‘Black Swan’ author Nassim Taleb says the US is heading for a debt ‘death spiral’
Story by Jennifer Sor, Market Insider, 1/30/24
The US is facing a “death spiral” as a result of its mounting debt and the inability of politicians to confront the issue, according to “The Black Swan” author Nassim Taleb.
Per Bloomberg, the Universa Investments advisor who correctly called the 2008 financial crash cast a dire warning about the US debt situation, which has seen the federal debt balance notch $34 trillion for the first time ever to start the year.
As long as Congress keeps up its rapid pace of spending, those debts are going to continue to pile up, which could have disastrous consequences for the US economy, Taleb said this week at an event held by Universa Investments.
In fact, rising debt in the US is a “white swan,” Taleb said, and is an event that poses an obvious risk to markets versus a “black swan” event, which can occur without much warning. Despite being broadcast to experts well before it becomes a true problem, the US debt load is making the economy more vulnerable to shocks than it has been in previous years, Taleb said.
“So long as you have Congress keep extending the debt limit and doing deals because they’re afraid of the consequences of doing the right thing, that’s the political structure of the political system, eventually you’re going to have a debt spiral,” Taleb said at an event for Universa Investments on Monday, per Bloomberg’s report. “A debt spiral is like a death spiral,” he added.
That death spiral would necessitate “something to come in from the outside, or maybe some kind of miracle,” Taleb said, when asked how the shock would play out, adding that the situation has made him more pessimistic about the political system in the West.
Experts have been sounding the alarm on the US’s rapid pace of borrowing for a while, but have voiced louder concerns recently after the Fed began to aggressively raise interest rates in 2022. The Fed funds rate has been raised to 5.25%-5.5, the highest cost of borrowing since 2001. That means that debt service costs have also risen, and the US is paying more interest on the bonds it’s issuing to finance the government.
Investors are anticipating the Fed to cut rates this year, but interest rates are still likely to stay higher-for-longer as central bankers keep an eye on inflation. That could help push US debt costs to a new record by 2025, Goldman Sachs previously predicted.
Borrowing is inherently inflationary, experts say, meaning the US’s high debt load could “collide” with the Fed’s inflation fight. Some of Wall Street’s most bearish commentators are warning of the risk of a stagflationary debt-crisis, a worst-case scenario where high debt and high inflation result in stagnant economic growth.
Congress has yet to approve a budget for the fiscal year that began in October as lawmakers continue to spar over spending. Congressional leaders last week approved another bill to delay a government shutdown, giving policymakers until March 1 to work out details on the budget.