Jamie Dimon: The $35 Trillion Dollar Storm Brewing in the US Economy

What you should worry about is the deficit. Today it is 7% of GDP. When Volcker was around and we had very high inflation, it was 3 and a half percent. The debt to GDP is 35% back then, 1982. It's 100% today. The deficit is the biggest peacetime deficit we've ever run. Deficits by their nature are inflationary.

Uh, and you know one point, we have to deal with this. Billionaire Jamie Dimon is observing some distressing signs in the US economy. In a recent interview with Bloomberg, Dimon warned about a $35 trillion storm that is brewing in the US economy. This problem is generations in the making but until recently had been flying under the radar. However, now it has simply gotten too big to ignore.

You need to be paying attention to this because the consequences of this storm finally making landfall have the potential to be devastating. Jamie Dimon’s position as CEO of JP Morgan Chase, the largest bank in the United States, gives some unparalleled insights into the US economy, and it's safe to say he is worried about what he is seeing.

Listen to what he has to say: "I'm not going to worry about that. I think what you should worry about is the deficit today is 7% of GDP. When Volcker was around and we had very high inflation, it was 3 and a half percent. The debt to GDP is 35% back then, 1982. It's 100% today. The deficit is the biggest peacetime deficit we ever ran. Deficits by their nature are inflationary. Uh, and you know one point, we have to deal with this. I mean I would beg the government to set up a powerful Simpson-Bowles type of committee authorized by the Congress, up or down vote. It's probably the only way to do it."

"The other way to do it is wait until there's some kind of disaster in the market and then you're kind of forced to do it at the wrong time, and I don't know when that might be. I will happen next year, probably not. But, you know, can America afford 120% debt of GDP? Probably, but should we wait for that hockey stick to start? I don't think so. I think it's just a bad way to run risk."

A budget deficit occurs in a country when federal government spending exceeds its revenues. While deficits can drive growth in the economy, create jobs, and lessen the impact of recessions, they can also increase debt and worsen inflation. When a deficit gets too large, it can create a downward spiral of a declining economy and sky-high inflation—a combination that has pushed countries into having to make some very tough and unpopular decisions.

In extreme cases, it can even send countries into bankruptcy. Dimon is worried that the United States is on the brink of hitting the point of no return. The US has been running a deficit every year since 2001, and the fiscal deficit has topped a whopping $1.8 trillion so far in 2024. This is the highest deficit ever, besides when the economy was shut down during 2020 and 2021, when the government had to take drastic actions to stimulate the economy, including sending stimulus checks to households and implementing trillion-dollar relief programs in response to a severe economic shock.

On the surface, the US economy is incredibly strong. Gross domestic product, or GDP for short, is a measure of the size and health of the economy. As you can see here, GDP continues to grow at a healthy and steady rate. Additionally, the current unemployment rate of 4.1% continues to sit well below the long-term average of around 6%. Household wealth is at an all-time high, and the stock market and home values continue to soar.

All of these numbers would seemingly point to a strong and vibrant economy. However, according to Dimon, looming in the distance is a terrifying and ever-growing storm that may soon be too big for the US to vanquish. That is the massive US Federal deficit. The deficit has continued to pile up despite government reassurances stating the opposite. In fact, the debt held by the US is growing faster than the economy, or GDP, and there aren't signs of it slowing down anytime soon.

Take a look at this chart: the federal debt relative to the size of the economy held by the US is projected to continue growing and be higher than it was even during World War II, the financial crisis, and the public health crisis in 2020. If this pace of spending continues, it's possible that other lenders will notice that America is not paying down its debt. These lenders could start demanding higher interest rates, leading to a collapse in the value of existing bonds and triggering a financial crisis.

This crisis would be even worse than usual, though, as the government would not have the ability to take even more debt to bail out the country like it has previously. Naturally, all of this has left Jamie Dimon worrying that the US government could reach a point where it is unable to repay its debt. If the deficit doesn't start to get under control, if that happened, it would have disastrous consequences for the US economy.

The US federal government is projected to spend more on interest than everything it spends on defense or Medicare in 2024. By around 2050, interest is projected to be the single largest federal government program. This means that even if the country is able to get the deficit under control, America's total debt will continue to rise. Like a person that has gotten into too much credit card debt, high interest payments start to add onto the balance owed, creating a snowball that builds up over time until it is simply unbearable.

A good measure to determine how likely a country is able to repay its debt is the debt to GDP ratio. The higher the debt to GDP ratio means that a country's government will likely have more difficulty paying back its debt. This increases the risk of default, which could cause financial panic in both domestic and international markets.

