In the pantheon of famous economists, Knut Wicksell is hardly a household name. Unlike Adam Smith, the Swedish interest-rate expert never made it to the face of a banknote. Yet a theory he developed more than a century ago is suddenly relevant again.<\/p>\n
In 1898, Wicksell shared the idea that inflation and economic instability stem from an imbalance: It occurs when market interest rates (set by the Fed and by banks) are out of sync with \u201cthe natural rate of interest.\u201d<\/p>\n
The \u201cnatural\u201d rate, Wicksell proposed, is the level of return investors get from investing in the economy as a whole (for instance via stocks) as opposed to the interest they might get from cash deposits or bonds. The U.S. economy is so strong that its natural rate is far above its official rates, which is why interest on American debt is relatively low given its size.<\/p>\n
Deutsche Bank<\/a> believes an updated version of Wicksell\u2019s theory explains why investors can\u2019t quit the U.S., despite the fact that many indicators of its economic health are flashing red: The might of the U.S. economy coincides with its eye-watering debt: some $39.77 trillion at the time of writing<\/a>, requiring service payments of $24 billion a week.<\/a><\/p>\n So far, lenders to the U.S. haven\u2019t demanded wildly higher rates of return on their loans, reflecting the dollar\u2019s unique role in global finance and confidence in America\u2019s economy. However, if growth rates remain dwarfed by deficit levels, perceptions of risk may shift, prompting a market recalibration, as JPMorgan Chase CEO Jamie Dimon has previously warned<\/a>.<\/p>\n In a note by Deutsche Bank\u2019s chief investment office, Dr. Ulrich Stephan, Dr. Dirk Steffen, and Elena Ahonen, write that these sustained deficits show a country that is \u201cfundamentally living beyond its means,\u201d but that America\u2019s role in the international financial system has so far allowed it to \u201cenjoy risk-free market interest rates that were below its estimated natural rate of interest.\u201d<\/p>\n That advantage is narrowing, the trio writes. <\/p>\n The silver bullet<\/p>\n The risk balance of investing in the U.S. vs simply keeping money in the bank has meaningfully shifted in a world of AI led by U.S. hyperscalers, the Deutsche team argues.<\/p>\n \u201cThe high return on equity (ROE) available on some U.S. sectors (e.g. tech) is now complementing or, to some degree, supplanting the structural\/geopolitical factors which have so far supported inward investment in the U.S. during the post-WW2 period,\u201d the trio writes. \u201cTo oversimplify: you could argue that U.S. deficits are, in effect, being increasingly funded by its tech sector.\u201d<\/p>\n They explain: \u201cIn the last few years, investor interest in the U.S., and thus its ability to sustain deficits, has \u2026 been supported by the country\u2019s relatively high productivity growth and high return on equity, largely the result of the country\u2019s successful technology sector and dominant position in artificial intelligence.\u201d<\/p>\n Arguments from the likes of Bridgewater Associates founder Ray Dalio that the U.S. is living beyond its means remain \u201cfundamentally true\u201d, the team adds, but suggest investors are now happy to funnel funds into U.S. deficits because, as a country, it offers higher returns on investments compared to other destinations.<\/p>\n Yet this dominance creates a fiscal loop: If the U.S. government stopped investing in AI, then confidence in the sector would shake. This spending, in itself, requires further borrowing. \u201cThe U.S. economy can therefore be seen, in some ways, as both a gainer and a victim of its own success,\u201d the team concludes. <\/p>\n Subscribe to\u00a0Fortune Gulf Brief. Every Tuesday, this new newsletter delivers clear-eyed, authoritative intelligence on the deals, decisions, policies, and power shifts shaping one of the world\u2019s most consequential regions, written for the people who need to act on it. Sign up here.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"In the pantheon of famous economists, Knut Wicksell is hardly a household name. 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