Jamie Dimon and Ray Dalio Voice Concerns Over US Debt

Concerns Grow Over Record US Government Debt

by Faruk Imamovic
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Jamie Dimon and Ray Dalio Voice Concerns Over US Debt
© Getty Images/Win McNamee

In the past 24 hours, JPMorgan CEO Jamie Dimon and Ray Dalio, founder of the world’s biggest hedge fund, have voiced their concerns about America’s mounting debt.

Dimon, in an interview with Sky News on Wednesday, emphasized the need for the US government to address its budget deficit — the gap between annual spending and tax revenues — before financial markets force a reckoning. “The sooner we focus on it, the better,” Dimon stated. “At one point, it will cause a problem… the problem will be caused by the market, and then you’ll be forced to deal with it and probably in a far more uncomfortable way than if you dealt with it to start.”

Economic Implications of Rising Debt

Budget deficits add to the overall US government debt because they necessitate more bond issuance by the Treasury to cover the shortfall. Dalio expressed his anxiety about declining investor interest in these government bonds, known as Treasuries. “I’m… concerned about the softening demand to meet supply, particularly from international buyers worried about the US debt picture and possible sanctions (against countries other than Russia),” he told the Financial Times.

If investors become hesitant, they might demand higher returns — or yields — to hold Treasuries, a risk highlighted by both the International Monetary Fund (IMF) and the Congressional Budget Office (CBO). Higher yields could lead to increased borrowing costs across the US economy.

Dimon and Dalio’s comments reflect widespread apprehension about the broader risks of the immense US government debt, which the Treasury Department estimates at $34.6 trillion, surpassing the size of the US economy. Dimon acknowledged that debt-fueled government spending, including pandemic stimulus measures, had contributed to robust economic growth. “America spent a lot of money during Covid and after Covid. Our deficit (is at) 6% now, that’s a lot, but obviously that drives growth,” he said.

However, this spending spree has also driven up consumer price inflation. “Any country can borrow money and drive some growth but it may not always lead to good growth, so I think America should be quite aware that we’ve got to focus on our fiscal deficit issues a little bit more and that is important for the world,” Dimon noted.

Last month, the IMF warned that the high and rising level of US government debt could drive up borrowing costs globally and undermine financial stability. This warning came after the CBO’s head cautioned that the United States risked a bond market crisis similar to the one that engulfed the United Kingdom under former Prime Minister Liz Truss. In that instance, investors rejected the UK government’s plan to finance extra spending and tax cuts by borrowing more, leading to a selloff in UK government bonds.

There is already evidence that investors are demanding higher returns to hold US Treasuries, according to the IMF, partly due to concerns about the debt trajectory. The Treasury Department reports that the federal government has spent $855 billion more than it has collected so far in the 2024 fiscal year, which began on October 1. Debt servicing costs have soared due to higher official interest rates, leaving less money for public services. In fiscal year 2023, the US government spent more on debt servicing than on housing, transport, and higher education combined, according to the Committee for a Responsible Federal Budget, a non-profit organization.

Global Impact and Financial Stability

The United States is not alone in living increasingly beyond its means. The European Central Bank expects government debt in the 20 countries using the euro to remain higher than before the pandemic, making European governments “more vulnerable to adverse shocks,” such as increased defense spending due to geopolitical tensions, the ECB said in a report.

The IMF has warned that the high and rising level of US government debt risks driving up borrowing costs around the world and undermining global financial stability. On Wednesday, the IMF noted that increased government spending, growing public debt, and elevated interest rates in the United States had led to high and volatile yields on Treasuries, raising the risk of higher rates elsewhere.

Its analysis showed that a spike in yields on long-term US government bonds is associated with similar increases in government bond yields in other advanced and developing economies, with the latter also experiencing exchange rate turbulence. “Loose fiscal policy in the United States exerts upward pressure on global interest rates and the dollar,” Vitor Gaspar, director of the IMF’s fiscal affairs department, told reporters. “It pushes up funding costs in the rest of the world, thereby exacerbating existing fragilities and risks.”

World Bank Building in Washington D.C.
World Bank Building in Washington D.C.© Getty Images/Michael Smith
 

Rising Costs and Calls for Restraint

This week, the IMF raised alarms about US fiscal policy for the second time. On Tuesday, it stated that public spending and borrowing were contributing to an overheating US economy, complicating the Federal Reserve’s efforts to control inflation. Higher interest rates make it more costly for households and businesses to service their loans, which can lead to defaults and increased financial instability.

The IMF’s warning adds to concerns about the broader consequences of ballooning US government debt, now approaching $35 trillion according to the Treasury Department. On Tuesday, Treasury yields hit new highs for the year after Fed Chair Jerome Powell indicated that official interest rates could remain high for an extended period due to persistent inflation.

US consumer prices have been supported by debt-fueled government spending, including pandemic stimulus measures, which have boosted households’ spending power and accelerated economic growth. Loose US fiscal policy, in addition to increasing the country’s already significant debt burden, could make it harder to achieve the Fed’s inflation target, the IMF said.

Pressures on US Government Finances

The IMF is also concerned that if US inflation remains high, it could dash investors’ hopes for interest rate cuts, leading to a selloff of financial assets, including stocks and government bonds worldwide. A resulting drop in bond prices would increase their yields. “Under this scenario, financial conditions would broadly tighten,” Tobias Adrian, director of the IMF’s monetary and capital markets department, wrote in a blog accompanying the agency’s Global Financial Stability Report. “Globally, borrowers would find it harder to service debt, given higher bond yields,” he added.

Gaspar highlighted that the problem could be especially severe in low-income countries, where constraints on public finances are particularly tight. “High and volatile interest rates make the situation worse,” he said.

Future of US Debt

There are significant risks for the United States itself. According to the IMF, investors are demanding higher returns to hold US Treasuries, reflecting their concerns over sustained inflation, the uncertain future path of monetary policy, and additional debt issuance. “The risk premium on (US) government debt has increased in recent times and may remain high in a context in which debt levels are elevated,” the agency’s chief economist Pierre-Olivier Gourinchas told reporters on Tuesday.

Even if the Fed cuts interest rates later this year — the IMF’s central scenario — US government funding costs may not fall by the same margin. This would place further pressure on the government’s finances, leaving less money for public services or for absorbing future economic shocks such as financial crises, pandemics, or wars.

In fiscal year 2023, the US government’s interest costs surged to $659 billion, nearly double the amount spent in fiscal year 2020. According to the Committee for a Responsible Federal Budget, the government spent more on debt servicing than on housing, transport, and higher education combined.

Call for Fiscal Restraint

The IMF expects US public debt to continue rising, contributing to a global increase in government debt to nearly 100% of global gross domestic product by 2029, up from 93% last year. The agency called on governments worldwide to exercise “fiscal restraint” during what it described as the “world’s biggest-ever election year.” "History shows governments tend to spend more and tax less during election years,” it warned, emphasizing the need for sustainable fiscal policies to ensure long-term financial stability.

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