Sahil Mahtani

The era of “easy globalisation” is over. Investors and policymakers now face a more fragmented, volatile and politically charged global system, in which long-standing assumptions about growth, inflation and market stability are increasingly unreliable.

In The end of easy globalisation^[1], Ninety One Investment Institute Director Sahil Mahtani sets out how the model that underpinned the global economy for the past three decades — characterised by US-led stability, cheap commodities and broad political consensus — is breaking down. In its place, a more complex and less predictable environment is emerging, shaped by geopolitical competition, resource constraints and rising domestic political pressure.

Sahil Mahtani, Director, Investment Institute: “Globalisation isn’t ending — but it’s no longer happening on easy mode.  The assumptions that defined the last 30 years are now being challenged all at once.”

Three structural forces are driving this shift.

First, the return of multipolar geopolitics. The post-Cold War era of US dominance is giving way to a more fragmented system, with power dispersed across the US, China and a growing group of influential middle powers across the Gulf, Asia and beyond. As a result, competition is increasingly playing out in “grey zones” — from trade policy and technology to cyber and industrial strategy — rather than through direct military confrontation.

Recent developments underscore this shift. The US has become more selective in its global commitments, prioritising key regions and pushing allies to take on greater responsibility, while China has expanded its economic and geopolitical reach through trade, industrial policy and strategic partnerships. At the same time, countries such as India, the UAE and others are exercising greater autonomy, pursuing more transactional relationships with major powers. “We’re moving from a unipolar world to a more competitive, multipolar system where friction is the norm, not the exception,” Mahtani said.

Second, a shift from commodity abundance to constraint. For decades, the global economy benefited from cheap and readily available energy and materials, enabling long, efficient supply chains and keeping inflationary pressures contained. That backdrop is now changing.

Demand for commodities is rising sharply, driven by electrification, AI infrastructure, defence spending and the reconfiguration of global supply chains. At the same time, supply is becoming more constrained due to underinvestment, long project lead times and increasing geopolitical intervention.

The result is a world in which energy, metals and critical minerals are no longer neutral inputs, but strategic assets. Export controls, stockpiling and industrial policy are becoming more common, while access to key resources is increasingly shaping both economic and geopolitical outcomes. Recent disruptions to energy and food markets following Russia’s invasion of Ukraine, alongside growing competition over critical minerals used in clean energy and technology, illustrate how quickly these pressures can translate into real-world shocks.

Mahtani: “What used to be plumbing — energy, metals, supply chains — is now strategy.  Access to resources is becoming a defining feature of both economic and geopolitical power.”

Third, the rise of an “age of grievance”, as stagnant living standards, rising inequality and rapid demographic change fuel public dissatisfaction across major economies. In many countries, real wage growth has been weak for over a decade, while wealth gains have become increasingly concentrated.

At the same time, large-scale migration and ageing populations are reshaping labour markets and social dynamics, while social media is amplifying political polarisation and dissatisfaction. Together, these forces are contributing to a more volatile policy environment, with governments under pressure to prioritise national interests, economic security and domestic stability.

This shift is already visible in the retreat from free trade orthodoxy, the rise of industrial policy and growing scepticism towards global institutions. Trade relationships are becoming more transactional, and economic policy is increasingly intertwined with national security.

“Public dissatisfaction is no longer a background issue — it’s a primary force shaping markets, policy and international relations,” Mahtani noted.

Taken together, these forces point to a “fourth systemic crisis” — a crisis of global integration, in which economic, political and geopolitical pressures are becoming increasingly intertwined. Unlike previous periods of instability, this is not a single shock, but a broader regime shift in how the global system operates.

For investors, the implications are significant. Portfolios built for a world of stable inflation; predictable correlations and a single global growth engine are likely to prove less resilient in the years ahead. Instead, the environment is likely to be characterised by more episodic inflation, shifting correlations and greater divergence across countries and sectors.

Mahtani: “This isn’t a cyclical shift. It’s a structural reset in how the global system works.  Investors are navigating a world of higher volatility, fatter tails and greater dispersion — not a single, benign macro backdrop.”

Global integration is not reversing, but it is becoming more fragmented, politicised and harder to sustain. In this environment, resilience, diversification and adaptability are likely to become increasingly important as markets adjust to a more uncertain and uneven global landscape.

———-

Notes:
[1] The end of easy globalisation

The post Globalisation gets harder: A new era of constraint, competition and volatility appeared first on AdviserVoice.

