaming foreign trading partners for our problems at home and start focusing on the real problems that are homegrown. The tax system has not only failed to cover the insane level of government spending, which has somehow been allowed to surge more than +50% above the level immediately preceding the pandemic in 2019, but has failed to prevent income inequalities from rising further to unprecedented levels. Means-testing Social Security or widening the bands of the income tax rate schedules have somehow become taboo; not to mention tightening the bands between net effective corporate rates and those in the personal sector. And that, my friends, will carry with it the laws of unintended consequences. Not now, perhaps, but in the future.