$35 Trillion Debt Crush US Stock Market & Economy !
Intro.
The weekend is upon us.
Would like to share something different that I have come across.
No, not US stocks or ETFs, but US National debt, that is not in the best shape or form.
Deep in Debt-cesspool.
The US national debt just hit a new all-time high of $34.667 trillion.
New numbers from the Treasury Department’s Debt to the Penny system show the country’s national debt reached the milestone on Fri, 31 May 2024.
That is a $677 billion increase since start of 2024, when the nation’s debt stood at $33.990 trillion.
Latest debt readings (as of 17 Jun 2024).
The new record high comes amid a report from the Congressional Budget Office (CBO) warning that the greater the nation’s debt, the less money Americans will earn.
Current law debt trajectory will reduce income growth by:
-12% over the next 3 decades.
-13% annually by Fiscal Year (FY) 2049.
Rapidly rising debt could reduce income growth by:
-33% over the next 3 decades.
-42% annually by FY 2049.
In today’s dollars, it will also reduce projected income by about $14,500 per person in FY 2054.
CBO has the followings to say:
High debt and deficits carry significant risks and threats to the budget and the economy.
The reduction in household income is due to “crowding out”, an economic theory that traces how high debt and deficits slow economic growth on national and individual level.
Consequences of High and rising debt:
Hinders economic growth by crowding out investments.
Pushes up interest rates.
Strains the federal budget through rising interest payments.
Creates geopolitical challenges and risks.
Makes responding to new emergencies more challenging.
Imposes burdens on future generations.
Increases the risk of a fiscal crisis.”
US Debt Limit & Development.
The “Debt limit” is defined as the maximum amount that the U.S. government can borrow to meet its legal obligations by issuing bonds.
When the Treasury Department cannot pay expenses when the debt ceiling is reached, there is a risk that the US will default on its debt.
“Good” News !
Since 03 Jun 2023, the debt ceiling has been suspended altogether.
It happened when US President Joe Biden signed the Fiscal Responsibility Act of 2023 into law.
This ended the debt-ceiling crisis that began on 19 Jan 2023 that has threatened to paralyze the US government from operations.
The suspension will remain in effect until 01 Jan 2025; just nice after the presidential election.
My viewpoints: (mine only)
I think no one needs an expert to tell them that it is very important to balance one’s books.
This means revenue (in) need to be less than or equal to expenditure (out)
Otherwise, it will affect both US economy and ripple through the US stock market.
How so?
Higher Interest Rates: As the debt grows, the government needs to borrow more money. This increased demand can push interest rates up, making it more expensive for businesses and consumers to borrow. Higher borrowing costs can slow economic growth and investment.
Reduced Spending: To manage the debt, the government might need to cut spending on programs or raise taxes. This could reduce economic activity and hurt certain sectors.
Investor Confidence: A ballooning debt can erode investor confidence in the US economy. This could lead to a decline in the stock market and make it harder for the government to borrow money in the future.
Inflation: High debt can also contribute to inflation, especially if the government resorts to printing money to pay its bills. This can erode the purchasing power of consumers and hurt businesses.
Impact on Stock Market:
A rising national debt can hurt the stock market in a few ways:
Lower Corporate Profits: Higher interest rates and slower economic growth can reduce corporate profits, which can lead to lower stock prices.
Investor Risk Aversion: If investors become worried about the future of the US economy, they may become more risk-averse and move their money out of stocks and into safer assets.
Increased Volatility: Uncertainty about the debt situation could lead to increased volatility in the stock market, making it more difficult for investors to make money.
Possible Remedies:
There's no easy solution, but some potential remedies include:
Fiscal Responsibility: Reducing the budget deficit and slowing the growth of the debt is crucial. This could involve spending cuts, tax increases, or a combination of both.
Economic Growth: A strong economy can help generate more tax revenue and make the debt burden less severe. Policies that promote economic growth, such as infrastructure investment and education reform, can be helpful.
Negotiating Lower Interest Rates: The government can negotiate lower interest rates on its debt with creditors.
Parting Note:
It is very interesting to note that economists have different views on the severity of the debt issue.
Some argue that the US can manage a high debt level as long as interest rates remain low.
Others believe that decisive action is needed to prevent a future fiscal crisis.
Parting Words:
Prudence is a virtue.
I believe in the saying, “cut your coat according to your cloth“.
When one does that, there is hope of a better future for the generations to come.
In overspending, it already eats into future resources and possibilities, putting great strains on the future in time to come.
President’s accountability.
Apart from the 3 possible remedies (see above), should hold any President accountable and judge his performance based on his/her ability to reduce national debt and not add to it, right.
Perhaps when this key performance index (KPI) becomes mandatory for any future incoming President, only then things may turn around for the once America the great.
Don’t Just Take My Words for it. (see below)
Banking veteran & JPMorgan CEO, Jamie Dimon, warns that US public debt is the “most predictable crisis” facing US economy.
In a short 3 months, US has added a staggering $2.1 trillion to its debt.
Congressional Budget Office (CBO) report reveals that 2024 actual deficit is $400 billion (+27%) larger than projected, and the cumulative deficit over 2025–2034 is larger by $2.1 trillion (10%).
Experts are concerned about the debt-to-GDP ratio, that indicates a country’s ability to repay. The CBO predicts that debt held by the public will rise from 99% of GDP in 2024 to 122% by 2034, surpassing the previous high in 1946 after World War II.
Sectors most affected.
I am sure many analysts and economists will have differing views on which stock market sectors will be “most” hard hit by national debt gone bad.
For me, I think it will be:
Consumer Discretionary Sector: This sector includes companies producing non-essential goods and services (e.g., retail, travel, entertainment). Rational consumers will cut back on discretionary spending due to economic uncertainty. Stocks likely affected include $Carnival(CCL)$, $American Airlines(AAL)$
Financial Sector: Banks and financial institutions are an economy’s barometer. When national debt begins to affect its economy, bank stocks will be the first to react as it affects their bottom lines. And so the top 3 most affected would be $JPMorgan Chase(JPM)$, $Bank of America(BAC)$ and $Wells Fargo(WFC)$ based on market capitalization.
Of course, it is hoped that it does not come to that.
However, should US national debt continues to grow exponentially, “long term investment” becomes a misnomer in a perverse sense.
Until then, quickly milk as much out of the cash cow before it dries up - sooner or later?
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Modify on 2024-06-26 21:42
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such a "decent" crazy amount..
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Great article, would you like to share it?