JPMorgan CEO Jamie Dimon has issued a grim warning for the direction of the U.S. economy, saying he sees the odds of a “soft landing” as far lower than markets are pricing in while sounding the alarm on a possible bout of 1970s’ style stagflation fueled in part by the Biden administration’s massive deficit spending.
Mr. Dimon made the remarks in an April 25 interview with The Wall Street Journal, in which he warned about Americans being lulled into a false sense of confidence because the U.S. consumer appears to be in “pretty good shape” right now, stock markets are up, jobs are plentiful, and unemployment is low at 3.8 percent.
“Don’t get lulled into a false sense of security because today looks okay, tomorrow is going to be okay,” he said. “So just try to separate the two.”
While various economic metrics have held up quite well, new data released on April 25 indicate that the U.S. economy showed signs of slowing in the first quarter as inflation pressures and higher borrowing costs associated with the Federal Reserve’s interest-rate hikes weighed on the country.
The U.S. economy expanded by 1.6 percent in the first three months of the year, down from 3.4 percent in the fourth quarter, according to the Bureau of Economic Analysis (BEA).
The reading fell short of the consensus estimate of 2.5 percent, with the downside surprise sending U.S. stocks into a tailspin, sending the Dow Jones Industrial Average plunging more than 600 points after opening bell, though it later pared those losses to around 425 points down, as of the time of reporting.
Smells Like Stagflation
Mr. Dimon said he sees the current economic setup as increasingly reminiscent of the 1970s, when a mix of high inflation and sluggish growth led to stagflation, an economically toxic condition characterized by high unemployment and elevated price pressures.“It looks a little bit more like the 1970s to me, and I point out to a lot of people, things looked pretty rosy in 1972. They were not rosy in 1973,” he said.
He said the issues that amplify the inflation risks in the stagflationary equation include “huge” fiscal deficits and monetary stimulus in the form of quantitative easing (QE), massive spending on the green economy, and a jump in military expenditures around the world at a time of geopolitical strife.
“Deficits which basically aren’t going to go away as far as the eye can see,” Mr. Dimon said. “All that puts me on the side of caution that things may not go as well as people expect. The odds of a soft landing—the market kind of prices in 70 percent—I think it’s half of that.”
Mr. Dimon’s cautionary note about the inflationary aspects of massive government spending come amid numerous warnings about America’s ballooning public debt.
Deficit spending in the United States hit $1.7 trillion in 2023, or 6.3 percent of gross domestic product (GDP), according to a recent report from the Congressional Budget Office (CBO). The agency warned that deficit spending that adds to a growing pile of public debt would slow economic growth and drive up interest payments to foreign holders of U.S. debt.
Over the next 30 years, U.S. deficit spending is expected to grow to 8.5 percent of GDP by 2054, according to CBO estimates. The agency also projects that America’s debt-to-GDP ratio, which in the 1980s was around 35 percent of GDP, will balloon to 166 percent by 2054, posing “significant risks” to America’s fiscal and economic outlook.
Looming Debt Cliff?
Mr. Dimon earlier warned that America’s debt-to-GDP ratio would “hockey stick” upward at some point, meaning rise sharply after a period of relatively gradual increase. He described this moment as a market “rebellion”-type reckoning that could involve a sudden deepening of the debt crisis as investors lose confidence in the government’s ability to service its debts and sell off U.S. Treasurys.The point at which America’s public debt becomes unsustainable is fast approaching, Mr. Dimon warned.
“It is a cliff. We see the cliff. It’s about 10 years out. We’re going 60 miles an hour,” he said, speaking on a panel at the Bipartisan Policy Center in Washington at the end of January 2024.
Republicans have repeatedly expressed opposition to the Biden administration’s high deficit spending, issuing similar warnings about debt sustainability and a catastrophic market reckoning.
President Joe Biden has defended his spending plans while criticizing the GOP for pushing budget cuts and trying to pin the blame for catapulting the public debt to over $34 trillion on President Donald Trump’s tax cuts.
During his April 25 interview with The Wall Street Journal, Mr. Dimon was asked for his thoughts on whether “Bidenomics” was working.
“Partially,” he replied. “When you spend that kind of money, you’re going to have growth,” he continued, adding that he supports some of the administration’s moves on industrial policy and infrastructure.
However, he said that many Americans might not experience the benefits, while cautioning that massive government spending is inflationary.
Analysts at the University of Pennsylvania estimate that when America’s debt-to-GDP ratio hits around 200 percent, it will hit the point of no return—when no amount of future tax increases or spending cuts could prevent the government from defaulting on its debt.
