By Sergei Klebnikov
January 4, 2019

For years, the U.S. and other nations have piled on debt as they sought to spur economic growth in the wake of the financial crisis. The U.S. budget deficit, exacerbated by the Trump Administration’s 2017 tax cuts, is set to pass the $1 trillion mark in 2019. Many developing nations, whose borrowings are denominated in U.S. dollars, also face trouble as U.S. interest rates rise.

Will all the borrowing come back to haunt the global economy in 2019? We asked five market pros:

“The Clock Is Ticking”

Nicholas Sargen, senior vice president, chief economist, and senior investment advisor at Fort Washington Investment Advisors

“The huge amount of federal debt that we added to help get us through the financial crisis hasn’t hurt us—yet. The problem is, not only have we failed to reverse course, we’ve exacerbated the situation with stimulus tax cuts and spending increases. I’m not a doom-and-gloomer, but in my view the bond market has been too forgiving. The budget deficit spiked 17%—to nearly $800 billion for 2018—and the prospect that it will reach $1 trillion next year hasn’t been priced into the market yet. At some point there is a risk that will happen. The huge supply of government bonds will mean that investors will demand more of a premium to hold them, and interest rates will rise well beyond where they are today. The clock is ticking.”

Watch “the Performance Gap”

Matthew McLennan, head of global value team and portfolio manager at First Eagle Investment Management

“If you look at low unemployment rates around the world, the best part of the recovery is behind us. And we didn’t use that recovery to repair balance sheets. Global sovereign debt is in worse shape than it was in 2007. The problem for the U.S. is that we have a current account deficit, so if we continue to borrow excessively, at some point that could hurt the value of the dollar. While the dollar stayed strong last year because of favorable U.S. interest rates, which helped attract capital flows, any kind of growth slowdown that closes the performance gap between the U.S. and the rest of the world could be very negative for the global economy. While it won’t necessarily happen to the U.S., Argentina and Turkey are two extreme examples of what happens when you have both big current account and fiscal deficits.”

“Becoming a Bigger Concern”

Kate Warne, principal and investment strategist at Edward Jones

“Debt is becoming a bigger concern but isn’t yet an overwhelming one. Overall debt levels—both government and corporate—are quite high, but low interest rates mean that interest payments aren’t yet straining budgets. If economic growth remains moderate and interest rates go up—but not sharply—then debt levels should remain manageable. On the other hand, if inflation rises sharply and rates suddenly spike, the heavy debt load could pose a big risk during the next downturn.”

“Sugar High”?

Mohamed El-Erian, chief economic advisor at Allianz

“I don’t think it’s a 2019 problem—it’s more long term than that. The key issue is not just the increase in debt, which has continued, but also what happens to actual and potential growth. Everyone agrees that we’re getting a short-term pop in growth because of the tax cuts, but there’s a lot of disagreement [on] whether this is a sugar high or something more permanent. If we get an infrastructure package from the new Congress, then there’s good reason to believe that it’s more than just a sugar high. Infrastructure, like deregulation, is one of the few things that positively impact both actual and potential growth. Higher debt as a way to facilitate progrowth reforms can be a good thing for economic prosperity and markets. The problem occurs when debt creation substitutes for reforms.”

“Needs to Be Dealt With”

Saira Malik, managing director and head of global equities at Nuveen

“With interest rates increasing, national debt certainly needs to be dealt with in the long run. But for now, the bull market will continue because U.S. companies continue to report strong earnings growth. The U.S. dollar will start to level out as U.S. growth slows and as the economic growth gap with non-U.S. stock markets narrows. The growing U.S. budget deficit should also put a lid on the dollar over the medium term.”

 

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