Sahil Mahtani

War in the Middle East and the disruption of energy flows through the Strait of Hormuz has potentially introduced a stagflationary shock at a time when markets were positioned for a goldilocks or reflationary backdrop. There are three parallels to the early 2020 dynamic that investors should note, according to Sahil Mahtani, Director, Investment Institute.

At first glance, early 2020 may seem an odd analogy for the current moment. The Iran crisis of 2026 is not a natural disaster or an accident but a deliberate act. And the economic transmission mechanism is different: while the Covid lockdowns created both a supply and demand shock, this is primarily a supply shock. But the comparison is still useful because, in both cases, markets may have recognised the event without fully pricing the second and third-order implications.

The first reason this could prove to be an early 2020 moment is simply the starting point. In both cases, this inherently stagflationary shock has arrived as markets were positioned for a Goldilocks environment. In early 2020, markets expected S&P 500 earnings to grow around 9% while interest rate markets were positioned for one cut by the end of the year. At the start of 2026, the S&P 500’s 2026 and 2027 year-on-year earnings estimates are +16%. For the ACWI, it is 17% and 14%, respectively. Meanwhile, SPY/TLT, which measures how US stocks are performing relative to longer-term bonds and is a simple measure of market expectations for future growth, is down just 5% from the February peak, while the dollar has firmed.

In other words, markets were pricing in above-trend growth, mild disinflation and a healthy backdrop for cross-asset returns despite elevated valuations.

Part of the reason for the sanguine price action is that markets have internalised the lesson of fading geopolitical shocks. Strategists are showing variants of the same table itemising previous geopolitical risk episodes and making the case that risk markets have typically ended up higher 12 months after previous such episodes. The Atlantic energy benchmarks that financial markets typically look at are also not reflecting the disruption to energy markets as much as Asian energy and product benchmarks. For instance, WTI ended last Friday (March 20) lower than the previous week, even as Singapore jet fuel rose 12% in the same period.

The second reason this could be an early-2020-type moment is that markets may be pricing the wrong policy destination (partly because they are underestimating the hit to growth). Currently, pricing transmission seems to be higher oil prices, higher headline inflation, more hawkish central banks and higher yields. That is due to some early economic data, but primarily hawkish central bank speak. Hence markets have priced in three more hikes this year in the UK, three in the eurozone, and at times have leaned toward a hike in the United States. Ultimately, we think markets are assuming a more hawkish central bank reaction function than will eventually apply.

Indeed, the initial headline inflation shock could be large, especially in Europe and Asia. In Europe, the inflation shock is likely to be around 150bp. But there is likely to be much less persistent pass-through to inflation than in the wake of the 2022 Ukraine war shock, given restrictive monetary policy and more limited pandemic-style fiscal intervention. Should worse war and energy scenarios materialise, financial conditions will tighten further, and the growth impact will ultimately be weaker. Should European central banks worry about the un-anchoring of inflation expectations, they will hike. But the combined effects of energy and terms-of-trade shocks, along with tighter financial conditions, would, in our view, push economies towards very weak growth and create medium-term downside risks to inflation

The third reason we may be in an early 2020 moment is that the commodity shock is likely to reverberate for months in ways not captured by the Atlantic benchmarks alone. True, the oil intensity of global GDP is far lower than it was in the 1970s, but product markets are already showing the non-linear effects of the shock. Jet fuel, bunker fuel and naphtha have risen faster than crude. Nearly half of global methanol supply comes from the Gulf region and the Gulf accounts for 43% of global urea, 44% of global sulphur and 27% of global ammonia supply. Those inputs run through plastics, packaging, fertilisers, construction, chemicals and transport. Meanwhile, markets are still trying to price the impact of global plant closures or plant damage in the Persian Gulf.

Countries have already begun introducing export controls (Thailand, China), price caps (South Korea), reserve releases (IEA 32-country coordinated release), tax cuts (Vietnam, Austria), shorter workweeks (Thailand, Philippines, Pakistan, Bangladesh) and coal or nuclear restarts (Japan and South Korea). That is exactly what one would expect when a physical energy shock starts pushing governments to act. This is concentrated in Asia more than in other places because that is where energy resources that pass through Hormuz primarily flow.

The closure of the Strait of Hormuz is one of two geopolitical events that strategists have always worried about (the other being Taiwan), and the removal of 10-15% of global oil flows and 3% of global natural gas consumption is a major shock even to hitherto oversupplied energy markets. If energy product market stress persists, if more countries intensify demand-restraint measures, and if financial markets continue to treat the episode as a manageable inflation scare rather than a growth shock, then the gap between physical reality and financial pricing could close abruptly.

