The $34 trillion mountain of national debt is a ‘boiling frog’ situation for the US economy, JPMorgan warns
The US’s $34 trillion debt mountain might be a “boiling frog” phenomenon for the economy, as higher deficits and ballooning debt servicing costs could easily become unsustainable, JPMorgan warned.
A boiling frog situation is one in which people fail to act on a potential problem that grows over time, causing it to become more severe until it eventually bubbles over. A frog thrown in boiling water might jump out, but if the water comes to a boil slowly, it’s too late by the time it notices it’s being cooked.
The age-old metaphor could easily apply to America’s debt situation, the bank said in its 2024 outlook. It’s an issue that has worried economists for years, and calls for something to change have grown louder as the government continues to borrow at record volumes.
The national debt hit a fresh $34 trillion this month, the result of lawmakers lifting the US debt ceiling last year to avoid a default. The debt picture will only worsen in the coming years, according to the Congressional Budget Office, which estimates that the US’s entitlement spending, mandatory spending, and net interest payments on the debt will exceed the government’s total revenue by the early 2030s.
“The problem for the US is the starting point; every round of fiscal stimulus brings the US one step closer to debt unsustainability,” JPMorgan strategist Michael Cembalest said. “However, we’re accustomed to deteriorating US government finances with limited consequences for investors, and one day that may change (the boiling frog analogy),” Cembalest added.
Cembalest predicted that pressure from markets and rating agencies would force the government to make “substantial changes” to its taxing and entitlement programs, such as by issuing new wealth taxes.
But it doesn’t appear likely that the US will significantly pull back its discretionary spending. That’s an issue lawmakers have been sparring over for months, with Congress having yet to approve a budget for the fiscal year.
“The US has run out of the road on that one,” Cembalest said of possible cuts to discretionary spending.
JPMorgan strategists previously predicted a “boiling frog” recession in 2023 and 2024, where aggressive central bank tightening leads to a global synchronized recession. Risks of a recession are still alive this year, Cembalest warned, though he noted that a coming downturn would likely be mild.
