Macro Risks and Active Accelerants
THIS PAPER WAS PUBLISHED AT THE BEGINNING OF MAY, OUTLINING 3 KEY RISKS THAT ARE IMPACTING THE GLOBAL ECONOMY (and asset prices). IT HIGHLIGHTS HOW 2 ACCELERANTS COULD BRING FORWARD THE REALISATION OF THOSE RISKS.
THE CONTINUED RISE OF LONG END YIELDS IS A SIGN THAT THE RISKS OUTLINED IN THIS PAPER ARE COMING TO FRUITION. UNLESS POLITICIANS CHANGE COURSE, EXPECT HEIGHTENED FINANCIAL MARKET VOLATILITY AHEAD WHICH WOULD HAVE AN IMPORTANT IMPACT ON GLOBAL ECONOMIES.
BELOW IS THE INTRODUCTION - EMAIL ME FOR A FREE COPY OF THE COMPLETE PAPER.
---------------------------------------------------------------------------------------------------------------------------
The Debt and Financial Market Risk That Many Have Not Been Briefed On
Opening Provocation
"Every year, the major institutions publish their risk frameworks. Every year, the same themes dominate — geopolitical tension, climate risk, and technological disruption. And every year, the global economy finds a way to surprise them. The reason is simple: they are watching the wrong things."
Most risk discussions at board level focus on the visible and the immediate — tariffs, geopolitical instability, artificial intelligence, the energy transition. These are real concerns. But they are symptoms. The underlying cause — the structural fault line that connects virtually every major economic risk of the current era — receives far less attention than it deserves.
That fault line is debt. Not debt as an abstract fiscal concept. Debt as the force that has driven growth, inflated asset prices and funded both private and public sector ambition for four decades. Excluding the pandemic, the biggest disruptions to the global economy over that period have not come from the risks that dominated boardroom agendas. They have come from debt and financial markets — the dot-com collapse, the Global Financial Crisis, the European sovereign debt crisis. Each arrived as a shock to most businesses precisely because the underlying financial dynamics were not visible in conventional risk frameworks.
This paper argues that a new episode of financial and economic disruption is building — driven by the same underlying force that caused each of those previous crises: the accumulation of debt beyond the economy's capacity to service it, now meeting a structurally higher interest rate environment for the first time.
Most business leaders are well-briefed on the immediate risks facing their organisations — supply chain fragility, geopolitical tension, the opportunities and threats of artificial intelligence. They are considerably less briefed on the structural financial risks that sit beneath all of these — risks that originate in sovereign debt markets and financial system dynamics, that are not yet visible in day-to-day business conditions, but that have the potential to affect financing costs, demand, input costs and strategic planning horizons across every sector and every geography.
That is the risk this paper sets out to explain.
The Framework That Built Forty Years of Prosperity – And Why It Is Breaking Down
Beat 1 - How the Stable World Was Built
For four decades, the global economy operated in conditions that, in retrospect, were extraordinarily benign. Interest rates fell almost continuously from the early 1980s until 2022. Inflation remained low and stable. Credit was cheap and increasingly available. Businesses could borrow to invest, households could borrow to consume, and governments could borrow to spend — all at a cost that declined year after year.
This stability was not accidental. It was built on two mutually reinforcing foundations.
The first was the globalisation of trade and production. The emergence of Japanese manufacturing in the 1980s and 1990s, followed by China's entry into the World Trade Organisation in 2001, integrated hundreds of millions of low-cost workers into the global economy. The result was a sustained reduction in the price of manufactured goods that lasted two decades. Combined with the offshoring of services and back-office functions to lower-cost economies, this kept inflation persistently low across the developed world — allowing central banks to keep interest rates at historically low levels without triggering price instability.
The second was the expansion of debt. Cheap credit fuelled consumption, investment and asset prices. Businesses grew faster than their underlying economics would otherwise have permitted. Households accumulated mortgages and consumer debt. Governments borrowed to fund public services and welfare commitments. The system worked because the cost of carrying all of this debt — interest rates — kept falling.
What is critical to understand is that the two foundations reinforced each other. Globalisation suppressed inflation, which allowed central banks to keep rates low, which made debt cheap, which enabled more borrowing, which drove more growth. The debt supercycle and the disinflationary dividend were not separate phenomena — they were two sides of the same coin.
Central banks, many of which had only recently gained independence in the late 1990s, were mandated solely to keep consumer price inflation low. There was no mandate to monitor or constrain the growth of debt. As long as goods and services prices remained stable, the debt could grow unchecked — and it did.
Beat 2 - The Structural Change
The expansion of debt over four decades was not uniform. It followed a pattern — one that has repeated across many economies over many centuries — that is essential to understanding where the fragility now sits, and why the growth that governments and central banks keep promising has been so persistently disappointing.
In the first phase, it was the private sector that borrowed. Households and businesses increased their leverage dramatically, facilitated by low interest rates and rising asset prices. Public debt remained relatively contained. Then, when private sector debt reached levels that the system could no longer sustain, central banks raised rates, asset prices fell, and financial crises followed — the Nikkei collapse in Japan, the dot-com crash, and most severely, the Global Financial Crisis of 2008.
What happened next is poorly understood — even, it must be said, by many of the central bankers and economists tasked with managing it. When the private sector reaches peak leverage and a financial crisis forces deleveraging, something structurally important changes. The private sector — households and businesses — stops borrowing and starts repaying debt. It does this regardless of how low interest rates fall — particularly when asset prices remain elevated and unaffordable for new borrowers. This is not irrational behaviour. It is the entirely logical response of an over-indebted borrower to a changed environment. Japan demonstrated this with painful clarity from the early 1990s onward. The United States, the UK and the Eurozone repeated the same pattern after 2008.
