The Daily Friend dailyfriend.co.za October 18, 2026

On the surface all is good.  Growth is solid, the dollar strong. The economy is running at full employment, having matched a 1960s record with the jobless rate below 5% for 61 consecutive months.  Despite a 40% rise in fuel prices from the Iran war, the stock market has been at record highs.

So, what could possibly go wrong?

The answer may be debt, deficits, inflation and speculation.

Last year at a conference in Hong Kong historian Niall Ferguson was discussing the rise and fall of nations.  He told the audience at the HSBC event that he had promulgated Ferguson’s Law:  when a country’s debt service exceeds its spending on defense, that nation is in decline.  In 2024, he continued, for the first time in modern history debt service in the US exceeded its defense budget.

It’s worse now.  The non-government Committee for a Responsible Federal Budget calculates that interest on debt in fiscal 2026 (which ended September 30) will total $1.1 trillion and is second only to social security payments in government spending. Public debt in the US has reached $40 trillion and interest payments are three times higher than in the 2019-2021 period.

The treasury estimates that the 2026 fiscal deficit will be $2 trillion, 6.2% of gross domestic product.  The deficit is swollen by spending for the war against Iran. The International Monetary Fund says that deficit to gdp ratio is low. It calculates the deficit is more likely 8% of gdp, an exceedingly big number for an advanced economy.

The debt debacle is not going to improve if interest rates keep rising.  With US inflation at 3.7%, well above the Federal Reserve’s 2% target, in September for the first time in three years the US central bank raised short-term interest rates.  Financial analysts expect more rate rises in the months ahead.

Will the United States ever pay down its debt?  No, says Carlyle private equity founder David Rubenstein. He believes that at some point there will be a crisis in which the dollar is devalued to make the debt less burdensome.  Entrepreneur Elon Musk is similarly pessimistic.  He said this month that only if America dominates the global economy in robotics and artificial intelligence can it avoid eventual financial calamity.

Another red flag is speculation.  In recent years US equities have outperformed their peers, rising 16% in 2025. The tech heavy Nasdaq has done even better, powered by strong corporate earnings and data center investments related to artificial intelligence.  Investors who own shares of the magnificent seven tech firms (Apple, Microsoft, Meta, Alphabet, Tesla, Nvidia, Amazon) have done very well.

There is FOMO (fear of missing out) among foreign investors. They’ve been rushing into American stocks, investing nearly one trillion dollars so far this year. Often the investments are made with borrowed money, which is not good if rates are rising.  Is this gambling?

None of the above portends imminent trouble.  Valuations suggest this is not 2000 when the dot com bubble burst.  There are no signs of recession in the immediate future. But what happens if some unforeseen event triggers panic and a sudden withdrawal of hot money?

Financial crises can erupt quickly and have long-term consequences.  Fifty years ago, in September 1976, Britain had to seek an emergency loan from the International Monetary Fund to halt a calamitous run on the pound. Investors lost confidence in the British government’s ability to combat inflation and control spending.  The IMF demanded austerity. The pound declined from $2.22 to $1.74. UK economic sovereignty was diminished.

Here in the US things look OK for now.  But prudent investors need to read history and be aware of market fragilities.#