Moody’s Analytics chief economist Mark Zandi has issued one of his starkest warnings yet, saying the US may be ‘sleepwalking’ into an economic crises. According a report by Moneywise, speaking on the Sonia and Simon podcast Zandi said, “Never in the 35 years has there ever been a time when all of the measures are screaming, you know, we got a problem”. He also cautioned that the preconditions for a reckoning are falling into place, even if the timing remains uncertain. Zandi pointed to America’s debt-to-GDP ratio crossing 100% in April, a level not seen since the aftermath of World War II. He highlighted the government’s $2 trillion annual budget deficit, which becomes harder to manage as interest rates rise. The cumulative national debt has now surpassed $40 trillion, with investors increasingly skeptical of US fiscal policy.
Mark Zandi said he couldn’t pinpoint exactly when a crisis might hit
Speaking on a recent episode of the Sonia and Simon podcast with hosts Sonia Jahshan and Simon Baggs, Zandi said he couldn’t pinpoint exactly when a crisis might hit, but stressed that the underlying preconditions for one are already falling into place — and that he doesn’t think the public fully appreciates how serious that is.Zandi went further, arguing that he believes it’s essentially unavoidable that the U.S. will need some kind of external shock to force real fiscal change. He said he doesn’t believe the American political system, or the public, is capable of making the difficult changes needed to address the country’s long-term fiscal problems without being pushed into it by a crisis triggered by rising interest rates.
The debt-to-GDP warning sign
Zandi pointed first to America’s debt-to-GDP ratio, which crossed the 100% threshold at the end of April. That ratio measures the size of government debt relative to the overall economy, and offers insight into the federal government’s long-term ability to repay what it owes. The U.S. hasn’t reached triple-digit debt-to-GDP territory since the years immediately following World War II, when the ratio briefly peaked at 106%.Zandi also flagged the sheer size of the government’s current $2 trillion annual budget deficit, noting that a deficit of that scale becomes even harder to manage as interest rates climb — which is exactly what’s happening now, driven in part by investors selling off Treasury bonds to protect their portfolios against risks tied to the Iran war and the country’s swelling debt load.
National debt tops $40 trillion
The cumulative U.S. national debt surpassed $40 trillion for the first time last week, with little indication that its upward climb is slowing. Zandi said the country is issuing large amounts of new debt even as its fiscal position continues to erode, and warned that combining that trend with growing skepticism among global investors — skepticism he tied directly to policy decisions made over the past couple of years — creates the conditions for significantly higher interest rates ahead.
Bond market turmoil intensifies
The yield on 30-year Treasury bonds stood at 5.17% on August 25, hovering near multi-year highs. Earlier this month, it briefly topped 5.3%, its highest level since 2007. Bond yields matter well beyond Wall Street: they determine what investors earn for holding government debt, but they also directly influence borrowing costs for everyday consumers, including mortgage and auto loan rates, as well as how much the federal government itself pays in interest on the national debt.In response to the sell-off, the Treasury Department is set to begin buying back more of its own bonds starting in early September, an effort aimed at artificially suppressing interest rates.
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