George Soros, the renowned hedge-fund manager, issued a warning in the 1980s about the risks of unsustainable U.S. public finances—a caution that has resurfaced amid today's market boom, stirring concerns among investors and economists alike.
What Happened: In his 1986 investment classic “The Alchemy of Finance,” Soros cautioned about the fundamental deterioration in the U.S.’s financial position. This warning materialized in October of the following year when the U.S. equity market experienced its swiftest crash in history, according to Economist Felix Martin‘s commentary on Reuters Breakingviews.
"The stock market boom has diverted our attention from the fundamental deterioration in the financial position of the United States," Soros wrote.
As the S&P 500 Index traded at 25 times earnings on the eve of the recent presidential election, the Congressional Budget Office projected that the U.S. public debt would surpass the post-World War Two record in 2027. With a potential Republican majority in Congress, this estimate could be conservative.
According to the Committee for a Responsible Federal Budget, President-elect Donald Trump‘s campaign plans could add a further $15.6 trillion to the U.S. public debt by 2035. This has led to a significant rise in U.S. Treasury yields, making Soros’ decades-old warning alarmingly relevant once again.
However, the issue isn’t confined to the U.S. alone. The International Monetary Fund projects that global public debt will surpass $100 trillion, or 93% of world GDP, this year and could reach 100% by 2030. The IMF notes that past projections have consistently underestimated debt levels.
Following Trump’s election victory on Wednesday, the S&P 500, tracked by the SPDR S&P 500 ETF Trust SPY, rallied 2.85%. Meanwhile, the Nasdaq 100, tracked by the Invesco QQQ Trust QQQ, soared 4.12% on Thursday.
See Also: Trump White House Could Unlock Trillion-Dollar AI Potential For Tesla, Says Dan Ives
Why It Matters: The recent economic developments in the U.S. have significant implications. Goldman Sachs recently reduced the likelihood of a U.S. recession to 15% following strong job growth.
However, the fiscal policies under a potential Republican administration could counteract these positive signs. Economists have warned that a Republican sweep could lead to increased inflationary pressures due to higher tariffs and a growing budget deficit. This scenario could prompt a more hawkish stance from the Federal Reserve.
Additionally, rising U.S. Treasury yields and a stronger dollar, following Trump’s return to the White House, might undermine the Federal Reserve’s efforts to lower interest rates. The bond market is reacting more to the fiscal and inflationary implications of Trump’s victory than to the Fed’s dovish policy.
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Image via Wikimedia Commons
This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote
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