Many investors are warning of the risk of a debt crisis, but governments are ignoring all the signals.

In an inflationary crisis, the government should reduce expenditures to help curb price increases while also anticipating a significant increase in borrowing costs. However, in this crisis, the United States administration is ignoring all the warning signs and continuing to borrow at a record pace.

Debt crises always happen when even the most conservative investors refuse to add to a sovereign bond portfolio that is loss-making to begin with. Central banks may decide to purchase those unwanted government bonds, but then the inflation problem worsens and the losses at the central bank accumulate.

The surprise terrorist attack on Israel by Hamas has created a new geopolitical crisis with many unexpected implications. We cannot forget the hundreds of people that have been killed in this attack—a terrible loss of innocent lives. In markets, the Key Tel Aviv share indices declined around 7% and sovereign bonds slumped by 3% after the bloodiest attack on Israel in many years.

Investors should not worry because this war has very significant ramifications. Iran has supported Hamas in their attack, and this could lead to new tensions with the United States. Furthermore, this war against Israel may create an even larger division between the two largest military and economic powers, the U.S. and China. It is very difficult to think that China will support Hamas and Iran, but it is also hard to see them supporting Israel.

There are hundreds of headlines all over the news warning of the negative impact of a government shutdown. The negative impact on GDP, according to Bloomberg, is estimated at 0.5% of the quarterly annualized rate if the shutdown lasts for two weeks. Obviously, that is an annualized rate, not the overall hit. The last government shutdown lasted between December 22nd, 2018, and January 20th, 2019, and the United States economy still grew at a 2.2 percent rate.

The Biden administration has signed a stopgap bill to prevent a government shutdown and fund the expenditures for up to 45 days if there is no agreement. However, the entire debate is created around the monumental crisis that a shutdown would generate instead of focusing on the cause: excessive deficit spending and soaring public debt.

If we search the news from 2007, we can find plenty of headlines with the IMF and the Federal Reserve predicting a soft landing. No one seemed to worry about rising imbalances. The main reason is that market participants and economists like to believe that the central bank will manage the economy as if it were a car. The current optimism about the U.S. economy reminds us of the same sentiment in 2007.

Many readers will argue that this time is different, and we will not see a 2008-style crisis, and they are right. No crisis is the same as the previous one. However, the main pushback I get when discussing the risks of a recession is that the Fed will inject all the liquidity that may be needed. Quantitative easing is seen as the antidote that will prevent a crisis. However, if the only antidote to prevent a 2008-style contraction is monetary easing, then the risk of stagflation is even higher. So, the good news for those fearing a recession is stagflation.