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The writer is president of the Rockefeller International Foundation. His last book is “What went wrong with capitalism'
Having described America's excessively large share of global financial markets as “The mother of all bubbles“In my last article, the main opposition I received, even from the few people who share my view, was that there is no sign that this bubble will deflate any time soon.
Almost no one expects an imminent pop. Almost every Wall Street analyst expects US stocks to continue outperforming the rest of the world in 2025. But all this enthusiasm only serves to confirm that the bubble is far advanced. If the consensus on “American exceptionalism” is so overwhelming, who might jump on the bandwagon and amplify it even further?
The certainty about Wall Street has extended to the popular media, which often picks up on market trends only when they are well established and near their end. The hype about American supremacy is now the stuff of television, radio, podcasts, newspaper columns and magazine cover stories, which has a record of pointing the wrong way about future trends.
The bulls say that America is capable of remaining dominant, given the impressive profits achieved by companies in the country. But profit growth in the United States would not have been exceptional without the abnormal profits achieved by major technology companies and huge government spending. Over time, competition takes place for extraordinary profits. Growth and profits also get an artificial boost from the largest deficit spending ever recorded at this point in the economic cycle, so far.
Despite this, most economists claim that the economic boom will continue, with the balance sheets of American households and businesses in good shape. The few who worry about President-elect Donald Trump's tariffs or immigration plans tend to believe they will hurt foreign economies more than the United States.
But every hero has a fatal flaw. America is suffering from a sharply increasing addiction to government debt. My calculations show that it now takes nearly $2 in new government debt to generate an additional $1 in US GDP growth – a 50 percent increase from just five years ago. If any other country had spent this way, investors would have fled, but for now, they believe America can get away with anything, as the world's leading economy and reserve currency issuer.
More likely, by some time next year, investors will balk and demand higher interest rates or a show of fiscal discipline, perhaps due to larger deficits or increasingly large auctions of Treasuries. These demands would wean the United States from its dependence on government spending, at least temporarily, which in turn would undermine economic growth and corporate profits.
To be clear, this is a bubble in America's performance relative to the rest of the world, not just a 1990s-style mania in the US market. Therefore, it could shrink in a benign way if the alternatives start to look more attractive.
Perhaps Germany and France can join their economic efforts together This is what Greece and Spain did a decade ago When you are under duress. Beijing, under pressure from Trump's tariffs and weak domestic demand, may finally boost consumption to stabilize the economy.
But analysts, fascinated by American exceptionalism, cannot help but talk about how the United States has remained the world's number one market for a century. They forget that in six of the past eleven decades, the country's stock market has lagged behind the rest of the world, most recently in the 2000s when it generated zero returns and emerging markets tripled in value. As that decade came to a close, the situation in emerging markets mirrored the certainty I hear about the US now: “Where is the money going?”
The impressive outperformance compared to other countries may end if growth slows in the United States, picks up in other major powers, or for unforeseen reasons. And that's how bubbles often end: unexpectedly. The most recent manias in global markets were the commodities boom, which began to explode in 2011 as new supply surged, and China's growth bubble, which collapsed in 2021 amid a government crackdown on the real estate sector.
The longer a trend lasts, the more confident investors become, and the more randomly they go crazy. In the late stages of a bubble, prices usually become parabolic, and over the past six months US stock prices have outperformed others by the largest margin of any comparable period in at least a quarter century. When flying in such thin air, it doesn't take much to stop the engines. All the classic signs of extreme prices, valuations and sentiment indicate that the end is near. It's time to bet against “American exceptionalism.”
