It's a familiar feeling. Fears of the next financial and economic crisis are simmering beneath everyone's optimism. In fact, such dispiriting sentiments have been around for several quarters now following the pandemic in 2020. However, when exactly will the crisis unfold is unknown. It could be six months or six years, as JPMorgan Chase's chief Jamie Dimon puts it.
Among others, the trigger this time is the US government's unstoppable rise of its sovereign debt and deficit. The spending and borrowing by the world's largest economy has shot up so much that it has vampirized the long-standing belief that sovereign debt is risk-free as governments seldom default on loans.
Interestingly, this was the same belief (that housing loan borrowers don't default on debt), which broke the US economy, setting off the world onto a global financial crisis in 2007-08. The fallouts were so intense that its repercussions are being felt even now, two decades later.
There have been plenty of warnings in the recent past about looming trouble whenever inflation shot up, or when global supply chains shocks, or during the onset of the Russia-Ukraine war and so on. Each time, as fears engulfed markets, fiscal and monetary policymakers managed to steer the economy towards a hard, if not a soft landing.
This time though, analysts say, the warnings can't be dismissed as routine cyclical noise, with some like Dimon warning of seismic shifts that could disrupt the natural order of global capital flow, currency stability, and commodity access. Worryingly, they are flashing alerts about financial, fiscal, and geopolitical structures approaching their breakpoints, simultaneously. If it happens, it'll be a dangerous scenario to even imagine.
Speaking at the Reagan National Economic Forum last week, Dimon warned that the US bond market was on the verge of a significant disruption, describing it as an inevitable crack due to excessive government spending and the US Federal Reserve's (Fed) prolonged money printing policies.
"The bond market is going to have a tough time. I don't know if it's six months or six years," he cautioned, adding that besides bond market breakdown, the odds of stagflation -- a toxic mix of low growth and high inflation -- are at least twice the market is currently pricing.
But US Treasury Secretary Scott Bessent was quick to downplay Dimon's predictions of a debt market crisis. "I've known Jamie a long time, and for his entire career he's made predictions like this," he said in an interview. "Fortunately, not all of them have come true."
Incidentally, a review of 20 years of Dimon's annual investor letters and public statements by a media outlet show a set pattern comprising frequent financial warnings, worries of a recession (which never happened), concerns about market meltdowns and the ballooning US deficit. It concluded that in the best of times and in the worst of times, Dimon's public outlook has always been grim.
That said, it's undeniable that all isn't well. Here's why.
Historically, the US has been relying on low-interest US Treasury bonds to support its economy. For instance, both during the 2007-08 financial crisis and the pandemic year 2020, the Fed purchased truckloads of Treasury bills just to keep its financial and credit markets afloat. But the bond markets are no longer absorbing debt like they used to.
Moreover, foreign investor demand for US debt is deteriorating with investors rethinking its credibility and demanding higher yields as compensation for the risk they are taking in. It appears that investors are either selling, or are allocating fewer funds towards US assets including the dollar, stocks and Treasury notes. This is unprecedented. Treasury notes are often considered risk-free investments, but are gradually losing their purchase amid America's worsening fiscal situation.
Anxiety in the bond land is also peaking, thanks to US President Donald Trump's 'Big, beautiful bill' that's likely to add to its $36.2 trillion debt load, of which $28.9 trillion is directly held by the public. Moreover, the US needs to indulge in massive debt issuances just to fund interest payments.
The rising expenditure and successive governments' inability to rein in spending has sparked fears that the US is on course for a fiscal breakdown. Besides, Trump's on-again, off-again approach to tariffs, which is being contested in the US courts, has also spooked investors and tanked stock markets.
The three-month T-Bill is hovering above 4.3%, annualised, the two-year is paying 3.9%, while the 10-year note -- used as a benchmark for a wide range of debt including personal loans -- topped 4.6% last week. Long-yields continued to march higher with the 30-year bond hitting 5.13% last week -- its highest since October 2023. According to one report, long-term treasuries and long-term corporate bonds turned in negative performance since September, which is rare. The only other time this happened was during the 2007-08 financial crisis.
The bond volatility comes several months after the Fed began the monetary easing cycle cutting policy rates. Broader market concerns about government spending and deficit levels, especially with a major tax bill have added to bond market jitters.
Last month, for the first time ever, the US lost its triple-A credit rating from Moody's, which warned that it expects US federal deficits to widen dramatically over the next decade. The US currently spends roughly $7 trillion, but collects only $5 trillion in taxes annually. The resulting deficit is a little over 6%-7% of GDP -- an all-time high.
Lastly, few believe that we are in a disinflationary glide path as global central bankers have been victoriously claiming. Rather, the odds of stagflation are at least twice what the market is currently pricing, and that 'cost-push inflation can return in waves', according to Dimon.
The last time it happened was in late 1970s-1980s when the US economy had a far stronger balance sheet. It was relatively in a better shape two decades ago when it managed to bail out too-big-to-fail banks and financial institutions that lacked equity capital to survive on their own.
But today, given that governments are overstretched with the rising budget deficits and an expanding debt burden, the biggest puzzle is if a country's financial system will be saved at all costs in the event of a crisis.
