The U.S. economy could be at a critical point.
For years, the U.S. government has embraced breakneck spending, causing larger deficits and soaring debt levels that may require trillions of dollars in interest payments over the coming decades.
The economic situation could have a dire impact if it means the government is forced to restructure its debt, something billionaire Ray Dalio has previously suggested.
Related: Billionaire Ray Dalio’s blunt message on economy turns heads
The risk of a potential economic reckoning isn’t lost on those who have seen a thing or two over decades of analyzing markets, including Michael Bloomberg, the billionaire founder of the Bloomberg terminals commonly found on the desks of most major hedge funds, mutual funds, and trading operations.
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Bloomberg recently weighed in on the economic challenges, delivering a blunt assessment that every investor should consider.
Michael Bloomberg, founder of Bloomberg LP, offered up a harsh assessment of the future of the U.S. economy.
The U.S. economy displays cracks in its armor
The Federal Reserve has put itself in a corner.
In 2021, Fed Chairman Jerome Powell tried to argue that inflation was transitory, only to backtrack shortly afterward as the Fed embarked on the most restrictive and hawkish monetary policy since Fed Chair Paul Volcker battled inflation in the early 1980s.
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Powell’s war on inflation worked, but it came at a cost. While inflation has retreated below 3% from over 8% in 2022, higher interest rates’ impact on economic growth has led to unemployment climbing to 4.1% from 3.5% as recently as 2023.
The upturn in joblessness prompted the Fed to lower its benchmark Fed Funds Rate in the fourth quarter of 2024. However, we’ve yet to see any improvement in the jobs market, and the rate cuts appear to have re-sparked inflation, given the Consumer Price Index showed inflation at 2.8% in February, up from 2.4% in September.
Worse, sticky inflation and job loss are coming alongside a deceleration in economic growth.
The Atlanta Fed’s GDPNow forecasts a first-quarter GDP of negative 3.7%. While that’s likely to improve as more data becomes available, it appears very likely that the first-quarter GDP will be far shy of the 3.1% pace during the second and third quarters last year.
Given consumer confidence levels, matters could get worse. The Conference Board’s Consumer Expectations Index is 65, far south of the 80 level that has signaled recessions in the past.
An even bigger problem exists for the U.S. economy
The short-term outlook for the economy is tenuous. However, the long-term outlook could be downright dangerous.
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Michael Bloomberg has been navigating the markets for a long time. His career stretches back to the late 1960s at Salomon Brothers, and he founded Bloomberg, L.P. in 1981. Since then, Bloomberg, L.P. has grown into one of the biggest and most influential market data companies on the planet, turning him into one of the world’s richest people.
Bloomberg thinks America’s future could be at a critical juncture, and he’s not mincing words.
“The US is on course for fiscal breakdown,” wrote Bloomberg in a recent article for his news outlet. “Unless Congress changes course, there’ll be a reckoning, and it will be grim.”
Bloomberg’s big concern: a mountainous – and growing – pile of debt.
“Deficit spending is more out of control than ever,” said Bloomberg. “Investors’ appetite for US government debt isn’t limitless.”
The U.S. government spends about $7 trillion annually but only collects about $5 trillion in taxes. As a result, the deficit exceeds 6% of the gross domestic product, or GDP.
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If spending continues unabated, public debt will total 100% of GDP this year and could climb to 118% by 2035.
“A responsible Congress would make deficit reduction its overriding priority,” said Bloomberg. “Higher tariff revenues won’t come close to balancing the books.”
President Trump’s administration has proposed extending tax cuts from his 2017 Tax Cuts and Jobs Act, which is set to expire this year.
Bloomberg says doing so could cost $5 trillion over the next decade. While Bloomberg favors keeping aspects of the law, including the larger standard income-tax deduction, he suggests other parts of the law are too costly.
“Congress has already delayed too long, but the cost of delaying further — and worse, compounding the problem with additional deficit spending — will have devastating economic consequences,” said Bloomberg.
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