Expert Voices Raise Concerns Over Escalating US Government Debt

The warnings about the risks of record US government debt are becoming more prominent. In the last day, Jamie Dimon, CEO of JPMorgan (JPM), and Ray Dalio, the founder of the world's largest hedge fund, have both expressed worries about the amount of debt in America.

Jamie Dimon, in an interview with Sky News on Wednesday, expressed his hope that the US government would prioritize reducing its budget deficit. He emphasized the importance of addressing the deficit, which is the difference between government spending and tax revenue each year, before financial markets intervene. Dimon stated that delaying action on the deficit could lead to a more challenging and uncomfortable situation in the future.

Yawning deficits are contributing to the increase in US government debt as the Treasury needs to issue more bonds to cover the shortfall.

Dalio expressed his concern about the decreasing interest from investors in government bonds, specifically Treasuries. He mentioned his worry about the weakening demand compared to the supply, especially from foreign buyers who are uneasy about the US debt situation and the potential imposition of sanctions (excluding Russia), in an interview with the Financial Times.

If investors start to feel cautious, they might ask for higher returns, also known as yields, in order to invest in Treasuries. This is a risk that has been pointed out by both the International Monetary Fund (IMF) and the Congressional Budget Office (CBO). As a result, this could lead to increased borrowing costs throughout the entire US economy.

Ray Dalio, the billionaire founder of Bridgewater Associates, during a Bloomberg Television interview in New York in April 2024.

Ray Dalio, the billionaire founder of Bridgewater Associates, during a Bloomberg Television interview in New York in April 2024.

Victor J. Blue/Bloomberg/Getty Images

Dimon and Dalio's remarks show that many people are worried about the overall risks associated with the large amount of debt owed by the US government. According to the Treasury Department, this debt stands at $34.6 trillion, surpassing the size of the US economy.

Dimon admitted that government spending fueled by debt, such as the pandemic relief funds, has played a role in driving strong growth in the largest economy in the world.

"During and after Covid, America has spent a significant amount of money. Currently, our deficit stands at 6%, which is quite high, but it is necessary for driving growth," he mentioned.

This increase in spending has also led to a rise in consumer price inflation.

"Dimon commented that any country can borrow money to stimulate growth, but it may not always result in sustainable growth. He emphasized the importance for America to focus more on its fiscal deficit issues, stating that it is crucial not just for the country but also for the world."

A statue of Alexander Hamilton is seen outside the U.S. Department of Treasury building as they joined other government financial institutions to bail out Silicon Valley Bank's account holders after it collapsed on March 13, 2023 in Washington, DC. U.S.

A statue of Alexander Hamilton stands outside the U.S. Department of Treasury building in Washington, DC. It is located among other government financial institutions. They came together to help Silicon Valley Bank's account holders when it collapsed on March 13, 2023.

Image Source: Chip Somodevilla/Getty Images

Related article

America’s debt problem is storing up trouble for the rest of the world

Last month, the IMF expressed concern about the high and growing level of US government debt, stating that it could lead to an increase in borrowing costs worldwide and pose a threat to global financial stability.

Shortly after, the head of the CBO, an independent fiscal watchdog for the US Congress, delivered a more direct warning. He mentioned that the United States was at risk of facing a bond market crisis similar to what the United Kingdom experienced during the tenure of former Prime Minister Liz Truss.

Investors recently showed disapproval of the UK government's proposal to increase spending and cut taxes by borrowing more money. This caused a decline in the value of UK government bonds.

According to the IMF, there are signs that investors are seeking greater returns to invest in US Treasuries. This is partly due to their worries about the increasing debt levels.

The federal government has spent $855 billion more than it collected in the 2024 fiscal year, which started on October 1, according to the Treasury Department.

This has led to an increase in debt servicing costs due to higher official interest rates, resulting in less funds available for public services. In the previous fiscal year, the US government spent more on servicing its debt than it did on housing, transportation, and higher education combined, as reported by the Committee for a Responsible Federal Budget, a non-profit organization.

Editor's P/S:

The article highlights the growing concerns surrounding the unsustainable levels of US government debt. Prominent figures like Jamie Dimon and Ray Dalio have expressed alarm over the potential risks, including higher borrowing costs, inflation, and a potential bond market crisis. The article delves into the impact of yawning deficits, waning investor interest in Treasuries, and the need for fiscal discipline.

While government spending may have played a role in stimulating growth, it has also contributed to a rise in inflation and a growing burden of debt servicing costs. The article underscores the importance of addressing the deficit before markets intervene, as inaction could lead to more challenging economic conditions. It also emphasizes the global implications of US debt, as an increase in borrowing costs in the US could impact financial stability worldwide. The warnings from Dimon, Dalio, and other experts serve as a reminder of the urgent need for fiscal responsibility to ensure long-term economic health and mitigate the potential risks associated with excessive government debt.