Expanding on the cautionary remarks made by Wharton professor Joao Gomes, it becomes evident that the United States faces a critical juncture in its fiscal policy, with implications that could reverberate through global financial markets. Gomes underscores the urgency for the US to recalibrate its fiscal trajectory to avoid potential market chaos in 2025. Drawing parallels to the UK’s fiscal crisis in 2022, triggered by a stimulus-heavy budget proposal, Gomes raises a red flag regarding the possibility of a similar scenario unfolding in the US next year. He warns that if the US were to announce an unsustainable fiscal path, it could trigger adverse market reactions, such as surging domestic yields, mortgage rates, and currency depreciation.
The warning gains further weight when considering the precedent set by the Treasury bond collapse in November 2023, which propelled yields to 5% levels. This collapse, attributed to mounting US debt and an oversupply of Treasury bonds, served as a wake-up call to investors about the fragility of the US fiscal situation. Currently, the US national debt stands at an unprecedented $34 trillion, fueled by extensive spending and escalating debt-servicing costs. Bank of America’s estimates, indicating that the US is accumulating an additional $1 trillion in debt every 100 days, underscore the urgency of the situation.
Furthermore, in an environment of rising interest rates, there looms an elevated risk of the US defaulting on its debt within this century. Referencing a Penn Wharton Budget Model study, Gomes highlights the narrow 20-year window the US has to address this issue before tax hikes or spending cuts become insufficient remedies. Consequently, Gomes anticipates a heated debate over the fate of the 2017 tax cuts next year, especially since the program is set to expire unless Congress elects to extend it. Initially introduced during the Trump Administration, these tax cuts were aimed at alleviating the tax burdens on corporations.
However, resolving this fiscal conundrum requires bipartisan cooperation and political will, as emphasized by Responsible Federal Budget president Maya MacGuineas. While tax increases are likely inevitable, both Democrats and Republicans must be willing to make substantial cuts to spending programs to put the US on a sustainable fiscal path. The outcome of the presidential election in November will likely influence the resolution of this issue, as neither candidate has outlined specific plans to address the fiscal challenge.
Gomes’ concerns about the magnitude of US borrowing are echoed by prominent figures in the financial industry, including Jamie Dimon and Ken Griffin, who have also sounded the alarm about an impending crisis. As such, the need for decisive action to address the US fiscal trajectory becomes increasingly urgent to avoid potential market turmoil and safeguard economic stability.