The post Macroscope: Is the Iran crisis an early 2020 moment for markets? appeared first on AdviserVoice.

Sahil Mahtani

Sticky inflation, rising fiscal strains and weak growth are eroding the role of bonds as a portfolio ballast, forcing investors to rethink defensive diversification, according to Sahil Mahtani, Head of Macro Research.

You hold government bonds for their ballast: they’re meant to rally when growth wobbles and equities sell off. That premise looks shaky these days. Medium-term inflation has not been durably contained; the fiscal arithmetic is deteriorating; and trend growth is too soft. Put together, these forces push term premia up and keep stock–bond correlations higher than the pre-2020 norm. This blunts bonds’ ability to offset equity drawdowns. So do you need them at all?

Start with inflation. It has eased from its 2022-2023 peaks but remains stubbornly above target in many advanced economies. In the UK, despite the lack of a feared wage-price spiral, inflation has been particularly sticky, with services inflation still hovering around 3.5% yoy. Sticky inflation has been driven by regulation – for example, five years of fast-paced increases in minimum wages, excise duties, packaging rules and loose fiscal policy, layered on top of higher global costs. That has interrupted disinflation and kept long-dated gilt yields higher.

In the US, fears of persistent inflation have deferred policy easing, despite cooling growth momentum, providing one reason why long-term Treasury yields are near cycle highs. Even in the euro area, where falling inflation has allowed a sizeable cutting cycle, disinflationary base effects have now played out and the bar is high for inflation not to rise into year-end 2025, especially with rising credit and money supply. As we get a wave of new capex cycles driven by the AI build out, deglobalisation and increased geopolitical tensions, the age of a higher, more volatile inflation regime is at hand, making the case for a new, higher normal in yields.

A second headwind is fiscal vulnerability. Across the OECD, the median real 10-year yield is now positive (roughly 1-2%) vs where it was in the late 2010s, pushing up the effective cost of debt. In 2024, interest payments consumed about 3.3% of GDP, up from 2.7% in 2015–2019. This rise is projected to continue. OECD refinancing requirements have risen from US$7.5 trillion in 2019 in the OECD to $13tn in 2025, a product of higher borrowing and a shift towards issuance of shorter maturities during the pandemic. Central bank holdings are also drifting lower, forcing more supply onto more price-sensitive private balance sheets, ergo increasing term premia.

The recent UK OBR long-term forecast underlines the long-term risks. At end 2024, the UK government deficit stood at 5.7% of GDP, debt was around 94% of GDP, and the 10-year gilt yield at end June was 4.5%, the third-highest borrowing costs among advanced economies. The OBR notes debt has ratcheted higher over decades. Stabilising it now requires a primary surplus of about 1.3% of GDP, a sharp swing from the current -2.2% deficit, because debt dynamics have worsened: real borrowing costs now exceed real growth rates. Meanwhile, the UK increasingly looks like a country attached to a health service, with health spending plausibly doubling over the long term. Due to ageing, chronic illness and low productivity, NHS spending will rise from 7.9% of GDP in 2025 to 14.5% by the 2070s, according to the OBR. By then, debt is projected to be 270% of GDP.

The third headwind is weak growth, which offers little relief. Euro-area real GDP growth is projected at just 1.1% for 2026 (with significant downward revisions since January), despite rising public spending. In the US, 2026 growth is only 1.7% even after modest upward revisions since May. Of course, this is a late cycle environment, and recession risks may well derail these fair-weather consensus forecasts. The result, weak trend growth with higher real rates, is exactly the combination that worsens debt dynamics and keeps term premia elevated

When inflation is sticky, deficits persistent and growth subdued, owning duration does not reliably cushion risk-asset selloffs in portfolios. Should the factors outlined above persist, bonds simply become a lower-returning version of equities. There is no meaningful diversification when the stock/bond correlation is as high as 60% (as it is in some countries, having risen materially since 2022). Duration no longer protects against recessions because policy cuts are too shallow, meaning the rally does not arrive when needed.

The conclusion is challenging for many portfolios: without a decisive improvement in inflation control, fiscal consolidation, or trend growth, government bonds will continue to struggle in their traditional role as portfolio shock-absorbers. The UK’s unattractive cycle of high yields, difficult budget decisions, and worsening growth could well spread.

