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. U.S. GDP fell by about 2 percent in 2020, while China’s increased by that percentage even amid the coronavirus pandemic, putting it only about $6 trillion behind the U.S.
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.
Then there is the looming restructuring of the commercial real estate markets thanks to COVID-19 and social distancing and a growing residential real estate bubble. COVID forbearances provided to consumer and commercial borrowers and tenants magically suspend financial reality by transferring the risk of loss to others. But it is a technique that can work for only so long. Finally, a potential smorgasbord of new federal and state taxes is being considered to finance all of this in style.
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. But since the two countries have vastly different populations and economic structures, China’s per capita GDP will still lag the U.S. by a wide measure. I leave the consequences of that to the experts.
As damaging as all this may be, it is the long-term technological indicators that may ultimately determine the country’s economic future. China has targeted 2030 as the date that it will dominate artificial intelligence and quantum computing. It is rolling out a central bank digital currency and has already deployed social behavioral programs powered by cell phone apps and widespread facial recognition. It is outspending the United States 10 to 1 to develop a code-breaking quantum “killer app.” There may be no more significant technological and financial event than the development and deployment of quantum computers. Given their exponentially greater speeds and capacities, they will be able to create nearly impenetrable forms of cyberspace security or obliterate those that have been previously deployed, realigning the foundations of economic and global stability.
The time available to adjust our economic and technological priorities is shrinking as if a death star were racing toward the planet. It is admittedly an extremely complicated challenge given the transformation of “American companies” into global citizens and the commingling of the U.S. and Chinese economies. However, given the stakes, the United States cannot settle for second place. If that happens, the world will pick a new champion, much as it did when it accepted the dollar as its reserve currency at Bretton Woods after World War II. It did so because the U.S. was the only economic and military superpower left standing. That choice was about power, as it always will be. No amount of political happy talk can change that.
Technological power will be the future driver of economic power. If our leaders do not reorder the country’s priorities and elevate both economic and technological priorities over politics, we will end up with a second-place finish. That is the existential financial reckoning that we face and ignore at our peril.
Thomas P. Vartanian is a former bank regulator. He is the executive director and a professor of law of the Program on Financial Regulation & Technology at George Mason University’s Antonin Scalia Law School.