America’s increasing reliance on government debt has been labeled a “fatal flaw” by Ruchir Sharma, chair of Rockefeller International. He warns that this dependency is creating a massive economic bubble that is on the verge of bursting.
What Happened: The “mother of all bubbles” in the U.S. economy, driven by excessive debt, is on the verge of bursting, according to Ruchir Sharma, chair of Rockefeller International. In a recent column in the Financial Times, Sharma highlighted America’s growing dependency on government debt as a critical weakness. He noted that attempts to control this addiction could hinder economic growth and corporate earnings.
Sharma emphasized that while Wall Street celebrates strong earnings, these figures are less impressive when adjusted for government spending and the influence of major tech companies. He pointed out that “supernormal profits” often normalize due to competition. The current economic boost is partly due to unprecedented deficit spending, which inflates growth and profits artificially.
“But every hero has a fatal flaw. America's is its sharply increasing addiction to government debt,” he wrote.
According to Sharma, U.S. public debt is nearing 100% of GDP, a level not seen since World War II. The cost of servicing this debt has surged, with interest expenses now reaching $1 trillion annually, surpassing defense spending. Despite the federal deficit, U.S. households and businesses maintain strong financial health, supporting the economy.
Sharma warned that next year, investors might demand higher interest rates or fiscal discipline, potentially reducing reliance on government spending and affecting growth. He also noted that other global economies could challenge America’s economic dominance, signaling an end to the current bubble.
Why It Matters: The warning from Sharma aligns with concerns raised by the International Monetary Fund (IMF) about the U.S. fiscal outlook. In October, the IMF projected a persistently high budget deficit and a national debt unlikely to stabilize by 2029. The Washington-based institution highlighted that both U.S. and Chinese debts have a low probability of stabilizing, underscoring the global implications of America’s fiscal policies.
Meanwhile, SPDR S&P 500 ETF Trust SPY which tracks the S&P 500, has increased 25.07% in terms of year-to-date (YTD) returns while that of Invesco QQQ Trust, Series 1 QQQ rose by 28.83%, as of Monday pre-market hours, according to Benzinga Pro.
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