NEW YORK (AP) — The United States’ “mother of all bubbles” is approaching a breaking point due to unsustainable government debt levels, according to Rockefeller International chair Ruchir Sharma.
In a Financial Times column, Sharma warned that America’s “fatal flaw” is its growing dependence on government borrowing, with $2 of new debt now required to generate just $1 of GDP growth – up 50% from five years ago.
“Growth and profits are getting an artificial lift from the heaviest deficit spending ever recorded at this stage of an economic cycle, by far,” said Sharma, author of “What Went Wrong With Capitalism.”
Public debt has reached approximately 100% of GDP and is expected to surpass the post-World War II record, but this time without a global catastrophe driving the increase. Interest payments on the debt have hit $1 trillion annually, exceeding defense spending.
Sharma identified several potential triggers that could burst the bubble. Markets might demand higher interest rates on new debt issuance or insist on fiscal discipline. Bond giant Pimco has already begun reducing exposure to long-term U.S. bonds over debt concerns.
Despite strong corporate and household balance sheets contributing to robust economic growth – recently revised up to 3.1% for the third quarter – Sharma believes the government’s debt addiction will eventually force a reduction in spending, hurting growth and corporate profits.
“When flying in such thin air, it doesn’t take much to stall the engines,” Sharma said, noting that U.S. stock prices have recently outpaced other markets by the widest margin in at least 25 years. “All the classic signs of extreme prices, valuations and sentiment suggest the end is near.”
The market expert also suggested that economic rebounds in Europe or China could erode America’s relative outperformance. While other countries with similar debt dynamics might face capital flight, the U.S. has been protected by its status as the world’s largest economy and reserve currency issuer.
“It’s time to bet against ‘American exceptionalism,'” Sharma concluded.
