- J.P. Morgan’s David Kelly warned this week that while America is “going broke” it's proceeding at a pace that's preventing market panic. Kelly noted that with the U.S. National debt surpassing $37.8 trillion and interest expenses climbing over $1.2 trillion, the debt-to-GDP ratio, currently at 99.9%, is poised to continue its ascent even with modest economic expansion. He warned that despite tariff income and short-term deficit reductions, political decisions or an economic downturn could rapidly deteriorate the fiscal outlook, advising investors to reduce their exposure to U.S. Holdings before “going broke slowly” shifts rapidly.
According to J.P. Morgan Asset Management’s chief global strategist, David Kelly, wrote in a note this week, America is facing financial ruin, though a lack of widespread panic stems from the government's gradual decline.
TL;DR
- J.P. Morgan's David Kelly warns America is "slowly going broke" due to ballooning national debt.
- U.S. National debt surpasses $37.8 trillion with interest expenses over $1.2 trillion.
- Tariff revenue is uncertain, and political decisions could rapidly worsen the fiscal outlook.
- Investors are advised to diversify portfolios due to the risk of a faster debt spiral.
Kelly outlined that while the economy is facing a barrage of issues (geopolitics, trade wars, changing immigration enforcement, and government shutdowns to name a few) one of the key longer-term issues is how the U.S. Government is going to pay its bills.
President Trump sought to reduce U.S. Federal debt, and its impact on the national debt, by proposing that Tesla CEO Elon Musk establish the Department of Government Efficiency (DOGE) with the goal with the goal of cutting $2 trillion from the federal budget.
However, the duo later had a significant disagreement concerning the White House's One Big Beautiful Bill Act, which the Congressional Budget Office (CBO) projected would add will add another $3.4 trillion to the national debt over the coming decade. The White House argued that its tariff policies would compensate for the expenditures and any revenue shortfall resulting from tax reductions. The CBO forecasts that tariffs will increase by $4 trillion by 2035, according to its estimates should reduce total deficits.
The United States' national debt is escalating rapidly. Currently, it exceeds $37.8 trillion, with an additional $1.2 trillion allocated for interest on this debt. Both JPMorgan CEO Jamie Dimon and Fed chairman Jerome Powell have voiced worries regarding this situation.
Kelly's contention is that although investors grasp the fundamental calculations, the issue will develop gradually over an extended duration.
“The question I am asked most frequently by investors and financial advisors is, ‘When is the federal debt going to blow up in all of our faces?’ My usual answer is that, while we are going broke, we are going broke slowly. Global bond markets are very well aware of the trajectory of U.S. Debt. The fact that even today, the U.S. Government can borrow money for 30 years at a yield of just 4.6% speaks to a conviction that there remains room for the government to borrow more,” Kelly wrote in a note yesterday.
Optimism or naivete?
The economist stated that short-term casual investors might find grounds for optimism. As an illustration, he highlighted tariff collections yielding substantial amounts ($31 billion in August, according to the White House) and recent estimates from the CBO and the Committee for a Responsible Federal Budget suggesting that fiscal year 2025 deficits will amount to 6% of GDP, a decrease from 6.3% in the preceding year.
Lenders in America closely monitor the decrease in borrowing relative to economic expansion. A country's debt-to-GDP ratio serves as a straightforward indicator of its capacity to settle its obligations or the elevated interest rates it might face when seeking to borrow.
Kelly advised caution, stating it's important to reflect on this figure. The aggregate federal debt held by the public has reached nearly $30.3 trillion, which we estimate to be 99.9% of GDP. Beginning at these thresholds, should nominal GDP expand by approximately 4.5% in the future (a combination of 2.0% real growth and 2.5% inflation), any budget shortfall exceeding 4.5% will lead to an increase in the debt-to-GDP ratio. Based on our projections, this ratio will ascend from 99.9% as of September 30th, 2025, to 102.2% of GDP 12 months later.”
Debt is likely to rise even quicker than this, he added.
Regarding tariffs, questions persist about the legality of Trump's actions. Kelly noted that if these are struck down by the U.S. Supreme Court, “this would, at a minimum, force the administration to go back to the drawing board to impose replacement tariffs under some other authority or by sending a bill through Congress. Moreover, it could force substantial refunds of tariffs already paid in recent months,”.
Furthermore, these projections depend on “no recession and no need for other major spending on domestic or international priorities.” Concerns are mounting regarding whether the U.S. Has already entered a recession in certain states. Kelly notes: “Because of all of this, a deficit equal to 6.7% of GDP should probably be regarded as a low-ball estimate of this year’s red ink.”
The takeaway for investors is diversifying their portfolios in case America’s debt begins to spiral more quickly than the current environment, Kelly said: “There is a danger that political choices lead to a faster deterioration in the federal finances, leading to a backup in long-term interest rates and a lower dollar. Based on current allocations and valuations alone, many investors should likely consider diversifying their portfolios by adding alternative assets and international stocks. The risk that we move from going broke slowly to going broke quickly adds an important reason to make this move today.”