This matters enormously for growth — and for the promise of growth that governments have been making ever since. When the private sector deleverages, the normal transmission mechanism of monetary policy breaks down. Central banks cut rates to zero. They expand their balance sheets through quantitative easing. And still the economy grows slowly, if at all, because the dominant force is not the availability of cheap credit but the imperative of debt repayment. Classical economic frameworks, which do not adequately account for the role of debt in driving cycles, consistently fail to predict this — which is why the growth forecasts of the post-2008 era were wrong year after year.
Into this gap stepped governments. They borrowed heavily and increased their leverage to prevent their economies from falling into deep recessions — and they were right to do so. But the quality of that spending has rarely matched its scale. Governments are structurally less efficient allocators of capital than the private sector — constrained by political pressures, short electoral cycles and institutional inertia, they tend to direct spending toward consumption, transfers and entitlements rather than productive investment.
CHART: GOVERNMENT BORROWING INCREASES WHEN PRIVATE SECTOR STARTS ITS DELEVERAGING CYCLE
The result is that public debt has surged without generating the growth that would make it easier to carry. Each crisis ratcheted government debt permanently higher as the private sector delivered — as the charts above illustrate — and government debt never came back down. The pandemic delivered a second, equally dramatic upward step. Debt rose. Growth remained disappointing. And the interest bill began to climb.
The result is a profound and largely unacknowledged dependency. The developed world is now reliant on large and persistent government deficits simply to avoid recession. Remove the fiscal support, and the underlying private sector deleveraging dynamic reasserts itself. This is not a temporary condition. It is the structural reality of an economy that has passed the peak of its private debt cycle and has not yet found a sustainable path to growth that does not depend on government borrowing.
For business leaders, the implication is direct and uncomfortable. The strong, self-sustaining growth that would justify current investment plans, hiring decisions and revenue forecasts is not coming — not because of temporary headwinds, but because the structural engine that drove growth for four decades has shifted. What has replaced it is a dependency on government spending that is itself becoming increasingly difficult to sustain as interest costs rise and fiscal room narrows.
Beat 3 - Why Now is Different
In 2022, central banks across the developed world began raising interest rates at a speed and scale not seen in modern financial history. The trigger was the inflation shock that followed the pandemic — but the underlying cause was the end of the disinflationary forces that had kept prices stable for four decades. Globalisation is reversing. Supply chains are shortening. Trade barriers are rising. The low-cost labour arbitrage that suppressed goods prices for two decades is unwinding.
The rate rise that followed was not merely large — it was globally synchronised. Every major central bank hiked simultaneously from near-zero, with no economy offering an offsetting buffer of easier conditions. And it arrived at precisely the moment when government debt was at its highest level in peacetime history.
Three consequences flow directly from this:
First, governments are now refinancing the debt they issued at near-zero interest rates into a market demanding significantly higher yields. The United States Treasury refinanced $5.7 trillion of maturing debt in 2025 alone — equivalent to 18% of GDP. The interest bill is rising rapidly and will continue to rise for years regardless of what central banks do next, as more low-coupon debt matures and must be replaced at current market rates.
Second, higher interest rates are transmitting directly into household finances. Mortgage costs are rising as fixed rate terms expire. Consumer debt is more expensive to service. The purchasing power of the consumer — who drives 60–70% of GDP in most developed economies — is being squeezed at precisely the moment when businesses are hoping for demand-led growth.
Third, the policy tools that governments and central banks used to manage previous crises are significantly less available. With debt already at elevated levels and inflation still above target, the ability to borrow more or cut rates aggressively to cushion the next shock is materially constrained.
High debt does not automatically produce a crisis. What it does is create a condition of structural fragility — a system in which the normal buffers have been consumed, the room to respond has narrowed, and the margin for error has all but disappeared.
From Condition to Crisis — The Role of Accelerants
Every major financial crisis of the past four decades began not as a crisis but as a slow accumulation of imbalances that the system could not ultimately sustain. The Global Financial Crisis did not begin in 2008 — the conditions that made it inevitable were visible years earlier in the accumulation of mortgage debt, the mispricing of risk and the inadequacy of bank capital buffers. The pandemic did not cause the public debt problem — it dramatically accelerated a problem that was already building.
This is the pattern: a slow accumulation of fragility, followed by an accelerant that converts a manageable deterioration into a sudden crisis. The GFC was the first accelerant — it transformed private sector debt stress into a public sector debt crisis across the developed world. The pandemic was the second — it dramatically deepened that public sector fragility at a moment when it had barely begun to recover.
The three risks that follow — public debt sustainability, high interest rates and global trade disruption — are the direct consequences of that accumulated fragility. They are already active. They are already affecting financing costs, household incomes and supply chain economics. They do not require a further trigger to cause damage.
What concerns me most is what comes next. Two further risks — the Iran conflict and the artificial intelligence investment explosion — are independent in origin, driven by geopolitics and technological competition respectively. But each has the potential to interact with the existing fragility in ways that are explosive rather than gradual. The kindling has been accumulating for four decades. The question is not whether it is there. It is what provides the spark — and whether organisations are prepared when it arrives.
CHART: GFC AND PANDEMIC - 2 RECENT ACCELERANTS
The paper continues and discusses:
The Three existing risks in detail
i. Public Debt - the fiscal trap is closing
ii High Interest Rates - The Transmission mechanism is working
iii Global Trade - The engine of stability is running into reverse
The Two Accelerants
i. Iran and Energy
ii Artificial Intelligence
The Probability of Accelerants
The Killer Question: When does the debt problem become the market event itself?
What Financial Markets are telling us
CONCLUSION - The case for preparation
Email me for a free copy of the complete paper.
Comments