America’s “snowballing debt”—at $34 trillion and counting—is putting the country on course to end up in a crisis reminiscent of Japan’s lost decade, and Washington cannot take for granted the notion that investors will continue to fund its fiscal deficit forever, warns BlackRock CEO Larry Fink.
The CEO of the world’s largest asset manager also cautioned that the recent three percentage point increase in U.S. Treasury yields, to 4%—which reflects longer term inflation expectations and the Fed’s aggressive interest rate hikes—is already very dangerous, since it amounts to an extra trillion dollars in interest payments alone over the next decade.
“The situation is more urgent than I can ever remember,” Fink wrote in his annual letter to investors on Tuesday. “There’s a bad scenario where the American economy starts looking like Japan’s in the late 1990s and early 2000s, when debt exceeded GDP and led to periods of austerity and stagnation.”
The national debt is rising at a rate of $1 trillion roughly every 100 days, which itself is putting upwards pressure on consumer prices. That is partly why both assets believed to be inflation hedges like physical gold and Bitcoin—what some view as the precious metal’s virtual cousin due to its limited nature—are both at record highs.
“A high-debt America would also be one where it’s much harder to fight inflation, since monetary policymakers could not raise rates without dramatically adding to an already unsustainable debt-servicing bill,” he added.
Fink joins Fed chair Jerome Powell, JPMorgan CEO Jamie Dimon, Bank of America boss Brian Moynihan and Elon Musk in sounding the alarm. And while Joe Biden has been blamed for spending excesses stemming from the COVID recovery, the truth is the problems harken back much further as the country lurched from one crisis response to the next.
Gravity-defying economic growth fueled by fiscal deficits
Ever since the budget surpluses under Bill Clinton, the 24 subsequent years—split evenly between Republican and Democrat-led administrations—have seen spending get out of control with the debt rising by $26 trillion over the period due to expensive wars, generous unfunded tax breaks and Keynsian-style spending to combat deflating asset bubbles.
“When I talk about this statistic, I get frightened,” Fink told Bloomberg TV on Tuesday. “The cost of financing our deficits is going to erode more and more of our disposable income as a country.”
It’s precisely these elevated levels of U.S. government spending that have been fueling the country’s remarkable expansion that has defied the economic gravity that all other nations have faced of late, according to Jim Bianco,
Speaking last week, the president of Bianco Research explained that expenditure as a percentage of GDP remains at levels only eclipsed by a once-in-a-century pandemic and the 2008 financial crisis. In other words, stimulus is being pumped into the U.S. economy at a rate more indicative of a government fighting off a recession. In theory, that approach makes sense when consumers are beating a retreat, but that has not been the case of late.
“We are spending a lot more money than we ever have before,” Bianco said, arguing the GDP will artificially levitate as long as government expenditure continues to comprise an above-average 22% of overall economic output. “They’re spending like it’s the middle of a recession.”
