The Impact of Debt

Overconfidence is a much bigger problem when leverage is high—that is the simple reason the banks fell so hard.

If Congress and the president decided to lay out a real (and credible) plan to reduce the deficit over time, say five or six years, to where it was less than nominal GDP, the bond market would (we think) behave. Reducing deficits by $150 billion a year through a combination of cuts in growth and spending would get us there in five years.

better—financial leverage is something you need to watch carefully. As with any kind of debt, a judicious amount can boost returns, but too much can lead to disaster.

Instead, when you have interest rates at zero, those scenarios become hugely important. If anything, fundamentally, the economy becomes much more of a gambling economy, because the future that has much bigger error bars becomes as important as the present where the error bars are much smaller. It’s not easy to deal with that.