Howard Marks, co-chairman of Oaktree Capital Management, contends that the U.S. demonstrates a profound lack of fiscal discipline, likening its position as the world's reserve currency holder to possessing a "golden credit card" with no credit limit and an ever-absent bill. He criticizes the current practice of incurring massive deficits during periods of prosperity, a stark contrast to John Maynard Keynes's advocacy for deficit spending only during economic slowdowns. Marks points out that the U.S. deficit is currently around 6% of GDP, an exceptionally high level given the economy's prosperity and a low unemployment rate of 4%.
Marks highlights the escalating cost of servicing the national debt, projecting net interest outlays to exceed $1 trillion this year, surpassing the defense budget. This rapid growth in interest payments is exacerbated by the debt's continued expansion relative to GDP and the potential for further interest rate hikes. He warns that this fiscal profligacy could lead to the U.S.'s "credit card" being revoked or restricted, immediately resulting in higher interest rates on U.S. debt and perpetuating a negative spiral of increasing costs and deficits.
He argues that the problem isn't speculative but a matter of simple math: spending outweighs revenue, debt is growing faster than GDP, and interest payments are skyrocketing. Marks dismisses Treasury buybacks as an effective solution, noting that recent increased buyback operations by Treasury Secretary Scott Bessent, including a tripling to $6 billion, have failed to impress markets, with yields moving higher. He states that such executive actions are often interpreted by the bond market as confirmation of a problem rather than a solution.
Marks emphasizes that the long-term solution requires a fundamental change in behavior, including adopting fiscal responsibility, curbing spending growth below GDP growth, and increasing revenues through higher income tax rates. He suggests that the U.S.'s bad habits could lead to investors losing confidence in U.S. Treasuries and the dollar, potentially manifesting as a "lower opinion of the dollar." For investors concerned about this risk, he advises considering assets denominated in non-dollar currencies, non-financial assets like gold or non-U.S. real estate, or non-U.S. companies and cryptocurrencies.
Ultimately, Marks asserts that one cannot defy the laws of economics indefinitely. He warns that the U.S. cannot perpetually spend more than it takes in without its creditworthiness being questioned and its currency and Treasury securities losing respect. He concludes that this is not primarily an investment problem but a political one that nonetheless poses significant challenges for investors, urging for action to address the underlying fiscal issues.
