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The U.S. debt problem is becoming a close focus for market experts and economic observers. They agree that a widening fiscal deficit could lead to a future recession, a prospect that raises widespread concerns.
The U.S. federal deficit has exploded in recent years, reaching unprecedented levels. During the quarter, the U.S. Treasury has had to auction up to $1 trillion in bonds to fill a huge deficit. The move raises questions about future debt sustainability and challenges market stability.
At the same time, the Fed has adopted aggressive tightening policies that have pushed borrowing costs higher. This exposes investors to higher costs of debt servicing, which has a significant impact on the already large U.S. Treasury market.
Recently, a number of prominent Wall Street investors, including Dalio, the founder of Bridgewater Fund, Gross known as the "old debt king", and Gonlac, known as the "new debt king", have expressed their views on the current situation.
Dalio said he is not bullish on investing in the bond market at the moment and believes that holding cash is a wiser choice. He noted that ballooning fiscal deficits are forcing the Treasury to issue new bonds, which is causing a surge in the supply of new bonds in the market. But the question is not just an increase in supply, but also whether investors will be able to secure real interest rates high enough that they might otherwise choose to sell existing bonds. Dalio is cautious about the outlook for long-term bonds, stressing the importance of caution for investors.
Gross expressed similar concerns about the bond market. He noted that the U.S. faces a situation where one-third of its outstanding debt will come due within a year. To attract enough buyers, the Treasury needs to raise bond yields. However, the Fed's quantitative tightening has led to an imbalance between supply and demand as the Fed gradually withdraws from the market as a buyer of bonds. Gross warned that insufficient demand could lead to continued lower U.S. Treasury prices, which would negatively impact the economic outlook.
Mr. Gundlac, known as the "new debt king," predicted that U.S. Treasuries would flood into the market, while warning that an impending recession could exacerbate the federal deficit problem. He noted that it is confusing that once plunged into a deeper recession, bond yields could actually start to rise due to monetary policy and the reaction of excessive money printing. While many economists are optimistic about the prospect of a soft landing for the economy, Gundlach is convinced that a recession could occur within six to eight months as consumer savings dwindle during the pandemic. He fears that if this happens against the backdrop of tightening by the Federal Reserve, the U.S. economy could slip into deflation, which would force the government to increase its debt further.
The views of these market experts raise concerns about the future of the U.S. economy, particularly about how to address fiscal and monetary policy challenges. Their warnings remind us that debt problems can have far-reaching implications for global financial markets, so policymakers and investors alike need to pay close attention to the issue and be prepared for potential instability.