According to the Zhitong Finance APP, Goldman Sachs published an article stating that the large fiscal deficit in the United States has raised questions about debt sustainability, putting pressure on long-term U.S. Treasury bonds and the dollar exchange rate. However, there are signs that the U.S. stock market will continue to rise strongly.
Meanwhile, against the backdrop of tariff increases, Goldman Sachs' research department holds a cautious outlook on the U.S. economic prospects: economists estimate that the average effective tariff rate will rise by about 14 percentage points by 2025, with an additional 3 percentage point increase next year, approaching 20% by 2026.
How will tariffs affect the U.S. economy?
Goldman Sachs Chief Economist Jan Hatzius stated that the U.S. GDP is expected to grow by about 1% year-on-year in the fourth quarter. The risk of recession is about 30%, which is twice the historical average.
Hatzius said, &#34;In terms of the economy, this will continue to be a tough struggle. Economic growth will remain very slow.&#34;
Although import tariffs have had little impact on prices so far, Hatzius expects the core inflation rate to rise by about one percentage point this year, reaching over 3%. Rising inflation will put pressure on consumer spending. Hatzius stated, &#34;Consumer spending is already weak. It has stagnated, which is uncommon outside of a recession.&#34;
How will the U.S. deficit affect U.S. Treasuries and the dollar?
Despite signs that investors have begun to accept the U.S. tariff increases, the deficit issue has become a more significant concern.
Goldman Sachs Vice Chairman and former Dallas Fed President Rob Kaplan stated, &#34;We have always talked about the fiscal deficit issue, but in terms of net debt, our leverage is higher than at any time in our lives.&#34; He noted that the current U.S. budget deficit is about $2 trillion, approximately 6-7% of GDP, which is historically high outside of a recession.
He stated, &#34;When the economy reaches or approaches full employment, debt reduction will begin. During a recession, the fiscal deficit will rise significantly.&#34;
Kaplan indicated that concerns about the fiscal deficit have begun to be reflected in the prices of longer-term U.S. government bonds. Investors demand higher returns for holding longer-term government bonds, known as the &#34;term premium.&#34; Although U.S. Treasuries have long been a safe-haven asset globally, the prices of long-term bonds have not risen this year, even as economic growth expectations have declined.
Kaplan stated, &#34;So the question is: Are bonds with maturities of 10 years or more still safe-haven assets, the choice for investors chasing quality assets? Their performance has not been entirely so in recent months.&#34;
Hatzius mentioned that he has been &#34;more optimistic&#34; about the U.S. fiscal outlook in the past. For example, after the 2008 financial crisis, massive budget deficits accompanied rising unemployment rates. At that time, interest rates were far below the trend growth rate of real GDP, which helped offset the widening deficit.
He stated, &#34;A lot has changed.&#34; The economy is clearly not underemployed, and real interest rates are much higher. The yield on 10-year U.S. Treasury Inflation-Protected Securities is roughly equivalent to the potential growth rate of the U.S. economy. Hatzius stated, &#34;This means we can only sustain a much smaller deficit.&#34; He pointed out that the deficit rate needs to be several percentage points lower than it is now to stabilize the debt-to-GDP ratio
Despite this, Ashok Varadhan, Co-Head of Global Banking and Markets at Goldman Sachs, stated that the yields on U.S. government bonds have risen, making these securities potentially attractive to private investors. This is different from the situation during the global financial crisis to the COVID-19 pandemic, when inflation-adjusted real rates were negative.
When discussing U.S. Treasuries, Varadhan said, &#34;U.S. Treasuries are no longer expensive. Sovereign debt has reached a level that should be able to attract private capital, and it can also provide diversification.&#34;
Overall, Varadhan expects the U.S. Treasury yield curve to steepen: as the Federal Reserve lowers policy rates, short-term Treasury yields may decline relative to long-term Treasury yields. &#34;The question is whether this data is sufficient to support a modest or significant easing of monetary policy by the Fed,&#34; he said.
Affected by fiscal concerns, many investors have a more pessimistic view of the dollar, and Goldman Sachs Research expects the dollar to depreciate further. However, Varadhan noted that the U.S. is not the only developed market with an unusually large budget deficit. Goldman Sachs Research estimates that the U.S. budget deficit this year will be about 6% of GDP, France 5.5%, and the UK 3.6%. Varadhan believes that the value of assets such as gold and Bitcoin may rise relative to fiat currencies.
How will U.S. stocks perform amid an expanding deficit?
Kaplan stated that while rising deficits may pose challenges to long-term U.S. Treasury yields, net stimulus measures could boost GDP growth in the short term. The combination of net stimulus measures and significant investment in artificial intelligence may help explain why overall corporate earnings in the U.S. could remain resilient.
Kaplan emphasized that the ability of artificial intelligence to enhance productivity will be crucial in the coming years. Many countries are facing an aging population, and the debt-to-GDP ratio in many countries is also above normal levels. This makes innovation and productivity enhancement particularly important.
Varadhan noted that despite the U.S. stock market reaching historic highs, he remains &#34;strongly bullish.&#34; Deregulation will provide a boost to the U.S. economy, and whether the U.S. can fairly adjust trade relations and continue to attract the best, brightest, and most capable talent into its labor market will be critical.
Varadhan stated, &#34;We haven't even entered the early stages of corporate applications of artificial intelligence. Once companies start applying it, they will reap productivity dividends.&#34;

Goldman Sachs warns that due to the worsening U.S. fiscal deficit, long-term government bonds and the dollar are under pressure, but the U.S. stock market still shows resilience. It is expected that real tariffs will rise in 2025, economic growth will be slow, and GDP growth in the fourth quarter will be about 1% year-on-year. The risk of recession is 30%, the core inflation rate will rise above 3%, and consumer spending is weak. The fiscal deficit issue has become a focal point, with the current budget deficit at about $2 trillion, accounting for 6-7% of GDP

- Goldman Sachs highlights concerns over the sustainability of U.S. debt due to a significant fiscal deficit, which pressures long-term Treasury bonds and the dollar.  
- Despite this, the U.S. stock market shows signs of resilience, with GDP growth projected at about 1% in Q4 2025, although recession risks are elevated at 30%.  
- The article suggests that while rising tariffs may impact consumer spending and inflation, investments in artificial intelligence could bolster productivity and corporate earnings in the long term.

The deficit crisis exacerbates market fragmentation! Goldman Sachs warns: US debt and the dollar are under pressure, while US stocks show resilience