- JP Morgan has warned that the growing US debt mountain is a “boiling frog” for the US economy.
- The Congressional Budget Office estimates that government bills will exceed revenues by the early 2030s.
- But the U.S. is unlikely to cut discretionary spending anytime soon, the central bank said.
America’s $34 trillion debt mountain could become a “boiling frog” phenomenon for the economy, as rising budget deficits and ballooning debt servicing costs could easily become unsustainable, says JP Morgan warned.
A boiling frog situation is one in which people fail to act on a potential problem that grows over time, becomes more serious, and eventually bubbles away. A frog thrown into boiling water may jump out, but if the water boils slowly, by the time you realize it’s being cooked it’s too late.
In its 2024 outlook, the bank said an old metaphor could easily apply to the U.S. debt situation. It’s a problem that has worried economists for years, and calls for something to change are growing louder as governments continue to borrow record amounts.
The nation’s debt hit an additional $34 trillion this month, the result of lawmakers raising the U.S. debt ceiling last year to avoid default. The debt situation will only get worse in the coming years, according to the Congressional Budget Office, which estimates that U.S. entitlement spending, mandatory spending, and net interest payments on the debt will exceed total government revenue by the early 2030s. .
“The problem for the US is a starting point. Every fiscal stimulus brings the US one step closer to debt unsustainability,” said Michael Chamberrest, a strategist at JPMorgan. “However, we are used to deteriorating U.S. government finances with limited impact on investors, and that may change at some point (the boiled frog analogy),” Chamberrest added.
Cembalest predicted that pressure from markets and rating agencies would force the government to make “significant changes” to its taxation and entitlement programs, including issuing a new wealth tax.
However, it seems unlikely that the United States will significantly reduce discretionary spending. Lawmakers have been debating the issue for months, and Congress has not yet approved a budget for the fiscal year.
“The United States has exhausted its options on that issue,” Cembalest said of possible cuts to discretionary spending.
JPMorgan strategists previously predicted a “boiled frog” recession in 2023 and 2024, with aggressive central bank tightening leading to a global recession. Cembalest warned that the risk of a recession remains this year, but noted that any future downturn is likely to be mild.
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