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- The growing mountain of US debt is a “boiling frog” for the US economy, warned JPMorgan.
- According to an estimate by the Congressional Budget Office, government spending will exceed revenues in the early 2030s.
- However, the U.S. is not likely to cut discretionary spending any time soon, the bank said.
The US's $34 trillion debt mountain could be a “boiling frog” phenomenon for the economy as higher deficits and rising debt service costs could easily become unsustainable, JPMorgan warned.
In a boiling frog situation, people fail to respond to a potential problem that worsens over time, making it worse until it eventually boils over. A frog dropped into boiling water may jump out, but if the water slowly boils, it will be too late by the time it realizes it is being boiled.
The age-old metaphor may well apply to America's debt situation, the bank said in its 2024 outlook. It's an issue that has worried economists for years, and calls for something to change are growing louder as the Gov continues to take out loans at record levels.
The national debt hit a new $34 trillion this month, reflecting lawmakers raising the U.S. debt ceiling last year to prevent a default. According to the Congressional Budget Office, the debt situation will only get worse in the coming years. The Congressional Budget Office estimates that U.S. social spending, mandatory spending, and net interest payments will exceed total government revenues by the early 2030s.
“The problem for the US is the starting point; Each round of fiscal stimulus brings the U.S. one step closer to debt unsustainability,” said JPMorgan strategist Michael Cembalest. “However, we are used to the U.S. government’s finances deteriorating with limited consequences for investors, and one day that may change (the boiling frog analogy),” Cembalest added.
Cembalest predicted that pressure from markets and ratings agencies would force the government to make “significant changes” to its tax and entitlement programs, such as introducing new wealth taxes.
However, it seems unlikely that the US will significantly reduce its discretionary spending. It's an issue lawmakers have been debating for months, as Congress has yet to approve a budget for the fiscal year.
“The U.S. is out of control on this issue,” Cembalest said of possible cuts to discretionary spending.
JPMorgan strategists have previously predicted a “boiling frog” recession in 2023 and 2024, in which aggressive central bank tightening would lead to a global synchronized recession. Cembalest warned that the risk of a recession still exists this year, although he noted that any coming downturn would likely be mild.
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