The models are always sexy
Not the magazine models, the economic ones.
The financial crisis was made a great deal worse because of models and assumptions that US housing prices could never fall.
But now central banks and deficit forecasters are using models that say economic growth won’t contract or be zeroed for a long period.
What if it does?
Italian debt is barely sustainable at 2% growth. Given the country’s poor demographics an extended contraction would make a restructuring inevitable. The reverberations through Europe and the world would set off other events that would blow away assumptions.
We know that black swan events tend to be clustered. We assume that the wave of financial and economic failures in the US were the complete cluster of black swans but let’s not rule out the possibility that there could be many others.
I want a stress test that assumes zero growth for 10 years. Who survives that?