Ruchir Sharma, Chair of Rockefeller International, has issued a warning about what he describes as the “mother of all bubbles” in the US economy, suggesting that America’s reliance on debt could soon lead to a major economic downturn, Fortune reports.
According to Sharma, the US has become increasingly addicted to debt, and this trend could weaken both economic growth and corporate profits in the near future.
In a recent column for the Financial Times, Sharma expanded on his previous warning, asserting that the gap between US economic performance and the rest of the world has been artificially inflated by unprecedented levels of government spending and a few high-valuation tech giants. While Wall Street may point to strong earnings as evidence of continued growth, Sharma argues that when adjusted for government spending and the dominance of a handful of tech companies, the record appears less impressive. He also notes that “supernormal profits” are likely to return to more normal levels due to increasing competition.
At the core of Sharma’s warning is the growing burden of US debt. Public debt, or the amount the government owes to external lenders, has already reached nearly 100% of GDP and is expected to surpass the record levels seen immediately after World War II. This increase is happening despite the absence of a global catastrophe, with the economy still relatively strong. However, the cost of servicing this massive debt has surged, contributing significantly to budget deficits. Interest payments on the debt now exceed $1 trillion annually, making them one of the largest budget items, even surpassing defense spending.
Despite the rising debt, US households and companies remain in strong financial positions, helping to fuel continued economic activity. For example, third-quarter GDP growth was recently revised up to 3.1%, partly driven by higher consumer spending. However, Sharma warns that America’s growing dependence on government debt represents a “fatal flaw” in the system. According to his analysis, it now takes $2 in new government debt to generate $1 in GDP growth, a 50% increase from five years ago. While other countries in a similar situation might experience capital flight, the US remains the world’s top economy with the dominant global reserve currency.
One of the key risks Sharma identifies is that markets may eventually lose patience with the growing debt burden. He predicts that investors could demand higher interest rates on new debt or a clear sign of fiscal discipline in the coming year. If this happens, the government may need to reduce its reliance on spending, which could lead to slower growth and reduced corporate profits.
There are also external factors that could contribute to the end of America’s economic outperformance. If major economies like Europe or China experience a rebound, or if unexpected events occur, the US could lose its competitive edge. Sharma points to the recent surge in US stock prices as a sign of a market bubble, noting that in the past six months, US stocks have outperformed others by the widest margin in at least 25 years. When stock prices soar to such extremes, he argues, it doesn’t take much for the market to stall.
