Renowned bond market expert Jeffrey Gundlach, often referred to as the “Bond King,” has issued a stark warning about the United States’ financial stability. Gundlach predicts that in the event of the next economic crisis, it will become painfully evident that the USA is teetering on the brink of bankruptcy, leaving it unable to meet its obligations. This revelation, he asserts, will trigger a significant decline in the value of the US dollar, with far-reaching consequences for global financial markets and the American economy.
According to Jeffrey Gundlach, dubbed the king of the bond market, during the next economic crisis, it will be understood that the USA is bankrupt and will not be able to fulfil its obligations, which will cause the dollar rate to drop sharply.
The major US stock indices Standard & Poor’s 500 and Nasdaq Composite have risen in price by 16 and 31 percent, respectively, this year. Investors have been bullish on stocks on hopes that advances in artificial intelligence and potential rate cuts by the Federal Reserve will help boost profits for listed companies.
Gundlachi said in an interview at the Future Proof conference that investors don’t see “demons on the horizon” and the main concern here is the cooling of the US economy. He cited waves of corporate layoffs, declining consumer purchasing power and record levels of credit card debt as red flags. He also talked about the sharp increase in home loan interest, which has a cooling effect on the real estate market. However, higher interest rates trap small companies, for whom debt refinancing has become much more expensive.
“The economy is clearly weakening,” Gundlach said. “I expect a recession next year, and the indicators are shaping up to be very convincing. We have reached the end of the economic cycle.”
The fund manager has earned the title of “Bond King” after the departure of the legendary Bill Gross – meaning he is considered the most important and influential person in the bond market.
Investors Understand That The US Is Bankrupt
According to Gundlach, however, the US government’s response to the next crisis will be key. This year, according to him, the economy has been kept afloat by dangerous and unsustainable government spending. In the next crisis, spending will rise even more, and this is the moment when investors will realise that the US is bankrupt and that spending like this is unsustainable.
“The economy is growing only because our budget deficit is 8 percent of GDP,” he said. “It’s as big now as it was at the deepest point of the financial crisis that started in 2008.”
Gundlach emphasised that, for the most part, the government has financed its spending at low interest rates. Now that the Federal Reserve has raised interest rates from zero to more than 5 percent, the government’s interest payments on top of its insane debt load are beginning to swell rapidly.
“I think they want a quick slowdown in the economy. I believe interest rates will come back down because if a recession happens under their leadership, it will be devastating to their reputation,” he added.
The US Government’s Response To The Next Crisis Will Be A Disaster
According to Gundlach, the cycle of interest rate hikes is over, and he predicts that the Federal Reserve will start cutting interest rates already in the first half of next year.
All these factors mean that the dollar can expect a sharp depreciation ahead. “When the recession comes, the dollar will do very badly, because we will see the budget deficit rise to 20 percent of GDP. It will be very ugly,” he explained. “I think the dollar will depreciate sharply in the next recession, because the response to the next crisis will be a complete disaster given the state of our budget.”
“This will be a wake-up call to realize that the United States is bankrupt, that we cannot meet our obligations,” he said. “The US government has unfunded liabilities of almost 200 trillion dollars, which is eight times larger than our GDP. In order to pay this at current purchasing power, we would have to pay off 10 percent of our GDP for 80 years in a row. We would have four generations of depression. We don’t do that.”
“Instead, we choose to abandon the dollar and we see a restructuring of the US financial system,” he explained.
Tavex analyst’s comments:
The fiscal position of the United States is very bad indeed. If you look at the structure of the US national debt, a large part of the debt matures in just a few years. The average bond maturity is about 74 months – meaning high interest rates have only just begun to be reflected in US interest payments. We can see this even now, where annualized interest payments on the national debt have risen to $970 billion in the second quarter of this year. Three years ago, this figure was only 520 billion. In the past, the 40-year downward trend of interest rates has made it possible to service the very large national debt, which, in my opinion, has now reversed.
For comparison, it can be pointed out that the structural deficit of the 2023 budget in Estonia is 2.6 percent – this is considered a big problem that must be solved with tax increases. In the US, three times the deficit is the norm, solved simply by issuing more debt. It should also be remembered that government spending is also taken into account in GDP growth. This means that if the US government ran a budget surplus, it would probably mean a deep recession.
Of course, the US is in a significantly different position than other countries because their currency is a reserve currency that they have the right to issue more of indefinitely. The U.S. also runs a large trade deficit, which means that much of the newly created dollars are moving out of the country. Despite the efforts of several countries to reduce their dependence on the dollar, the demand for them remains high internationally – 70 percent of international trade transactions are made in dollars. This means that much of the monetary inflation is moving out of the US.
Will the dollar suffer a sharp decline in the next crisis? In my opinion, the dollar may initially suffer a big drop, but it must be taken into account that today’s crises are global, and probably other countries will also react to the economic downturn with low interest rates and money printing. It should be remembered that the most followed dollar index (DXY) measures the dollar’s performance against other major currencies. And in the next crisis, all currencies will probably fall, it’s just a matter of which ones will be hit the hardest. We saw a similar thing after the start of the corona crisis in 2020 – the dollar reacted with a big drop, but has since recovered, and there was also a rapid strengthening in the meantime. This can partly be explained by the dollar milkshake theory, which you can read more about here.
Although we may even be hit by inflation in the first phases of the recession, the response to the crisis will be loose monetary policy and money printing. This will devalue all currencies and probably lead to another wave of inflation within a few years. This in turn means that the value of goods, services and assets will begin to increase against currencies. Real assets, including gold, should do particularly well in such an environment.
Gundlach’s cautionary words serve as a sobering reminder of the fragility of the U.S. economy and the potential consequences of unsustainable government spending. As economic indicators point towards an impending recession, questions arise about the government’s ability to respond effectively. The looming specter of a depreciating dollar and the need for a fundamental restructuring of the U.S. financial system underscores the urgency of addressing the nation’s fiscal challenges.