America's Fiscal Time Bomb: Deficit Spending Hits Crisis Levels Despite No Economic Downturn Say Market Commentators

Market observers are raising fresh concerns regarding the fiscal health of the United States, with the country’s deficit spending already mirroring those seen during previous recessions.

What Happened: Popular market newsletter, The Kobeissi Letter, shared a post on its X account on Monday, highlighting the severity of America’s fiscal pressures, amid rising yields and the new budget bill that is expected to add trillions more to the deficit.

The post says that “the US budget deficit has averaged 9% of GDP over the last 5 years,” adding that over the past 12 months alone, the “budget gap has hit 7% of GDP.”

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It notes that the deficit figures as a percentage of GDP are now higher than they were during the market downturns of 2001 and 1980, which are usually periods that coincide with higher government spending, aimed at counteracting the low aggregate demand.

“The government is now running larger deficits than during an average economic downturn,” the post says, before asking, “What happens if the US economy enters a recession?”

The post essentially highlights the fact that if Washington is already running crisis-era deficits during a period of relative economic calm, the next downturn could quickly become a full-blown fiscal squeeze.

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Why It Matters: Experts and analysts are increasingly concerned about the country’s deficits amid rising yields and a falling U.S. Dollar.

Ratings agency, Moody’s, downgraded the U.S. government debt from Aaa to Aa1 last week, echoing similar concerns of a sustained increase in government debt and interest payment ratios over the past decade.

Deutsche Bank's Jim Reid recently stated that the fiscal situation of the U.S. is like “death by a thousand cuts,” highlighting the gradual erosion of confidence in America’s fiscal future.

While referring to the Moody’s downgrade, Reid said, “…keeps the drip, drip, drip of poor fiscal news building up against the debt sustainability dam in the background.”

Price Action: U.S. 10-Year Treasury yields now stand at 4.489%, the 20-Years at 5.014%, and the 30-Year note at 5.006%. The U.S. Dollar Index (DXY) is down 0.27% on Monday, trading at 98.84.

Photo Courtesy: Jack_the_sparow on Shutterstock.com

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