Excessive government deficits
With the rise of China and other countries, the West has lost a significant measure of its competitiveness. This is increasingly holding back economic growth. It should now be clear that the West has only one effective response to all this. This is to ensure that all manner of products are invented and manufactured in the West which the rest of the world lacks the capacity to produce. Productivity must also be significantly increased. Numerous reports have been written on this subject, including by Mario Draghi, but they all essentially boil down to the same thing: much more must be spent on improving the training of the workforce, on research and development, and on upgrading infrastructure. Entrepreneurs must also be given greater financial incentives to invent new products and bring them to market.
There are many other points that could be added to these, but almost invariably it boils down to the fact that the funds required for this would have to come at the expense of social spending and social security. This is something most politicians do not dare to tackle.
Only if the economy's earning capacity is not increased and economic growth slows, whilst there is a high level of debt, does the economy become increasingly prone to collapsing like a house of cards. That is why, to prevent this, there has been an increasing reliance on widening the public deficit and keeping interest rates low. This has enabled politicians to avoid making any real choices. For example, if one wanted to cut taxes and another to increase spending, both measures were implemented. There was not enough money for this, but the shortfall was simply borrowed. From 2022 onwards, however, this has become increasingly difficult:
- From 2009 to 2022, interest rates were very low and, due to the risk of deflation, were under constant downward pressure. For a time, there were even negative interest rates. After the coronavirus crisis, however, interest rates rose sharply. The risk of deflation had by then turned into a risk of inflation. Furthermore, on the capital markets, due to the ageing population, ever-widening government deficits, a rapidly increasing demand for capital to finance the rise of AI, and a reduced inflow of capital from abroad, the supply-and-demand balance began to deteriorate further and further. The result of all this was that interest rates rose sharply, causing the 'interest payable' item to increase significantly across the board. So much so that it is increasingly beginning to crowd out other expenditure necessary for future economic growth. If this is allowed to continue, the economy will end up in a downward spiral. The ever-increasing accumulation of debt must therefore be redirected towards its repayment.
- Geopolitical developments are giving rise to an increasing number of blocs that compete with one another economically and militarily. As a result, external competition in the West is beginning to diminish. Countries are increasingly shielding themselves from competition from other blocs. Consequently, more and more trade barriers are being erected against cheap imports. This coincides with a Western workforce that, due to an ageing population and resistance to immigration, is barely growing, if at all, or is even shrinking. Added to this is the war in the Middle East, which is driving up energy and food prices, for example. All of this is making it increasingly difficult for Western central banks to pursue a monetary policy that is accommodative enough to stimulate economic growth.
In short, the days when politicians could have it 'all, all, all' and did not, in fact, have to make particularly difficult choices are over. It is now a case of one or the other.
The rise of populist parties
This is infuriating many voters. For years now, their real disposable income has largely stagnated. The debts, which have mounted enormously, have done far more to ensure they have not been worse off than to help them get ahead. Now, however, we are also entering a period in which politicians can no longer hand out 'gifts', but must increasingly make cutbacks. This is not what politicians had promised them; on the contrary, they promised nothing but progress. This applies to virtually every party in the (broad) centre. That is why we are now seeing, throughout the West, the strong rise of all manner of parties that cater to the rapidly growing group of angry voters with simple solutions, such as halting immigration. This strongly appeals to the feeling that immigration is causing the loss of their own culture and jobs. The former is possible, but the latter only exacerbates the decline in the working-age population. Similarly, there are parties in Europe that are rapidly gaining popularity and want their country to leave the euro. They reason that, at the very least, they would no longer have to subsidise other countries, and so they believe they would be better off as a result. They simply fail to mention that the collapse of the euro would lead to a massive economic crisis. Unfortunately, many of these parties also espouse anti-democratic ideas and are often unwilling to abide by laws and regulations that they find inconvenient. It is therefore understandable that most other parties do not wish to cooperate with them.
However, this creates a situation in which many countries are left adrift. Populist parties usually do not constitute a majority, but they are large enough that, if the other parties wish to form a government based on a majority, all sorts of parties with entirely different worldviews and completely different solutions must be forced to work together.
Such a situation now threatens to arise in Germany, but also in France, Spain and the Netherlands. This is likely to apply to the US as well. There, we see Trump and his supporters suffering heavy losses in November, something that is likely to lead to a significant rift within the Republican Party. The Democrats will then have more of a say, but this party, too, is deeply divided internally.
We therefore fear that, in most Western countries, we will increasingly be faced with a deeply divided political landscape and governments too weak to do much about the enormous challenges facing the West. This means that, at the very least, we expect interest rates to remain under upward pressure as a result of persistently excessive government deficits.
