But the fresh-faced expert isn’t afraid to step away from the pack if it means pushing presidential hopefuls for some answers. Gomes admits he’s “probably” more worried than his colleagues about government debt, but refuses to stay silent on a broiling issue he believes will throw the global economy into disarray.
Gomes predicts America’s $34 trillion debt burden may upset the world’s financial markets as early as next year—should a president-elect announce a raft of expensive policies.
And remember the UK’s mortgage meltdown following a disastrous premiership under Prime Minister Liz Truss? That’s on the cards as well, as Gomes said rates could spiral to 7% “or higher” if the topic is swept under the rug by Washington.
The warning isn’t chiming alone. Since the beginning of the year an increasing cacophony of alarm bells has been ringing out: JPMorgan Chase CEO Jamie Dimon says there will be a market “rebellion” over the issue while Bank of America CEO Brian Moynihan says it’s time to stop “admiring” the problem and instead do something about it.
The concern regarding America’s mounting debt is not confined to Wall Street alone. Nassim Taleb, renowned author of “The Black Swan,” warns that the economy is caught in a “death spiral,” while Federal Reserve Chairman Jerome Powell emphasizes the necessity of engaging in an “adult conversation” about fiscal responsibility.
Despite these dire warnings, it’s unlikely that presidential candidates will take the stage with promises to tackle the debt-to-GDP ratio and bring it down to a more sustainable level. Experts currently project the ratio to soar to 190% by 2050.
Joao Gomes, reflecting on this situation, expressed his wish that the debt issue would be a focal point in the political discourse. However, he doubts that either party has the incentive to prioritize it. He believes that amidst discussions about tax policies and government programs, it’s crucial to consider whether the country can afford such promises.
Gomes observes that the current moment in history presents a clear opportunity to evaluate choices, assess feasibility, and compare competing plans. Yet, he suspects that neither political party is inclined to engage in such a discussion, and the issue may be swept under the rug instead.
Indeed, the ballooning deficits witnessed under both Presidents Trump and Biden represent a significant challenge, with Bank of America Research’s Flow Show team highlighting that these deficits are the largest since Franklin D. Roosevelt’s tenure in the 1930s. Both Trump and Biden grappled with economic crises precipitated by a global pandemic, reminiscent of FDR’s response to the Great Depression and the subsequent American involvement in World War II.
Joao Gomes underscores the inevitability of addressing this issue, regardless of which party shoulders the blame for its creation. He asserts, “Toward the latter part of the decade, we will have to deal with this.” Gomes warns that failure to address the burgeoning debt could spell trouble for the next administration, particularly if it introduces plans for significant tax cuts or another substantial fiscal stimulus. Such actions could trigger market backlash, leading to a spike in interest rates and potentially culminating in a crisis as early as 2025. He expresses confidence that by the end of the decade, one way or another, the nation will confront this challenge head-on.
Warning signs
As with any financial crisis, there are warning signs that indicate when the national debt becomes unsustainable—though these realizations may not occur simultaneously for consumers and markets.
Joao Gomes highlights that at a policy level, the tipping point will be reached when the entities purchasing debt deem the current model unsustainable. This could be triggered by early policies announced by the next administration, causing concern among investors faced with a hefty price tag.
“The most important thing about debt for people to keep in mind is you need somebody to buy it,” Gomes explains. “We used to be able to count on China, Japanese investors, the Fed to [buy the debt]. All those players are slowly going away and are actually now selling.”
The growing concern about America’s ability to meet its debt obligations is shared by nations worldwide that hold a significant portion of these funds. Japan, China, the U.K., Luxembourg, and Canada are among the nations most exposed to America’s debt, collectively owning a substantial $7.6 trillion chunk as of November 2023.
Gomes warns that if these investors, who have previously been willing to buy government debt, begin to doubt its value as an investment, they may demand higher interest rates, potentially leading to a crisis.
In such a scenario, Gomes predicts a situation similar to the Liz Truss debacle in the UK. In 2022, Truss supported a mini-budget featuring significant fiscal stimulus, which unsettled the financial markets to the extent that the pound plummeted to its lowest value against the dollar in history. Truss was swiftly removed from office, but the legacy of her policies lingered: mortgage rates in Britain increased by approximately 2% in a matter of weeks.
Following this trend, Gomes warns that consumers will start feeling the impact, particularly in mortgage rates. Once mortgage rates exceed 7%, consumers will likely demand change. Gomes emphasizes that if policymakers fail to take action now, consumers could face these rates again, “if not worse.”
Avoiding exposure
The prospect of averting a debt crisis is accompanied by both hope and challenges. While there are potential solutions, the inevitability of government debt becoming a significant economic issue looms large—and once it arrives, it will be challenging to ignore.
To put the scale of the debt burden into perspective, current estimates suggest that each individual would need to shoulder over $100,000 of government debt.
One apparent route to addressing the issue is by boosting the GDP, thereby lowering the debt-to-GDP ratio. However, achieving rapid economic growth is no easy feat, and many doubt America’s ability to accomplish this.
The alternative solution, albeit unpopular, is cutting spending. Gomes suggests that implementing “responsible budget proposals” may suffice to appease the markets, but imposing substantial cuts on certain programs risks sparking social unrest—a scenario nobody wants to entertain.
If global markets rebel and plunge the world’s largest economy into turmoil, the repercussions will reverberate across borders. Unfortunately, Gomes sees little chance of avoiding such a scenario. A government facing funding difficulties and struggling to secure investors for its debt may have no choice but to raise taxes—a move that will impact individuals worldwide.
In such a scenario, exposure to mortgages, loans, or any other financial instruments becomes challenging to avoid. The consequences will be detrimental for the country as a whole, with individuals across the globe bearing the brunt of the fallout.