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CIO Strategy BulletinArticle18 Feb 2024

Debt and Consequences: Will Debt and Deficits Derail the US Recovery?

CIO Strategy Bulletin

Those looking for an economy-wide debt crisis may be distracted and waiting in vain.

Key takeaways from this week's bulletin:

  • U.S. Debt and Deficits are Unlikely to Derail the Recovery: Is the pace of US Federal borrowing long-run sustainable?No. But will the US have an economic crisis and trigger a global economic crisis in the next decade because of Federal borrowing? We think it’s unlikely. This dual view does not mean debt and government spending is “insignificant.” Focusing resources on servicing the debt is an inefficient economic use. That does not mean that the US Treasury will be unable to refinance and grow its borrowing or that real interest rates will surge.
  • Global Confidence in US Bonds Remains High: Many long-run Federal debt metrics looked worse in 2020 when short-run US borrowing was also at its peak pace. Rates plummeted to record lows despite this. Then and now, the US dollar was strong and foreign confidence in US bonds high. Even after the Fed’s strong tightening measures, US debt servicing costs are below 1990s levels. As such, the US is not at serious risk of default.
  • Do Not Wait for Household Debt to Sink This Recovery: The experience of 2007-2008 has observers on high alert for signs of excessive consumer borrowing. While components of US household debt have surged, broad private debt and household debt have been restrained, falling relative to GDP in recent years. Those looking for an economy-wide debt crisis may be distracted and waiting in vain.

Potential Portfolio Implications

For those seeking to stabilize portfolios, hedging costs in equity and credit markets remain historically inexpensive. For those that are under-exposed to equity and bond market investments, we’d look for pullbacks to consider reasonably-priced growth and income opportunities highlighted in our asset allocation (please see our latest Quadrant).

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