In a sobering warning, Goldman Sachs Group Inc. President John Waldron cautioned that the United States could face grave consequences if unchecked government spending collides with a political crisis, according to a new report from Bloomberg.
Speaking at a Semafor event, Waldron drew parallels to the recent pension fund turmoil in the United Kingdom, where a risky investment strategy known as liability-driven investment (LDI) backfired following the announcement of unfunded tax cuts and increased state funding by Prime Minister Liz Truss’s government.
“The thing that I worry about is the confluence of a political crisis and a lot of leverage in the Treasury system,” Waldron stated.
He emphasized that excessive leverage amplifies risk, urging Washington to rein in its spending habits.
The UK’s pension fund debacle, which Waldron attributed to a “Truss budget at that moment that didn’t have a lot of credibility,” exposed a significant vulnerability at the core of the country’s financial system.
A run on government bonds, or Gilts, revealed a levered structure that had gone unnoticed until the crisis struck.
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Waldron expressed concern that a similar scenario could unfold in the US if a political crisis were to occur. “So I think we should worry about that,” he warned.
The Goldman Sachs president also cautioned against taking the US dollar’s reserve currency status for granted.
Goldman Sachs President John Waldron warned that out-of-control spending could expose the US to serious risk in the event of a political crisis. https://t.co/eIL5HOdU8Z
— Bloomberg Markets (@markets) April 18, 2024
With foreign buyers like China, who have historically been significant purchasers of Treasuries, reducing their investments, US households have been left to pick up the slack.
Waldron pointed out that there is an assumption that the growing wealth in the US will continue to flow into Treasuries, as investors believe there is no viable alternative to the dollar in the near future.
“You’re making a pretty big bet that will continue to be the case,” Waldron remarked, highlighting the potential risks associated with this assumption.
Waldron’s warnings serve as a reminder that out-of-control deficit spending has become the norm in Washington, D.C.
Politicians from both sides of the aisle have shown little inclination to curb spending, even in the face of looming crises.
The prospect of a political upheaval, combined with the extensive leverage in the Treasury system, creates a precarious situation that could have far-reaching consequences for the US economy.
As the nation’s debt continues to balloon, the likelihood of politicians taking decisive action to address the issue before a crisis erupts appears increasingly slim.
Waldron’s candid assessment underscores the urgent need for fiscal responsibility and a reevaluation of the nation’s spending habits.
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Failure to do so could leave the US vulnerable to the same kind of financial turmoil that rocked the UK, with potentially devastating consequences for the global economy.
Image source: Wikimedia
