Why the US *Can't Afford* a Recession - A Sovereign Margin Call

About this Video

• Video Title: Why the US Can't Afford a Recession - A Sovereign Margin Call
• Channel: Infranomics
• Speakers: One speaker (name not provided in transcript)
• Duration: 00:22:27

Introduction

This video analyzes why a US recession would be catastrophic, focusing on the mechanics of a recession's impact on the US economy and its effect on national debt. The speaker uses charts and data to demonstrate how current fiscal deficits, government spending, and the hyperfinancialization of the US economy would exacerbate the consequences of a recession.

Key Takeaways

1. Pro-cyclical deficits: The US is experiencing ever-increasing fiscal deficits despite lower unemployment, a phenomenon termed a "pro-cyclical deficit." This contrasts with the typical response of increasing deficits during recessions to stimulate the economy.
2. Recessionary impacts on revenue and spending: During a recession, government spending typically increases, while tax revenue falls. This effect is magnified in the current hyperfinancialized economy, where revenue falls more sharply.
3. GDP as a limiting factor: The US's Gross Domestic Product (GDP), which represents the capacity to absorb new debt, decreases during recessions, further worsening the deficit as a share of GDP. This makes debt issuance more challenging and increases debt-to-GDP ratio.
4. Debt issuance and bond market dynamics: The government finances deficits by issuing debt. In a recession, the increased deficit, coupled with falling GDP, places increased pressure on the bond market. The speaker highlights the unusual "bare steepener" in the current rate-cutting cycle, where long-term bond yields rise even as short-term rates are lowered—a signal the market isn't absorbing the increased debt issuance. This indicates a potential debt doom loop.
5. Marginal return on debt: For every dollar of new debt issued since 2007, the US economy is only receiving 34 cents of GDP, indicating diminishing returns on debt. This return is further reduced as government spending increases as a share of GDP.