Have you heard the one about the businessman who discovers his product is unprofitable? “It’s fine,” he assures himself. “I’ll make it up in volume.”
Treasury Secretary Scott Bessent seemingly knows the joke. At the recent G-20 meeting in North Carolina, he gave it a reprise: “The world is awash in debt … and the only way for us to get out of this is to grow our way out of this.”
Bessent’s not alone. As The Economist reports, “Governments look increasingly as if they are betting on economic growth to pay the bills.”
Leverage is, functionally, a ratio. So it’s certainly possible to lower it by juicing the denominator.
Possible – but is it probable? Is it probable when U.S. debt held by the public tops 100% of GDP, with deficits approaching 6%? When real economic growth putters along at an annualized 1.5%?
In How Countries Go Broke, Ray Dalio studied historical sovereign debt crises and found that Bessent’s “happy path” – economic growth – reduced debt-to-GDP by an average of 26 percentage points. That sounds promising … until you read that “unhappy” paths like inflation, money printing, and default reduced leverage by another 53 percentage points.
Unhappy paths beat the happy path by a factor of two.
Even more disheartening? In Dalio’s research, interest on the debt added back a whopping 76 percentage points – nearly three times what economic growth took away.
“Ah, but selection bias!” you counter: Dalio studied cases that ended badly! Fair. We can turn instead to the McKinsey Global Institute, which studied 45 episodes of macroeconomic deleveraging. Its finding?
“…in just three [of 45] cases … were economies able to grow out of debt solely because of rapid economic expansions…”
Those expansions, by the way, were powered by oil booms. Or war.
As a leverage cure-all, growth is appealing. It requires no sacrifice, no difficult decisions, no cuts, no compromises. It’s the most saccharine solution available.
But history suggests it’s rare. It’s the equivalent of making it up in volume.