Cracks in the Economy: Is the Levee About to Break?

[Editor’s Note: This was written before the stock market began to fall.]

By Dr. Christopher Miller

The U.S. economy stands on the precipice of a major downturn, and yet, Washington remains locked in a partisan death spiral. Democrats are too preoccupied with resisting Republican attacks, while the GOP is focused on dismantling the opposition rather than governing. This political dysfunction is coming at a time when the economy is showing undeniable warning signs—signs that neither party seems willing or prepared to address.

Stock Market: A Bubble Waiting to Burst
The stock market, riding high on a wave of speculative investment, remains dangerously overvalued. The S&P 500 has been soaring despite economic fundamentals suggesting otherwise. Analysts at Morgan Stanley and Bank of America have warned that price-to-earnings ratios have stretched beyond sustainable levels. Jeremy Grantham, co-founder of GMO, recently stated, “This is one of the great bubbles of financial history—right alongside 1929 and 2000.” History tells us that when markets reach this level of euphoria, a correction, or worse, a crash, isn’t a question of if, but when.

Trade War and Economic Uncertainty
Amid economic fragility, the threat of an unnecessary trade war looms large. Trump has openly flirted with the idea of reigniting tariffs should he return to office, despite evidence that previous tariffs did little to benefit American industry. In fact, a 2019 study from the Federal Reserve found that the tariffs imposed under Trump’s first term resulted in “higher prices for consumers and a decline in U.S. manufacturing employment.”

Meanwhile, the Biden administration, rather than dismantling these tariffs, has let many of them remain, offering a policy of half-measures that do little to restore certainty. This ongoing uncertainty around trade will only serve to exacerbate market volatility.

Mass Layoffs in the Federal Government
Congressional gridlock and the debt ceiling debacle have left federal agencies bracing for budget cuts and mass layoffs. Should these layoffs occur, the ripple effects will hit the broader economy, leading to contraction in key sectors reliant on government contracts and spending. The private sector, which benefits from government-funded infrastructure projects and research grants, will feel the sting as well. According to the Center for American Progress, “federal employment cutbacks could eliminate hundreds of thousands of jobs indirectly tied to government spending.”

Sticky Inflation and Consumer Strain
The Federal Reserve’s aggressive rate hikes have yet to fully cool inflation, which remains stubbornly high. Food, rent, and energy prices continue to strain household budgets, with inflation hovering above the Fed’s 2% target. The New York Federal Reserve’s recent consumer credit report showed alarming trends:

**Missed mortgage payments are at their highest level since 2009.

**Credit card debt has surpassed $1 trillion, with delinquencies rising sharply.

**Rent nonpayment rates are climbing, with eviction filings up nearly 50% compared to pre-pandemic levels, according to the Eviction Lab at Princeton University.

These are the early cracks in the economic foundation. Historically, when Americans become overleveraged and default rates rise, a financial crisis follows.

Who Is Paying Attention?
In this moment of economic fragility, the question is: Who is awake to the storm brewing on the horizon? Trump is too defensive to handle a financial crisis—his go-to response is blaming the Fed or foreign actors rather than proposing substantive solutions. Biden and the Democrats have also been largely absent from discussions on market instability, instead focusing on climate initiatives and social programs while leaving economic risk management to the Fed.

There is no Paul Volcker or Ben Bernanke figure currently shaping economic policy with a steady hand. Instead, policymakers are treating the economy like a spectator sport—watching from the sidelines rather than preparing for impact.

Conclusion: The Levee Won’t Hold Without Action
The early warning signs are here. The market is inflated, debt levels are unsustainable, government instability is mounting, and inflation remains sticky. The only question is whether the coming economic storm will be a mild correction or a full-blown disaster. With neither party taking the risk seriously, the levee may break before Washington even realizes it’s raining.

This article originally appeared in moderatereport.com.