US Economy 'Worse' off Than when Biden Departed

US Economy 'worse' off than when Biden departed

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The U.S. economy is currently "worse" than when former President Joe Biden departed office last year, economic and political commentator Peter Schiff asserted, warning that the nation faces the "threat" of a Democratic socialist winning the White House during the 2028 presidential election.

President Donald Trump is "unpopular because the economy is worse now than it was when Biden left office," Schiff, chief economist and global strategist of Euro Pacific Asset Management and host of "The Peter Schiff Show" podcast, told Fox News Digital during an interview on Wednesday.

"So Trump ran promising to fix what Biden broke," but then "broke it more," Schiff asserted.

"He said that prices will come down on day one as soon as I become president," Schiff said, adding "inflation is a bigger problem now than it was when Trump was elected."

While Republicans currently hold majorities in both chambers of Congress, Schiff said that he thinks the GOP will lose many House seats in the midterm elections this year and that they "have a real chance of losing the Senate too."

Schiff said he expects the party to lose control of the Senate in 2028 if they haven't lost their USA majority in the chamber before then and that he thinks the GOP will lose the presidency in 2028 as well. He warned that "the real threat" looming over the 2028 White House contest is the possibility of "a real USA Democratic socialist" getting elected as president.

He argued that investors should be "diversifying into stocks in international markets" to protect against "a weak U.S. dollar."

Schiff said "stagflation" will "be a big problem for the U.S. economy for years to come," warning of a "crisis" pertaining to "sovereign debt" as well as "currency."

"But I want people to understand that this is not about a failure of capitalism. It's about a failure to have capitalism. It's a failure of central planning, central government, central banking. It's big government that interfered with the free market that created the problem. And the solutions that are gonna be proposed by government to increase the size of government, to have even more regulation, to have even more taxes, they will just make all the problems worse," Schiff said.

The U.S. national debt has surpassed $40 trillion, according to the U.S. Treasury.

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It’s been a long hot summer just about everywhere, but USA markets seem to think there’s been some cooling across the US economy. Things felt uncomfortably warm a few weeks ago, as the Iran conflict simmered and Kevin Warsh dissembled. A few chilled-out inflation, employment and retail-sales prints later, the odds of a September rate hike are slipping, and equity prices are once more off to the races. Could it be the case that demand is slackening? Could this create USA conditions for a Kevin cut? Never say never, but the totality of the data seems to suggest we’re experiencing structural shifts across the economy rather than any cyclical weakness. Labour supply is falling Start with the labour market. The latest jobs report erased just over 100,000 jobs from the hiring numbers announced in May and June and showed an absolute decline in employment in July. Employment growth has now fallen for four consecutive months, which certainly seems like a disconcerting demand signal. Is it, though? Other indicators of labour market slack look pretty good. For the past two years,

the number of USA unemployed USA workers per job opening has been basically flat at a level around 1.0, a strong number relative to the pre-pandemic norm. Claims for unemployment insurance remain very flat and very low. Crucially, reduced hiring looks like a supply-side issue rather than a demand-side one. America’s civilian labour force has been shrinking for months. Relative to last July, the labour force is 1.3mn workers smaller while the level of employment is more than 300,000 workers higher. It certainly looks concerning that payrolls were only 60,000 jobs larger in July than in April, but on the other hand the labour force was 900,000 workers smaller. This is America’s economic reality now, given demographic change and the ongoing deportation of roughly 50,000 people per month. And in that reality, employment increases like those we saw in March and April are honestly more than the economy can handle.

USA Consumption is no longer the main driver of growth Next, turn to the USA consumer. Last week, we learnt that retail sales declined outright in July, in nominal terms. This was only partly about falling petrol prices, and the drop reflected a second consecutive month of deceleration. Surely, this is evidence in favour of weakening demand? Maybe it isn’t. Consumer spending has been the overwhelming driver of economic growth since the pandemic, responsible for something like three quarters of incremental output. But over the past two years, the structure of economic growth has shifted away from such heavy reliance on the consumer. In fact, in recent quarters the contribution to USA GDP growth from AI-adjacent investment has rivalled that from personal USA consumption.

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Nonetheless, we might worry that weaker consumption growth leaves the economy more dependent on an investment boom of uncertain durability, and thus more vulnerable to a sharp slowdown. But before we draw this conclusion, we need to understand why consumption is contributing less to growth. If consumers were cutting back amid rising unemployment, that would clearly be bad. Unemployment isn’t rising, though. Something else is. Interest rates! Since early 2022, when central banks began yanking up policy rates to combat high inflation, personal consumption’s contribution to growth has declined by about 50bps. This has occurred alongside a decline in household debt as a share of GDP, from nearly 63 per cent to under 58 per cent. Federal government borrowing offset this decline exactly, rising from 103 per cent of GDP in 2022 to 108 per cent today. In the first half of 2026, corporate borrowing (which initially fell as a share of GDP as rates rose) also began to climb again, as the AI complex stuck its enormous straws into the credit-market milkshake. So sure, consumers are watching their spending closely, as they have done since 2022. More importantly, the cost to finance purchases keeps rising. In other words, households are being outbid for scarce capital. Personal consumption is increasingly being crowded out by

