Shocks, Crises, and False Alarms: How to Assess True Macroeconomic Risk by Philipp Carlsson-Szlezak & Paul Swartz

Author:Philipp Carlsson-Szlezak & Paul Swartz [Carlsson-Szlezak, Philipp & Swartz, Paul]
Language: eng
Format: epub
Tags: Business & Economics, Economics, Macroeconomics, Finance, Financial Risk Management, Strategic Planning, Commercial Policy, General, Mathematics, Game Theory, International
ISBN: 9781647825416
Google: m7zHEAAAQBAJ
Publisher: Harvard Business Press
Published: 2024-07-08T23:00:00+00:00

CHAPTER 15

The Threat of Debt, Imagined and Real

In Lionel Shriver’s dystopian novel The Mandibles: A Family, 2029–2047, readers are immersed in a macroeconomic dystopia.1 Crushed by its mountain of debt, the United States has defaulted, the greenback is worthless, and hyperinflation rages. The crisis stretches beyond macroeconomics and leads to a societal breakdown. Gold, guns, and a farm offer the best chance of hanging on. The Mandibles, a family of wealth, are fighting for survival.

Though this novel is entirely fictional, it speaks to real—and surprisingly common—fears about the macroeconomy.2 When we discussed the novel with Shriver in 2021, she told us that her plot, which begins in 2029, could turn into reality before a potential movie hits the screen. In fact, fears about a debt-driven economic meltdown are commonplace, particularly among the wealthy, who have the most to lose.3 The topic also features in boardrooms unexpectedly often.

Yet these worries have been around for a long time, and so far, they have never been substantiated. As far back as 1986, Peter F. Drucker wrote in Foreign Affairs: “With every deficit year the indebtedness of the U.S. government goes up, and with it the interest charges on the U.S. budget, which in turn raises the deficit even further. Sooner or later … confidence in America and the American dollar will be undermined—some observers consider this practically imminent.”4

Over the subsequent nearly 40 years, the US national debt has grown dramatically. And while macroeconomic crises have come and gone, the catastrophe foreseen by Drucker has failed to materialize—despite frequent warnings of its being “practically imminent.” Were debt doomsayers wrong (for a discussion of dollar risks, see chapter 20), or are they simply early? Have we inexorably inched closer to an even higher debt precipice?

Concerns about public debt are not unfounded, and it’s wrong to say that deficits don’t matter. Unease is warranted if for no other reason than that crises—the big and the small—are exceptionally difficult to predict and can have tremendous impact. But the common existential fear is misguided and often rooted in an undue focus on debt levels. To better assess the macroeconomic risks that the public debt poses, we instead need to focus on a framework that captures the interplay of nominal growth (g) and the nominal interest rate (r), what we call the g-versus-r framework.5 We also discuss how risks from private debt differ.

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