If sovereign bonds are compromised, how should investors diversify defensively in portfolios? Bonds are roughly half of the global market portfolio so cannot be ignored entirely. So, what can investors do within fixed income? First, use options strategically. If traditional diversification is at risk, replacing direct exposure with call-replacement or protection strategies can provide more reliable and occasionally cost-effective volatility reduction. Second, more esoteric fixed income exposure may offer something genuinely differentiated, for instance, some emerging markets and some dollar-bloc developed markets. Either way, things must change for everything to stay the same.

The post Government bonds: the end of the shock absorber appeared first on AdviserVoice.

Sahil Mahtani

Ninety One has published the latest in its research series examining the strategic implications of shifting macro dynamics for the US dollar and global portfolio construction.  The Shrinking Upside in the Dollar Story^[1], contends that while past cycles were defined by an unambiguous American overweight, the next may be shaped by a structural rethink of that allocation norm.

“Since the global financial crisis, allocating to US assets has been the easy trade,” said Sahil Mahtani, Head of Macro Research, Ninety One. “Yet as 2025 unfolds, that consensus is being severely tested.” Washington’s growing embrace of tariffs, a deteriorating fiscal position, and a more transactional foreign policy posture are all reconfiguring the strategic foundation of US asset dominance.

Dollar cycles typically span 18 years^[2] and only turn when four structural forces — geopolitics, growth differentials, investment flows, and currency interventions — realign within a narrow window. That condition is now taking shape. While turning points are rare, Mahtani has identified three reasons suggesting upside risk for the dollar is shrinking due to: the dollar’s valuation, normalisation of unusually high US investment allocations, and shifting sentiment in the dollar’s global role.  Trump could accelerate this trend by expanding fiscal deficits and compressing the US’s relative growth premium.

The US Dollar is now extremely expensive

The US dollar has appreciated over 40% since 2011, pushing valuations toward historically unsustainable levels — comparable to the peaks preceding the 1985 Plaza Accord and the 2001–2002 downturn. “Today’s ratios of PPP-based to USD-based GDP are at the highest levels in almost 25 years,” said Mahtani. On a purchasing power parity (PPP) basis, US GDP is equal to its nominal output, but China’s PPP GDP is double its nominal size, and India’s is four times larger.

“This overvaluation affects competitiveness. A further rise would exacerbate the growing competitiveness issue in the United States versus the rest of the world,” Mahtani continued.  A 20–30% correction could bring the dollar more in line with global cost structures.

The dollar is likely to fall

Moreover, portfolio rebalancing, hedge ratio normalisation, and benchmark weight adjustments are aligning to create multi-year pressure on the greenback.  Institutional investors — especially in Europe and Japan — have at times in 2025 incurred sizeable losses on unhedged US equity positions. For example, a 2025 YTD unhedged allocation to the S&P500 was underperforming the Stoxx 600 by over 20 percentage points in euros at one point in mid-April (and as of August 1 is underperforming by 12%). Mahtani: “If Europeans were to ‘normalise’ their US equity weight, roughly US$500 billion of stock would need to be sold.” At present, foreign investors hold around US$32 trillion of US securities, with about half owned by European and Japanese institutions.

Additionally, work by Wenxin Du and Amy Huber shows that hedge ratios — particularly in US bonds — have fallen since 2018. Simply rewinding those modest changes would prompt US$1 trillion in FX trades against the dollar.

However, a full structural downcycle likely requires broader valuation convergence. “Overseas investors rarely lighten US exposure while American firms dominate global earnings and innovation… Investors might do so if there are compelling opportunities outside the US. So understanding the path of the dollar requires understanding what the “phase II” AI trade looks like.” said Mahtani.

Downside risk to the dollar’s position in the world is becoming increasingly salient

This is not just a cyclical trade. Structural risks to dollar centrality are rising. “The prospect of a medium-term shift is more visible than it was even a few years ago.” The PBoC’s move toward greater currency flexibility, and the 2022 seizure of US$300 billion in Russian central bank reserves, have shifted perceptions among sovereign reserve managers.  Gold’s rise since 2021 — “in defiance of conventional models” focused on real rates — suggests it has overtaken the euro in the sovereign safe asset hierarchy. Countries like India, Brazil, Chile and Zambia, while nominally floating, continue to shape monetary policy around the dollar, making any softening of dollar dominance globally significant.

