US Debt Sustained by Strong Economy and Tech Sector Dominance

Over a century ago, Swedish economist Knut Wicksell proposed a theory that is gaining relevance today. His idea is centered around the concept of the 'natural rate of interest', which refers to the level of return investors get from investing in the economy as a whole. According to Wicksell, when market interest rates are out of sync with the natural rate, it can lead to inflation and economic instability.

Deutsche Bank's Chief Investment Office has applied Wicksell's theory to the current situation in the US, where the country is struggling with a massive debt pile of nearly $40 trillion. Despite this, investors have continued to fund the deficit due to the strong economy and its dominant position in artificial intelligence.

The team at Deutsche Bank argues that the high return on equity (ROE) available in certain sectors, particularly tech, has become a major factor supporting inward investment in the US. This has allowed the country to sustain large deficits without facing significantly higher interest rates.

However, this situation creates a fiscal loop where the government's spending on AI requires further borrowing, which in turn supports the continued growth of the sector.

JPMorgan Chase CEO Jamie Dimon had previously warned that if growth rates remain dwarfed by deficit levels, perceptions of risk may shift, prompting a market recalibration. The Deutsche Bank team notes that this advantage is narrowing and investors are now happy to funnel funds into US deficits because of higher returns compared to other destinations.