Now the ratio itself is very simple. First, you take a country's total public debt and put that number in the numerator of the equation. As of the making of this video, the total public debt in the United States stands at a whopping $35.7 trillion. Next, you take that same country's GDP and put that in the denominator of the equation. As of the making of this video, the GDP of the United States is $29.02 trillion.

Now, dividing 35.7 trillion by 29.02 trillion gets you a debt to GDP ratio of 123%. Now, is this a good or bad debt to GDP ratio? Well, you are about to be in for quite the surprise when you see a chart of the debt to GDP ratio dating back to before 1970. At 123%, the debt to GDP ratio is at one of the highest levels ever. In fact, as Jamie Dimon pointed out, the debt to GDP ratio is over three times higher than it was in the late 1970s and 1980s and even higher than the long-term average of 65.7% from 1940 to 2023.

So what does this mean for the US economy? Well, as Dimon noted, the effects may not be immediate. The economy can survive on this large of a deficit so long as there is money to borrow. But the further we kick the can down the road, the worse it is going to be for America.

Listen to this quote from Dimon in a separate interview he did with Sky News: "At one point it will cause a problem, and why should you wait? The problem will be caused by the market and then you will be forced to deal with it, and probably in a far more uncomfortable way than if you dealt with it to start."

So how do we get the deficit under control? Well, there are currently three accepted options for lowering the fiscal deficit. The first is to tame inflation. While inflation has come down significantly from its peak, Dimon is still worried that we are entering a long-term period of structurally higher inflation. Listen to him explain: "You know you said that there are a lot of inflationary things that are coming down the pike. Do you think that it was a mistake for the FED to cut by 50 basis points? No, actually. I mean, you got to separate the here and now."

Inflation has definitely been coming down. They don't want to go into recession. Unemployment has been going up. They were raising rates, but they raised it very high rapidly to 5%. I think is the right thing and they're right to take their foot off the gas in that one. I don't think it matters that much 50, 25, honestly. But I think that was okay. If inflation comes back, I'm looking at future things: the remilitarization of the world's fiscal deficits, particularly the United States, are inflationary. The green economy is inflationary. Demographics are inflationary.

Uh, it's very possible energy prices down the road—I'm talking about two, three years—be inflationary will hit later. They should react at that time to those things, but I don't think you can anticipate that. We don't know that that's going to happen. As Dimon noted in the interview, deficits are inflationary by nature. This is due to the laws of supply and demand.

Now let me explain this concept using a basic supply and demand graph. Right here we have the demand line. This line represents the demand for a particular good or service. And here we have the supply line. The supply line represents the number of goods or services available to be purchased at any given time. The point at which our two lines cross represents the price for that good or service.

You see, when the government spends a lot of money on projects and creates a deficit, the demand for those goods and services increases. As the deficit continues to increase, there is also an increase in demand illustrated by our demand line here getting pushed to the right. Notice how now the two lines cross at a much higher price point.

As we can see, the shifting supply and demand dynamics has generally caused prices for goods and services to skyrocket. This, of course, is a simplified explanation of how inflation works, but it conveys the important message: inflation happens when there is too much demand for a good or service relative to the supply available in the market.

The good news is that the Federal Reserve is already taking steps to tame inflation. However, this process can take years, and it will not happen overnight. Only time will tell if taking down inflation will have an impact on the massive deficit the US is running.

The second option for lowering the fiscal deficit is for the government to decrease government spending. Now, this may sound pretty obvious, but it's actually a lot harder to do in practice. The government often struggles to significantly decrease spending because many programs are politically sensitive, meaning cutting them can lead to intense public backlash. Additionally, reducing spending can have negative economic impacts, potentially leading to job losses and an economic slowdown.

Additionally, a large portion of government spending is considered mandatory, like Social Security and Medicare, so it's difficult to cut those without major policy changes. Though reducing expenditures may not be easy to do in practice, there is one other option to consider. This option is on the other side of the deficit equation.

The third option for lowering the fiscal deficit is for the government to raise taxes on individuals. This is obviously not a popular choice for many reasons. To begin with, raising taxes on citizens is a slow process. In the US, Congress must agree on a tax law, which then must be implemented. Now, if you have been paying attention to US politics at all over the past few years, that's nearly impossible to do.

Further, politicians are generally very reluctant to increase taxes as it's typically unpopular, costing them votes. So it doesn't seem like the deficit problem will be solved anytime soon, but Jamie Dimon's dire warning is clear: the sooner we do not solve this, the worse off we will be as a country. If we want to have a strong economic future, we need to make sure politicians focus on this.

If you made it this far in the video, it is obvious you are serious about learning what's happening in the economy, so make sure to check out this video here because legendary investor Warren Buffett talks about the trillion-dollar storm brewing in the real estate market. I will see you over there.