Stepping back from dollar centrality

Domestic signals matter too. The appointment of Stephen Miran as head of the Trump Council of Economic Advisors brought renewed attention to ideas like taxing dollar inflows. While Miran has since distanced himself from the paper, the mere fact the ideas are being discussed are an interesting signal. This logic of capital controls appeared again in Section 899 of the 2025 fiscal reconciliation bill, which would have raised taxes on foreign held US assets and removed sovereign exemptions. “Its inclusion underscores how quickly anti-inflow proposals can move from fringe policy papers into near-term legislative drafts.”

Eroding Fed independence

Institutional erosion also threatens the dollar’s appeal. The 2025 Wilcox Supreme Court case was a close call. Although the Court explicitly exempted the Fed from presidential removal powers, describing it as a “uniquely structured, quasi-private entity,” the ruling signalled that future challenges may still surface.

America’s debt trajectory

The fiscal position adds further strain. Stabilising debt-to-GDP ratios would require an improbable combination of very high real growth, very low rates, and substantial primary surpluses — conditions not currently supported by legislation. “Even including tariff revenues, fiscal risks are growing, not shrinking.”

Conclusion

A structural dollar weakening has become the most probable scenario. “There is no symmetry in the case of owning the dollar.” Left tail risks are growing — institutional, fiscal, and geopolitical — just as alternatives become marginally more investable.  Mahtani concludes: “If the age of the unquestioned American overweight is behind us, the implications will be profound.”

———

Notes:
[1]  The Shrinking Upside in the Dollar Story
[2] Dollar cycles typically span 18 years.

The post The shrinking upside in the dollar story appeared first on AdviserVoice.

Sahil Mahtani

An investor recently recalled asking an older colleague in late 2000 when the right time would be to buy the NASDAQ. His answer, which turned out to be broadly correct: “When people stop asking that question.”

For Chinese equities, that point was reached last year. Faced with rising regulatory and geopolitical risks in an economy shackled by pandemic policy, investors had stopped asking the question. However, then came a pivot on pandemic and macroeconomic policy, and a rally ensued. According to the Bank of America fund manager survey, fund managers went from exceptionally bearish to exceptionally bullish in the span of about twelve months.

Peak optimism was early 2023. Weaker than expected Chinese data in the context of medium-term structural challenges mean investors are again worrying about allocations to China. Year to date the ACWI has outperformed Chinese equities by 15%. Pessimism is prowling in.

We think this is creating opportunities to invest in what we expect will be a robust cyclical recovery.

First, foregrounding structural economic concerns has been a classic error made by investors at the early stages of a cyclical recovery in China. Investors were similarly pessimistic in mid-2012, mid-2016, and mid-2019, worrying about debts, or the property cycle, or about demographics. However, that did not stop Chinese equities from staging a powerful rally from 2016 to 2017. Last year China’s real output was 1.5x the size it was in 2016. None of this is to say China’s structural challenges aren’t real; investors need to think about those long-term challenges. But in the short term what will matter for markets is the course of the cyclical recovery.

Second, China’s stalling recovery is easily explainable. The slowdown in the growth momentum in April and May is because policy support was prematurely withdrawn, as indicated in new credit and issuance data. This is not because policymakers are insufficiently committed to easing but because they were probably overconfident about the strength of the recovery on one hand, and worried about the risks of a debt build up on the other.

However, with the economy exhibiting plenty of spare capacity–as evidenced by low inflation and high youth unemployment–policymakers have an incentive to pursue expansionary fiscal policy. The top priority, made clear in speeches and minutes since December, remains boosting demand. New policy supports, including one last week on real estate, are being announced. Ultimately, China is a command economy and will go where policy makers want it to, with a lag. The Chinese leadership itself is highly incentivised to deliver a positive outcome given the CCP’s social contract with the population.

Finally, what about geopolitics? Doesn’t this make China fundamentally uninvestable? While every asset owner has to make the investability decision in the way that fits the needs of their stakeholders, we believe the spate of geopolitical concerns about China after the invasion of Ukraine is vulnerable to recency bias and availability bias. We would be wary of drawing easy parallels between Russia and China.

There are many differences, but two can be cited here: Chinese behaviour in revising the international order has been about mostly working through existing institutions or creating new institutions it can control (like AIIB). Russia has pursued armed combat overseas several times since 2000 (Georgia, Syria, Ukraine). China is a rising power with time on its side. Russia is a declining power. Finally, the barriers to decoupling are much higher. China’s economy is deeply integrated into Western production processes, whereas Russia was a relatively small and undiversified economy.

