America’s ‘addiction to government debt’ is a fatal flaw – and could lead to a stock market crash, an expert has warned.
Ruchir Sharma, author and fund manager, said efforts to rein in debt – which now stands at a record $36 billion – will ultimately weaken economic growth.
Sharma, chairman of Rockefeller International who worked at Morgan Stanley for 25 years, made the comments in a column for the Financial times.
He had previously said that the US financial market has become “the mother of all bubbles” that will soon burst.
The stock market has soared to record highs in recent weeks, boosted in part by Donald Trump’s victory in the presidential election.
Despite last week’s rough patch, many on Wall Street are predicting that U.S. stocks will continue to outperform the rest of the world in 2025.
“But US earnings growth wouldn’t look so extraordinary if it weren’t for supernormal profits from big tech companies and massive government spending,” Sharma said.
Growth and profits are being given an “artificial boost” by the “heaviest budget deficits ever recorded at this stage of an economic cycle,” he added.
Sharma said the US financial market has become “the mother of all bubbles” that will soon burst
The US federal debt has risen above $36 trillion – a record high.
Interest costs on the debt now amount to $1 trillion a year and are among the largest budget items – even exceeding defense spending.
Despite this, American households and businesses continue to spend money and fuel the economy.
GDP growth for the third quarter of this year was revised upwards to 3.1 percent, according to the newspaper, from an earlier reading of 2.8 percent, partly due to higher consumer spending.
“But every hero has a fatal flaw,” wrote Sharma, the author of “What Went Wrong with Capitalism.”
“America is in its sharply increasing addiction to government debt.”
According to his calculations, almost $2 in new government debt is needed to generate another $1 in GDP growth – a 50 percent increase from five years ago.
Any other country with similar dynamics would see capital leave the country, but the US still boasts the world’s top economy and reserve currency, he said.
Ruchir Sharma, author and fund manager, said efforts to rein in US debt will ultimately weaken economic growth
Growth and profits are getting an ‘artificial boost’ from the ‘heaviest budget deficits ever recorded at this stage of the economic cycle’, Sharma said
According to Sharma, one thing that could end the boom is if markets get fed up with it.
He predicted that by 2025, investors will likely demand higher interest rates on all new debt issued or there will be a sign of fiscal discipline, according to Fortune.
This will then lead to efforts to reduce the high dependence on government spending, which will in turn hurt growth and profits.
“In the late stages of a bubble, prices typically go parabolic, and over the past six months, U.S. stock prices have outpaced U.S. stock prices by the widest margin for a comparable period in at least a quarter century,” he wrote.
“When you’re flying in such thin air, it doesn’t take much to stall the engines. All the classic signs of extreme prices, valuations and sentiment indicate that the end is near.
“It’s time to bet against ‘American exceptionalism.’
Despite hitting record highs after Trump’s presidential election victory in November, the stock market has had a bumpier stretch in recent weeks.
Last week, stocks tumbled after the Federal Reserve indicated it would slow the pace of interest rate cuts next year.
The Fed said inflation, which rose to 2.7 percent from a year earlier in November, remains “somewhat elevated.”
Due to the central bank’s caution, the S&P 500 fell almost 3 percent on December 18.
The Dow Jones also fell more than 2.6 percent, marking the eleventh consecutive trading session in the red and the longest losing streak since 1974.