David Kelly, J.P. Morgan Asset Management’s chief global strategist, warns of a looming federal debt crisis in the United States. According to his recent analysis, although the economy faces several immediate challenges, such as geopolitics and trade wars, the federal government’s mounting debt represents a longer-term threat.
Current State of U.S. Federal Debt
As of now, the national debt exceeds $37.8 trillion, with annual interest payments reaching $1.2 trillion. This sharp increase in debt raises concerns among financial leaders, including JPMorgan CEO Jamie Dimon and Federal Reserve Chairman Jerome Powell.
Key Insights from David Kelly
- Kelly notes that the U.S. can still borrow at low rates. For instance, 30-year bonds yield only 4.6%.
- Despite this, the question remains when the debt crisis will escalate significantly.
- Tariff revenues, which contributed $31 billion in August 2023, provide some hope. Recent estimates show that fiscal year 2025 deficits might decrease to 6% of GDP from 6.3% last year.
However, Kelly warns that the federal debt held by the public is nearly $30.3 trillion, almost 99.9% of GDP. If nominal GDP grows by around 4.5%, any budget deficit exceeding this percentage could lead to a rising debt-to-GDP ratio.
Potential Risks Ahead
Kelly projects that the debt-to-GDP ratio could rise to 102.2% by September 2026, assuming inflation remains steady. If recent tariff measures are overturned by the Supreme Court, the government might face a complex situation regarding budget management and potential refunds of tariffs collected.
Furthermore, these financial forecasts depend on the economy avoiding another recession and managing international obligations without drastic spending increases. Kelly cautions that current deficit estimates may still be underestimated, suggesting a more significant figure of 6.7% of GDP could materialize this year.
Advice for Investors
In light of these concerns, Kelly advises investors to diversify their portfolios. The potential shift from a slowly deteriorating financial state to a rapid decline could impact long-term interest rates and the value of the dollar significantly. He encourages moving towards alternative assets and international stocks to mitigate risks in a volatile economic landscape.
As America’s federal debt crisis unfolds, closely monitoring changes in fiscal policy and the broader economy will be crucial for both investors and policymakers alike.