Regardless, the key question for the next 12 months is whether the US-China relationship is getting worse or better–at least three high-level US-China meetings in May 2023 suggest the possibility that things are improving.

Philosophically, as investors what we are trying to do is invest in assets with macro tailwinds and invest against those with macro headwinds, and crucially to allocate to those ideas counter-cyclically. Markets overindex to short-term noise and focus on past data.

We try to do the opposite. Nowhere are the opportunities greater to do this today than in China.

By Sahil Mahtani, Strategist 

The post Macroscope: Opportunity knocks when investors lose faith appeared first on AdviserVoice.

Sahil Mahtani

Ninety One Strategist Sahil Mahtani and Analyst Daniel Morgan say that it is easy to imagine worse scenarios.

At some point in the 2010s, it became unfashionable to worry about the long term fiscal outlook. Inflation was extraordinarily low and interest rates were set low in response. Post-2008 worries about inflation from QE proved misplaced. Reinhardt and Rogoff’s link between high debt and low growth was flattered by an excel error. High inequality, the need for massive green investment, and unpopular austerity measures led prominent analysts to adopt Keynes’ mantra, “anything we can do we can afford.”

In this context, the 2023 debt ceiling fight feels like an anachronism—Republicans and Democrats fighting to invalidate spending that has already been approved, even after both parties have spent like drunken sailors, to use John McCain’s phrase. And the fact that this feels so anachronistic is why we think the standoff will probably be resolved. Both sides are in a very different place from where they were in the early 2010s. Nevertheless, this is unlikely to be the last fiscal bunfight in a new era of higher rates and inflation.

Broadly, there are four scenarios for how this debt ceiling skirmish could play out: a) most likely, a negotiated deal, probably involving some spending cuts and regulatory changes, b) a debt ceiling increase without Congressional agreement (via executive action or an unusual manoeuvre), which is less likely given the legal challenges that may result, c) a no deal scenario with the prioritisation of interest payments and d), with a vanishingly small probability, no deal with full default.

We think a negotiated deal is most likely because first, unlike 2011 and 2013, deficit concerns are not in the foreground today. Second, Republicans are less united than in the early 2010s, when their majority in the House was also much bigger. The composition of the $3.2tn of the discretionary spending cuts in the Local Government Services Act remain undisclosed because Republicans would rather not defend cuts to popular programs. Third, the Biden administration may in fact want, sotto voce, some fiscal restraint given the current macroeconomic juncture. In 2011, unemployment was high, and inflation was low; today it is the opposite. Finally, the Senate has been quite effective in getting bills passed in recent years, and there are some solid working relationships to act against the impasse.

The market implications of a resolution would be a repricing of the US macro outlook as a tail-risk to growth is avoided; the US rates curve will move modestly up in response. It will also result in the reversion of specific market anomalies, e.g. the T-bill curve will normalise. Finally, the liquidity outlook will paradoxically deteriorate as the US Treasury begins to rebuild its cash balance and liquidity is drained from the US economy, which is likely to be negative for US equities even if there will be some immediate relief in markets.

Looking further ahead there are some serious structural headwinds around the fiscal situation for markets to understand.

For one, US deficits are likely to be much higher. In its May update, the Congressional Budget Office projected that America’s deficit would average 6.1% of GDP over the next decade, well above the 3.2% average from 1980-2019. High deficits are not a problem when nominal interest rates are lower than nominal growth rates, as they were in the 2010s and in the Covid recovery period. That is because the power of compound interest is offset by the power of compound growth, so debt ratios do not snowball. But if nominal growth were to fall, for instance through normalising inflation or a recession, then debt levels could rise sharply. By 2033, the CBO projects federal debt to surge to 119% of GDP, surpassing its average over the past 50 years by about two and a half times.

It would be one story if debts were higher because of ambitious government programs. But the bulk of the deficit increase is just higher interest costs, and three-quarters of the growth in interest costs can be accounted for by increases in the average interest rate on federal debt. Net interest outlays will go from 1.9% of GDP in 2022 to 3.7% by 2033.

For context, the US defence budget is supposed to shrink from 3.0% to 2.8% of GDP in this period, apparently in the face of a geopolitical challenge from China.  Moreover, these forecasts from the CBO assume that the average interest cost on US debt rises quite modestly, from 2.7% to 3.2% by 2033.

It is easy to imagine worse scenarios.

The post Macroscope: The debt ceiling – an inevitable increase, an unavoidable reckoning appeared first on AdviserVoice.