Is the US in recession?

The prospects for US debt funding hang on the state of its economy. Official statistics paint a mixed picture, leaning towards the positive. But what is the real position?

Last Thursday, Adam Taggart (adamtaggart.substack.com) interviewed Joanne Hsu who produces the University of Michigan’s prestigious Surveys of Consumers. Hsu, and I quote from Adam’s Substack post, “ …reports that 2025 has seen a fast erosion of confidence across almost every dimension. People are super worried right now.” This survey is due to be published today (Wednesday), suggesting that official statistics don’t capture current economic conditions.

The US is not alone. Government spending is rising throughout the G7 and either citizens pay for it in higher taxes or currency debasement. Either way consumers are being squeezed, and their spending is suffering. But in their ivory towers, the governing establishments and their financial epigones seem divorced from this reality. They take the simplistic view, that GDP is a measure of economic activity and adjusted for inflation is the principal measure of the success or otherwise of government economic policy.

There are two faults with this view, going some way to explaining the dichotomy between surveys and statistics. The first is that GDP is only the amount of credit recorded in the statistic, and an expansion of private sector credit is not necessarily productive, particularly when it backs excessive consumer borrowing. Nor can it be a measure of economic progress, which surely is what people have in mind when they talk about growth.

Progress of any sort is immeasurable. Furthermore, over time in western economies there has been increased spending at the cost of savings and a shift from domestic production of goods to services. Capturing these changes is a problem with all one-size-fits-all statistics, even if they were accurate in their collection which is almost never the case.

The second fault is to lump government spending in with private sector activity. Government spending is not consumer driven, like private sector demand. It is imposed. And it is paid for by taxation, detracting from private sector activity from which economic progress and national wealth spring. This is why a low tax economy advances considerably faster than a high tax economy, improving the living standards and overall wealth of a population.

Subsidiary to that second error is a budget deficit, in practice being unfunded government spending. Before Keynes published his General Theory in 1936, there was no economic justification for government deficit spending. Governments understood that their interventions in a slump should be strictly limited. But Keynes argued that when the business cycle turned down there was a role for the state to stimulate an economy by deficit spending, so long as it balanced out over the cycle.

It is the foundation stone of today’s macroeconomics, replacing the classical theory developed by a mixture of astute thinkers and practical experience since Richard Cantillion wrote his Essai sur la Nature du Commerce en Général in about 1730. Macroeconomics replaced hands-off government policy with socialising intervention. Very crudely, an expansion of unfunded government spending might save some viable businesses from going bust in a slump, but all too often it’s more about saving unviable or overindebted businesses for political reasons.

We should pass on that wider argument, simply noting that far from being a temporary tool of economic stimulus deficits have become a permanent reality. They cannot be regarded as economically stimulating any more, but they leave a legacy of unsustainable debt.

The US’s debt pile would not have grown this much if it wasn’t for the enduring belief that US Treasury debt is the most secure form of credit in the post-Bretton Woods currency system. The conviction that it would always be demanded even in a crisis has encouraged US government profligacy. Consequently, foreign ownership of US dollars and dollar-denominated assets has increased to staggering levels. The table below breaks down where this $39.6 trillion is allocated.