JPMorgan Sounds Alarm on Deficits and De-population as Interest Rate Drivers

JPMorgan's economists have sounded the alarm on two major factors that will drive up interest rates worldwide. The bank's research team, led by Joyce Chang, has identified 'deficits' and 'de-population' as the key contributors to higher borrowing costs.

The global debt burden has reached $251 trillion, with public debt alone totaling $100 trillion. This has reduced fiscal space, leaving governments with little room for maneuver when it comes to budgeting and spending. Elevated deficits have been driving up interest rates, with JPMorgan warning that this trend will continue.

The bank's economists point out that the theory is that an expanding national debt may spark fears that the government is less creditworthy, leading the Federal Reserve to increase the money supply and create inflation. However, governments have leaned heavily on fiscal stimulus during times of crisis, without implementing well-identified offsets or rebuilding fiscal space.

In the US, a larger stock of debt and higher interest rates point to higher term premiums, with JPMorgan warning that the unsustainable US fiscal deficit has not yet caused significant damage to the economy. However, the bank notes that any dramatic military, political, energy security, or economic setbacks could make the US no longer the safest and strongest country.

The demographic challenge is also a major concern for JPMorgan's economists. Advanced economies are facing declining birth rates and aging populations, which will lead to a smaller labor supply and increased demand for pension and healthcare expenditures. Without offsetting measures such as higher government revenues or changes in the interest rate-growth differential, these spending pressures imply a substantial increase in public debt across jurisdictions beyond 2031.