The Peter Zeihan Podcast Series - Strong American Growth (and Something to Worry About) || Peter Zeihan

Episode Date: June 19, 2024

If you don't want to start your day with beautiful beach views and economic forecasts, you may want to skip the video. Today we'll be discussing recent changes to the US economy and what future impacts might look like. Full Newsletter: https://mailchi.mp/zeihan/strong-american-growth-and-something-to-worry-about Donate to MedShare Here: https://www.medshare.org/zeihan-impact/

Hey everybody, Peter Zion here coming to you from Monarch Bay in Southern California. Today we're going to do kind of a big picture economic take of the United States because, you know, a lot has gone down in the last 25 years. I think it's good for me to kind of put my stamp on the ground on where we are. We might be getting back to some version of Norman. It is kind of a bunch light here. We kind of spill that out from the backside. If you remember back to the transition from the Trump administration,

to the Biden administration. There was this contest among the two of them about who Americans would like more because they had been paid to like though. The incoming Biden administration had made it very clear that the first thing he was going to do was a trillion dollar stimulus that would put money in people's hands to get over COVID. And as soon as Trump heard about this, he's like, well, I want to do that too. So I want to be in my administration to leave on a high point. Things might work out that way, but he did put, I think it was $900 billion into the the system in his final few weeks. And if you remember back, COVID was pretty much over by then. So we had two trillion dollars dumped in in a quarter into a system that was already experiencing

rapid economic growth as one of the many reasons why we had an inflation pulse in the early Biden administration. Anyway, you combine that with all the stimulus that was still rolling around to the system from the COVID crisis. And Americans conservatively, entered the Biden administration with over two trillion dollars in savings that they hadn't had before. According to the San Francisco Fed, they didn't finish burning through that extra capital until the first quarter of 2024, which means we're only now finding the ability to like out, look under the hood of the economy with a more normal supply and demand dynamic. And at the moment, things look pretty good. Yes, loan delinquencies are rising, but we are pretty close to record lows still, nor nowhere near the average.

We're certainly nowhere near the numbers that we had back in the last technical recession in 2007. Interest rates are higher, but the frequency rates are far lower than they were at the period before we entered any other recession. So I'm not saying that this is like we're going to grow forever or anything like that. But at the moment, the mechanicals look pretty positive. And I wouldn't expect the United States to enter into recession this calendar year. and some things would have to get a lot worse for us to consider a recession in next calendar year at the current moment. If there is a concern, it's more structural because it has to do with the balance between private credit and government spending. Now, normally private credit rises and falls based on economic conditions, and if it rises too fast, you get a bubble, which leads to a correction.

The last, of course, big instance and we had that was the subprime bill from 2000 to 2007, where we roughly doubled total private credit in seven and a half years, and as a result, we had the Great Recession, which was no fun for anyone. Nothing like that is in the books this time. Private credit has been growing for the last 15 years at something much more along the lines of the century average. Normally, private credit only drops or goes negative in times of recession, because banks and stock holders generally restrict their play of capital in the system in a time when everything is over leveraged. We're not seeing that today.

Instead, what we're seeing is more government activity. Normally, the balance between these two factors is private credit is in the driver's seat except in times of recession, which is when the government steps in. And if you add the two together, you get actually a pretty even line. What has changed in calendar year 20203 is that relationship broke. And for the first time in modern American history, total new government spending, not just the deficit, but the increase in the deficit year on year, that number surpassed the total increase in private spending for the first time in American history outside of a recession. Now, this is only one data point. I don't want to overplay this, but for the first time in American history, the government has become the primary driver of economic growth in the country. This is not a healthy position to be yet.

This is a very Zimbabwe, South African, Venezuelan sort of approach to economic management. Now, there's still trillions of dollars of private investment. There's still tens of trillions of dollars of private investment. private economic activity. This is not something I'm overly stressing about right now. But if the numbers from last year are repeated this year, and based on the Biden administration's spending, it looks like they will be. And then next year, which Biden has indicated they probably will be, or if Trump wins, it absolutely indicated he plans to expand the government, then we're in a different era of it. And if you remove the private sector as the primary driver of American economic

a growth. Yes, you might get a little bit more populist support for the government or a particular candidate, but it comes at the cost of long-term dynamism in size of the American economy, which has served the United States very well these last 200 years. Now, the degree of populism was always going to be in the cars, not just because of the politics, but because of our demographics. The baby boomers, the largest generation ever. They're past halfway through retirement. They're going to be sucking at the government teeth for Medicare and Medicaid and Social Security until the day they die. So government outlays have to go up, which means deficit spending has to go up. And there is no appetite on either side of the American political aisle to do anything about that because it's not a

boat winner. And if this sticks, we will have a problem down the line. This is a much bigger problem than the federal deficit because this changes the complexion of the American economy. and how we can adapt to shifts in the future, because the government just isn't nearly as efficient. It can be quick, but it's not efficient. And ultimately, the efficient use of capital is half of the American story. So you're looking for something to worry about.

I'd worry about that. But in the meantime, government spending is stimulatory, and that suggests that for this calendar year and next, we're not looking at a recession. So, you know, take your good news where you can.