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Among the illustrious nameplates adorning the offices of Ivy League business schools is one Joao Gomes. A Wharton Business School finance professor, Gomes is issuing a warning cry many of his peers so far have chosen to ignore: America\u2019s burgeoning public debt mountain. <\/p>\n
Professor Gomes is what some might call up-and-coming: He was appointed senior vice dean of research in 2021, adding University of Pennsylvania\u2019s Marshall Blume Prize to his CV in 2018. <\/p>\n
But the fresh-faced expert isn\u2019t afraid to step away from the pack if it means pushing presidential hopefuls for some answers. Gomes admits he\u2019s \u201cprobably\u201d more worried than his colleagues about government debt, but refuses to stay silent on a broiling issue he believes will throw the global economy into disarray. <\/p>\n
Gomes predicts America\u2019s $34 trillion debt burden may upset the world\u2019s financial markets as early as next year\u2014should a president-elect announce a raft of expensive policies. <\/p>\n
And remember the UK\u2019s mortgage meltdown following a disastrous premiership under Prime Minister Liz Truss? That\u2019s on the cards as well, as Gomes said rates could spiral to 7% \u201cor higher\u201d if the topic is swept under the rug by Washington. <\/p>\n
The warning isn\u2019t chiming alone. Since the beginning of the year an increasing cacophony of alarm bells has been ringing out: JPMorgan Chase<\/a> CEO Jamie Dimon says there will be a market \u201crebellion\u201d<\/a> over the issue while Bank of America<\/a> CEO Brian Moynihan says it\u2019s time to stop \u201cadmiring\u201d the problem<\/a> and instead do something about it.<\/p>\n This fear is echoing outside of Wall Street, too. The Black Swan<\/em>\u00a0author Nassim Taleb says the economy is in a\u00a0\u201cdeath spiral,\u201d<\/a>\u00a0while Fed Chairman Jerome Powell says it\u2019s past time to have an\u00a0\u201cadult conversation\u201d about fiscal responsibility.<\/a> <\/p>\n But despite this, presidential candidates likely won\u2019t be getting on stage with promises of how they\u2019ll wrestle down the debt-to-GDP ratio to a more palatable figure (experts are currently predicting it will reach 190% by 2050<\/a>.) <\/p>\n \u201cI wish it was a big issue but I\u2019m not sure it\u2019s in the interest of either party to make it a big issue,\u201d Gomes told Fortune<\/em>. \u201cAs we discuss promises about: \u2018What we\u2019re going to do with tax and programs\u2019 it\u2019s going to be important to put it in the context of: \u2018Can we afford that?’\u201d<\/p>\n \u201cIt\u2019s a really obvious moment in history for us to say: \u2018OK, what are our choices, what can we feasibly do, who has the better plan?\u2019 I suspect neither party is interested in that and it might all be pushed under the rug.\u201d<\/p>\n I probably worry about the US debt more than most of my professional colleagues. But in this election year I believe voters should ask much tougher questions of politicians that don\u2019t take this threat seriously. https:\/\/t.co\/TDMDbCssVi<\/a><\/p>\n \u2014 Joao Gomes (@ProfJoaoGomes) February 16, 2024<\/a><\/p><\/blockquote>\n Indeed, while one party will have to make some unpopular decisions to tackle the issue, it\u2019s a problem created by both of them. Bank of America Research\u2019s Flow Show team, led by investment strategist Michael Hartnett, calculated in February that the deficits run up under the tenures of Presidents Trump and Biden are the greatest since Franklin D. Roosevelt in the 1930s. <\/p>\n Trump and Biden both dealt with a crisis-struck economy trying to navigate a global pandemic. FDR, of course, was firefighting the Great Depression and then oversaw the American entry into World War II.<\/p>\n Gomes believes that irrespective of who contributed to the mess, one party is going to have to shoulder the responsibility for unpicking it: \u201cToward the latter part of the decade we will have to deal with this.\u201d<\/p>\n \u201cIt could derail the next administration, frankly. If they come up with plans for large tax cuts or another big fiscal stimulus, the markets could rebel, interest rates could just spike right there and we would have a crisis in 2025. It could very well happen.