By KBC Associate 
Americans are increasingly concerned that the U.S.’s soaring deficit and mountain of debt are major warning signs of an economic reckoning that could send the stock market reeling.
Those concerns intensified this week after Moody’s, one of the three most significant credit-rating companies, downgraded the U.S.’s credit because of fears that America’s debt was becoming more problematic.
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Spending more than you earn isn’t a great recipe, and mounting stagflation and recession risk due to newly implemented tariffs doesn’t help matters.
Overall, the backdrop has investors wringing their hands about what could happen next, particularly in the wake of a major stock market rally off the S&P 500’s early April lows.
The dynamic isn’t lost on longtime market participant Jim Cramer. Cramer, who famously blasted the Federal Reserve during the Great Recession as “knowing nothing,” recently weighed in on the impact of debt on stocks, delivering a blunt take on the situation.
A struggling US economy makes the US debt situation worrisome
America arguably has a spending problem, and it’s unlikely to get better anytime soon, given recent economic signs.
The US economy made major headway following the Covid pandemic thanks to record-setting monetary and fiscal stimulus.
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Arguably, stimulus payments to Americans and zero-interest-rate policy kept America from tailspinning into the biggest depression since the Great Depression in the 1930s.
However, those policies also caused inflation to skyrocket. In 2022, Federal Reserve Chairman Jerome Powell was forced to embark on the most hawkish rate cuts to battle inflation since former Fed Chairman Paul Volcker broke inflation’s back in the 1980s.
The rate hikes worked: Inflation has fallen below 3% from a peak above 8%. However, they came at a price. Because higher rates cap economic activity, job losses have increased unemployment to 4.2% from its 3.4% low in 2023.
The Fed switched tactics again, cutting rates late last year to shore up employment. However, this year it’s been forced to pause additional rate cuts to support the economy because of fears that President Donald Trump’s tariff plan would reignite inflation.
The situation leaves the Fed in a bind, trapped by its dual mandate to ensure low unemployment and inflation, two often competing goals.
As a result, many worry that we may enter stagflation, slow growth plus inflation, or worse, wind up in a recession with the Fed sidelined.
The US debt situation also means Congress might have little room to offer economic support through spending like during Covid-19.
The US deficit totals nearly $2 trillion annually, accounting for roughly 6.4% of gross domestic product. Meanwhile, total public debt outstanding is some 122% of GDP. For perspective, it was below 75% in 2008 during the Great Recession.
The debt has caught the attention of many prominent hedge fund managers and stock market watchers. Perhaps the billionaire Ray Dalio, the legendary founder of the hedge fund Bridgewater, has been most vocal about its risks.
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Dalio has witnessed his share of good and bad economies since founding Bridgewater in 1975, including the 1970s inflation spike, the savings-and-loan crisis in the 1990s, the internet bust in the early 2000s, the Great Recession in 2008, and the Covid tumble in 2000.
Dalio has been pounding the table for the past year, advising the government to cut its debt levels now or face a crisis.
“If you don’t do it, you’re going to be in trouble,” Dalio said on Bloomberg’s Odd Lots podcast. “I can’t tell you exactly when it’ll come; it’s like the heart attack. … You’re getting closer. My guess would be three years, give or take a year, something like that.”
Jim Cramer offers frank words on debt and stocks
Moody’s’ decision to cut the U.S. debt rating to Aa1 from Aaa comes after similar decisions by Fitch Ratings in 2023 and S&P Global in 2011.
S&P Global’s 2011 downgrade sent shockwaves through the market; the response to Fitch Ratings’ downgrade wasn’t nearly as worrisome. Most say that this time stocks will react similarly to 2023, given that 2011’s market shock was due largely to concerns about language restricting ownership of debt that wasn’t rated highest by many large debt owners, including pensions. That language has since been changed.
Jim Cramer is similarly less concerned about the debt overhang on the stock market.
More experts:
- Treasury Secretary has blunt 3-word response to stock market drop
- Fed chairman has blunt 9-word response to recession talk
- Billionaire Ray Dalio’s blunt message on economy turns heads
Cramer, who hosts a popular show on CNBC and founded TheStreet in 1996 before selling it in 2019, has also seen his fair share of market pops and drops and economic booms and busts.
On his May 19 show he delivered a blunt takeaway.
“In my lifetime, national debt worries have been proven to be dead wrong,” said Cramer. “The idea that you should sell everything because of the debt downgrade as that early warning sign, that makes no sense whatsoever.”
Cramer suggested that Americans could use volatility caused by debt worries to invest more of what they can save. But he cautioned against investing more aggressively.
“That’s the real hedge if you’re worried about the government’s creditworthiness,” said Cramer. “The concept of pulling out of the market because of something that might be a problem in the distant future is totally counterintuitive and wrong.”
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