USA government consumption and massive AI-related investment, through the mechanism of higher interest rates. That should mean that if and as borrowing in those other sectors slows, interest rates will come down, unleashing latent household demand.* The big debt crunch So where does this leave us? The economy appears to be more constrained by supply (of workers, inputs to AI, and loanable savings) than by demand. The pressure is showing up in higher interest rates. Rates are up a lot; you may have noticed. Since the start of the war, yields on 10-year and 30-year US Treasury bonds are up close to 70bps and 60bps, respectively, unless they’ve gone up even more since I typed this. Inflation isn’t really the big contributor here. Relative to the immediate prewar period, break-even inflation rates are basically unchanged. I think you can see a Warsh factor in the five-year, five-year forward break-even inflation rate, which is up about 10bps since his first Fed meeting. That should discourage Warsh from concluding that he’s been vindicated by recent data.

Is this the market doing Warsh’s work for him, as the Fed chair suggested in his July press conference? It’s hard to give that idea too much credence. As the chart shows, higher interest rates are not translating into falling inflation expectations, at least not since Warsh took over. Meanwhile, equity-market indices are sitting at or near all-time highs. And despite higher interest rates, financial conditions have actually loosened in recent months.

All things considered, it seems premature to be forecasting a break in the heat. And if the Fed doesn’t work to bring demand into better balance with supply, then the temperatures will keep rising.

What with a 250th birthday, Taylor Swift's wedding and the football World Cup, Americans could be forgiven for taking their eye off the ball this summer.

But signs of economic trouble have been building. This week they hit the headlines when US national debt passed the $40tn mark, raising concerns both at home and abroad.

How did the we get here?

It took almost 200 years for America's national debt reach $1tn for the first time, says Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

That milestone back in 1981 was treated as a wake-up call. "At that time, President [Ronald] Reagan told the nation in a televised address, 'If we as a nation needed a warning, let that be it'," she said.

"Jumping to America's 250th year, we are spending more than that just on interest payments on our debt."

Hitting the $40tn milestone was expected - driven by public spending surges under both the Donald Trump and Joe Biden administrations - but it marks another line in the sand.

Ballooning costs for social programs and other spending have outstripped revenues undermined by tax cuts. Responses to crises such as the 2008 financial crisis and the Covid pandemic have led to increased borrowing.

Add to that higher interest rates in response to recent inflation shocks and the picture begins to look grim.

How bad is it?

At the beginning of Trump's first presidential term in 2016, US national debt stood at just under $20tn. It has doubled in the decade since.

According to the Congress Joint Economic Committee, the figure is rising by about $90,000 every second, or $7.8bn a day.

"What's very different now compared to a decade ago is the level of interest rates," says Eric Swanson, professor of economics at University of California and former senior economist at the Federal Reserve.

"Long-term interest rates in the US are at multi-decade highs - part of that is concerns about inflation, but part of that is concerns about the extreme levels of US government borrowing."

The bond market is demanding higher returns with investors wary of the scale of the US's debt, but also because tech firms borrowing eye-watering sums to spend on AI are competing with the government for investors' cash.

"What happens when interest rates go up is that the funding of the deficit becomes more expensive," says economist Mohamed A. El-Erian, a professor at the Wharton School.

The US is nearing its $41.1tn debt ceiling, with debt forecast to climb to about $64tn by 2036, according to the Congressional Budget Office.But the situation is not yet critical, say economists. The US's position as the world's largest economy and the dollar being the world's reserve currency gives the US a "much longer runway to fiscally misbehave" than other countries, El-Erian says."We're getting to a point where it's a flashing yellow light. It's not a flashing red light," he says.Swanson says other countries have had similar, or higher debt levels.While US national debt is 126% compared with the size of the economy, it's lower than other G7 nations Japan and Italy.But investor appetite in lending the US government money through buying bonds is "diminishing", Swanson warns, creating a "vicious" cycle, requiring the government to offer ever higher returns to keep investors purchasing its debt.

And higher US borrowing costs inevitably spill over, raising other countries' borrowing costs too. "What happens in the US never stays in the US," says El-Erian.

Households will likely face higher rates for mortgages, auto loans and credit cards as a result of the current situation, with those on lower incomes hit hardest, El-Erian says.

There's also a secondary effect on consumers as higher borrowing costs for firms is often passed through to them via higher prices.

So the impact of the debt "finds its way to the pocketbooks of people one way or another," says MacGuineas.

That matters because economic growth means more tax revenue, which can pay for spending, whether that's on government programmes or interest payments. With enough growth, the debt problem is eased, points out El-Erian.

But without sufficient growth the US might have to look at other options. They could include reforming the tax system and public spending, or austerity. Debt restructuring is another option.

The strategy so far employed has been a kind of financial engineering, with the Treasury department on Wednesday stepping in to buy back government debt, boosting demand for bonds and lowering borrowing rates.

But the impact was shortlived with long-term borrowing costs bouncing back up a day later.

With the mid-term elections approaching, the White House will want to be seen to be delivering on the economy. Affordability is the top concern among voters. But the other options are no more appealing and El-Erian is doubtful the government is ready to look at other measures.

"I don't see anything happening that is going to significantly lower the deficit over the next two to three years. If you look at the political talk, it's about tax cuts."

Posted on 2026/08/21 08:33 AM