\u00a0I\u2019m very confident by the end of the decade one way or another, we will be there.\u201d\u00a0<\/p>\n As with any financial crisis, there will be warning signs when the national debt comes home to roost\u2014though for consumers and markets this realization may not happen in synchrony. <\/p>\n At a policy level, Gomes believes, this will be when the parties buying debt decide the model is simply no longer sustainable. This could even be triggered by government policies announced early in the next administration, which in turn will spook a market seeing a hefty price tag attached. <\/p>\n \u201cThe most important thing about debt for people to keep in mind is you need somebody to buy it,\u201d Gomes told\u00a0Fortune<\/em>. \u201cWe used to be able to count on China, Japanese investors, the Fed to [buy the debt]. All those players are slowly going away and are actually now selling.\u201d<\/p>\n America\u2019s ability to pay its debts is a concern for the nations around the world that own a $7.6 trillion chunk of the funds<\/a>.\u00a0<\/p>\n The nations most exposed are Japan, which owned $1.1 trillion\u00a0as of November 2023<\/a>, China ($782 billion), the U.K. ($716 billion), Luxembourg ($371 billion), and Canada ($321 billion).<\/p>\n \u201cIf at some moment these folks that have so far been happy to buy government debt from major economies decide, \u2018You know what, I\u2019m not too sure if this is a good investment anymore. I\u2019m going to ask for a higher interest rate to be persuaded to hold this,\u2019 then we could have a real accident on our hands,\u201d Gomes said.<\/p>\n In this case, Gomes believes America would see something of a Liz Truss-like implosion. In 2022, the British MP backed a mini-budget featuring a raft of fiscal stimulus, spooking the City to the extent that the pound spiraled to its lowest value ever against the dollar. <\/p>\n After the shortest premiership in British history, Truss was promptly ousted, but not before leaving a legacy: British mortgage rates increased by approximately 2% in a matter of weeks. <\/p>\n And following this trend, mortgages\u2014a cornerstone of Western economies\u2014are precisely where consumers will start to feel the heat. When mortgage rates go above 7% is when consumers will start pushing for change, said Gomes, adding that if policymakers don\u2019t take steps now the public will be back to these rates, \u201cif not worse.\u201d<\/p>\n The good news is, there are a couple of ways to avoid this crisis. The bad news is, nothing at all<\/em> needs to happen for government debt to become the economic issue of the next decade\u2014and it\u2019ll be pretty unavoidable once it gets here. <\/p>\n And if you\u2019re wondering how much debt the government would need to recoup per person, it\u2019s not pretty: current estimates are that it\u2019s over $100,000 for each individual.<\/a><\/p>\n The route to avoiding this problem sounds simple: After all, if the debt-to-GDP ratio is what\u2019s got everyone so concerned, just upping the second variable will rebalance it, right? Yes, but it means growing the economy pretty swiftly, and few are convinced America can do that. <\/a><\/p>\n The second solution is unpopular, but may be the only alternative the government is left with: Cutting spending. \u201cResponsible budget proposals\u201d may suffice to stave off any market upset, Gomes said, while \u201cimposing major cuts on some programs \u2026 opens a Pandora\u2019s box of social unrest that I don\u2019t think anybody wants to think about.\u201d<\/p>\n If markets do indeed rebel across the globe and throw the world\u2019s largest economy into disarray, the ripple effects will be felt across borders. Unfortunately, Gomes believes there will be no avoiding it: \u201cA government that runs into funding difficulties, that cannot convince investors to fund its debt, that government is going to probably have to raise taxes. There\u2019s no way you can protect yourself from that.<\/p>\n \u201cAny exposure you have, whether it\u2019s mortgages or loans, is really hard to avoid in any dimension.\u00a0It\u2019s bad across the board for the country but it\u2019s hard to avoid exposure wherever you live in the world.\u201d<\/p>\n<\/div>\n\n
Warning signs<\/h2>\n
Avoiding exposure<\/h2>\n