The Mirage of Western Prosperity: A Debt-Fuelled Illusion
The global economy has been spluttering for years, even before the pandemic struck. Sluggish growth, especially in economic powerhouses like China and the G7, painted a grim picture. We speculated many years ago that this slowdown was likely caused by shrinking working-age populations, a demographic trend that has persisted post-pandemic. Despite some recent glimmers of recovery, the underlying problems remain, masked by a perilous reliance on debt.
Take the United States, for example. A 2.7% GDP growth rate might seem rosy, but it's a mirage. The US government is running a gargantuan 7% budget deficit, borrowing far more than it earns. This unsustainable fiscal policy conjures an illusion of growth, but it's a house built on sand.
The situation isn't much rosier in other major economies. Growth forecasts for 2024 in nations like Canada, France, Germany, and the UK are all significantly lower than their pre-pandemic levels in 2019. While US employment figures might appear robust, the reality is that the economy is propped up by government spending, not genuine productivity.
Adding to the unease is the alarming level of debt in these nations. Except for Germany, all G7 countries have a debt-to-GDP ratio exceeding 100%. Servicing such high levels of debt at interest rates above GDP growth is simply not sustainable.
This addiction to debt has ominous consequences. As Jerome Powell, the Chairman of the Federal Reserve, has cautioned, this trajectory is unsustainable. In a recent speech, Powell emphasised the gravity of the situation: "The U.S. federal government is on an unsustainable fiscal path. The debt is growing faster than the economy. It's as simple as that."
Powell's stark warnings underscore the precarious nature of the current economic situation. The US, and indeed much of the Western world, is living on borrowed time. Ironically, while there is much handwringing over ESG and sustainability policies, there's little discussion about whether government spending itself is sustainable.
In light of these mounting pressures, substantially lower interest rates are not just likely, they are inevitable. The sheer weight of accumulated debt, coupled with anaemic economic growth, leaves central banks with few options. This shift towards lower rates is not a policy choice, but an economic imperative.
The question is not whether interest rates will fall, but how far and how fast.
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