$34 Trillion National Debt Could Lead to 'Boiling Frog' Crisis for US Economy, JP Morgan Warns
In its 2024 outlook, JP Morgan highlights the alarming possibility of the United States' mounting debt reaching a critical point, comparing it to the boiling frog phenomenon. This analogy suggests that the nation's debt problem has been gradually intensifying without appropriate action, potentially leading to dire consequences in the future.
Concerns over America's national debt have persisted among economists, voicing the urgent need for change as the government continues to borrow at unprecedented levels.
Recently, the country's debt surpassed $34 trillion after lawmakers raised the debt ceiling to avoid default. According to the Congressional Budget Office, this debt situation is expected to worsen in the coming years. Mandatory spending, entitlement programs, and debt interest payments will likely exceed the government's total revenue by the early 2030s.
JP Morgan strategist Michael Cembalest emphasizes that the issue lies in the starting point of the US's fiscal stimulus, as each round brings the nation closer to unsustainable debt levels. Although the consequences for investors have been limited thus far, Cembalest suggests that this could change at any moment.
To address the growing debt crisis, Cembalest predicts that market and rating agency pressures will ultimately force the government to implement significant changes to its taxing structure and entitlement programs. One potential solution he mentions is the introduction of new wealth taxes.
However, it is seemingly unlikely that the US will substantially reduce discretionary spending. Lawmakers have been engaged in a prolonged debate over budget approval for the fiscal year, with no clear resolution in sight. Cembalest believes that the country has reached the limits of cutting discretionary spending.
The US has run out of the road on that one, Cembalest said of possible cuts to discretionary spending.
JPMorgan strategists had previously predicted a boiling frog recession in 2023 and 2024. The catalyst for this recession would be aggressive tightening by central banks, leading to a synchronized global downturn. While the risks of a recession remain this year, Cembalest anticipates that any forthcoming downturn would likely be mild.