Crisis Inevitability and Base Rates

The Historical Base Rate

“Throughout history only a few well-disciplined countries have avoided debt crises. That’s because lending is never done perfectly and is often done badly due to how the cycle affects people’s psychology to produce bubbles and busts.” — a-00063

Near-100% historical occurrence across all major economies. Debt crises are not tail events — they are the modal outcome over a full generational cycle. The policy question is not whether but when and how well managed.

“Major debt restructurings/devaluations occur roughly once per generation (~75 years).” — a-00070

Frequency: ~once per 75 years. This timing makes them systematically underpriced by markets with shorter memory.

Why They’re Inevitable: Policy Bias

“While policy makers generally try to get it right, more often than not they err on the side of being too loose with credit because the near-term rewards (faster growth) seem to justify it. It is also politically easier to allow easy credit.” — a-00161

The political economy creates an irreversible bias:

• Easy credit = short-term growth = political reward
• Tight credit = stable long-term = politically punished
• Debt buildup = diffuse and distant = ignored until acute

Manageability

“Most debt crises, even big ones, can be managed well if economic policy makers spread out their negative impacts.” — a-00073

“Managing debt crises is all about spreading out the pain of the bad debts, and this can almost always be done well if one’s debts are in one’s own currency. The biggest risks are typically not from the debts themselves, but from the failure of policy makers to do the right things due to a lack of knowledge and/or lack of authority.” — a-00197

Key insight: The debt is not the problem. The policy response is. Local currency debt + competent policy = manageable. Foreign currency debt OR incompetent/constrained policy = crisis.

US Position (2025)

“At this time, I judge the long-term risks of US government debt to be very high because the current and projected levels of US government debt and debt service relative to revenues are the highest they’ve been since World War II.” — a-00117

The US is at post-WWII highs on debt/revenue and debt-service/revenue. This is a structural condition, not cyclical.

“By my measures the US and most major countries (the other G7 countries and China) are overindebted, in the late stages of their Big Debt Cycles, and have to frequently rely on Monetary Policy 3 (i.e., big fiscal deficits that are funded by central banks buying the debt).” — a-00120

G7 + China are all in late-stage position simultaneously — no major economy has a clean balance sheet to serve as credible safe haven.

Tension The US holds reserve currency status, which creates structural demand for USD assets and allows larger deficits for longer. But reserve currency status is itself at risk in late-cycle conditions. See reserve-currency-lifecycle.

Debt Crises Are the Modal Outcome, Not Tail Events

“Big debt crises are inevitable. Throughout history only a very few well-disciplined countries have avoided them. They are inevitable because lending is never done perfectly relative to the incomes that are needed to service it.” — a-00236

Debt crises are the default path over a full cycle — only a small number of historically disciplined countries (e.g., Singapore, Switzerland) have avoided them. The mechanism is universal: credit demand is always biased upward by human psychology; perfect calibration is impossible; accumulation to unsustainability is the default trajectory. Treating crises as rare tail events is the key investor error — the question is not “if” but “when and what form.” — a-00236