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Macroscope | Why risk of US debt crisis and a Trump second term should be taken seriously
- News around the US economy has been positive of late, but two alarming trends could undermine the improvement and scare off investors
- If they gain momentum, the debate over whether the US will have a soft or hard landing will give way to deeper worries about its economy and democracy
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For believers in a “soft landing” for the US economy, the good news keeps getting better. The publication of data on inflation on Tuesday showed that price rises slowed last month to a softer-than-expected 3.2 per cent, with the more reliable core rate – which strips out volatile food and energy prices – dropping to 4 per cent, down from 6.6 per cent in September 2022.
Financial markets are convinced the US Federal Reserve is done raising interest rates. Furthermore, 20 months after the Fed began to tighten policy, the US economy remains resilient, underpinned by a remarkably strong labour market that has given consumers the confidence to keep spending.
The findings of Bank of America’s latest global fund manager survey, published on Tuesday, revealed that respondents had the third-largest overweight position in US government bonds in the past two decades because of their conviction that inflation, interest rates and bond yields are all coming down. As 2023 nears its end, the case for a soft landing looks increasingly compelling.
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Yet, beneath the surface of day-to-day shifts in sentiment, two alarming trends are increasingly apparent. Should they gain significant momentum, the debate over whether the United States will experience a soft or hard landing will give way to deeper worries about the country’s economy and democracy.
In the past few months, the ballooning US budget deficit and public debt have become a hot-button issue in markets and have contributed to the rise in Treasury yields. If the parlous state of US public finances becomes a more important determinant of sentiment among bond investors, debt sustainability and sovereign creditworthiness could be called into question.
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Fiscal alarm bells are starting to ring just when US President Joe Biden’s polling numbers are going from bad to worse. Former president Donald Trump is now leading among registered voters by a significant margin in key battleground states, according to the results of a poll conducted by The New York Times and Siena College published on November 5.
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