J.P. Morgan’s David Kelly Warns America Is ‘Going Broke Slowly’
WASHINGTON, D.C.—J.P. Morgan Asset Management’s chief global strategist, David Kelly, issued a stark warning this week about America’s deteriorating fiscal outlook. With federal debt topping $37.8 trillion and interest payments poised to exceed annual defense spending this year and all discretionary spending by 2052, Kelly cautioned that the country is “going broke slowly.” He warned that even moderate deficits will keep pushing the debt-to-GDP ratio higher and that political or economic shocks could accelerate the crisis quickly.
WORD ON THE STREET
From David Kelly, Chief Global Strategist at J.P. Morgan:
"One of the more challenging positions in football is that of place kicker for the visiting team… Your job is to ignore the distractions, distortions and threats and focus on the matter at hand. Long-term investors in 2025 face a similar set of distractions, distortions and threats… Amidst all of this, the job for investors is to focus on the trends that actually determine long-term returns. … it is worth taking a look at one important long-term theme, namely, what is going on with the federal debt and how the steady deterioration of U.S. government finances could impact asset class returns.
"The total federal debt in the hands of the public is now almost $30.3 trillion or, we estimate, 99.9% of GDP. Starting from these levels, if nominal GDP grows by roughly 4.5% going forward… then any budget deficit north of 4.5% will cause the debt-to-GDP ratio to rise. Under our assumptions, the debt-to-GDP ratio climbs from 99.9% on September 30th, 2025 to 102.2% of GDP 12 months later.
"There are good reasons to believe, however, that the debt will rise even faster than this… if the Supreme Court rules that the tariffs the President imposed… are illegal, this would… force substantial refunds of tariffs already paid in recent months. … Because of all of this, a deficit equal to 6.7% of GDP should probably be regarded as a low-ball estimate of this year’s red ink.
"The question I am asked most frequently by investors and financial advisors is when is the federal debt going to blow up in all of our faces. My usual answer is that, while we are going broke, we are going broke slowly. Global bond markets are very well aware of the trajectory of U.S. debt. The fact that even today, the U.S. government can borrow money for 30 years at a yield of just 4.6% speaks to a conviction that there remains room for the government to borrow more.
"That being said, there is a danger that political choices lead to a faster deterioration in the federal finances, leading to a backup in long-term interest rates and a lower dollar. … The risk that we move from going broke slowly to going broke quickly adds an important reason to make this move today."
Read the full note here.
THE BOTTOM LINE
America is on an unsustainable fiscal path, and J.P. Morgan’s warning is just the latest reminder. This year, Republicans passed into law the largest reduction in mandatory spending in U.S. history—by two-fold. H.R. 1 implemented generational reforms to reduce cradle-to-grave reliance on the federal government and responsibly slowed the growth of spending in health care and welfare. But even with these historic reforms, more must be done to rein in Washington’s spending addiction to prevent our nation from going over a fiscal cliff.
