BIS: “We know from experience that things look sustainable until, suddenly, they no longer do.”

 “Markets could at some point question fiscal sustainability,” Claudio Borrio, head of the BIS economic department, said in a press conference ahead of the release of the report.

U.S. government debt has been rising even more sharply over the past decade, and the International Monetary Fund warned Thursday that it is set to reach a record high of 140% of GDP by 2032 if taxation and spending don’t change.

“Such high deficits and debt create a growing risk to the U.S. and global economy,” the IMF said in its annual assessment of the U.S. economy.

The BIS said that before the Covid-19 pandemic, the threat posed by high and growing debts was hidden by a long period of near-zero interest rates, which pushed debt servicing costs to historic lows. 

Wall Street Journal 1 July 2024

Annual Economic Report 2024

- There is no way to know when it will happen. There is no magic debt level, no magic drop in currencies, no percentage level of fiscal deficits, no single point where we can say ‘This is it.’

 Reading that now, I see I was describing what I’ve elsewhere called a collapsing sandpile, or a “Minsky Moment.” 

Debt is sustainable until it suddenly isn’t. Some event, some last grain of sand, triggers the hidden fingers of instability and it all collapses. And anything can be that trigger.

This is why debt crises are so destructive. By their nature, no one is prepared because no one sees them coming. A few expect them, yes, but they never know the timing. 

History shows over and over that in a debt crisis, everything is fine and then it’s not.

John Mauldin 21 June 2024


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