Time to batten down the hatches

Argentina's economy may still be a rickety and woefully unproductive affair but, thanks to Javier Milei’s single-minded determination to reduce public spending to a sustainable level and the possession of valuable natural resources which are beginning to be exploited, it should be able to stay afloat if, as now seems likely, the global financial storm that is brewing turns out to be as violent as many fear. While debts of one kind or another, including those owed to international institutions, continue to cause serious problems, on the whole they look less intractable than the ones currently facing a surprisingly large number of countries that have long been respected for their allegedly commonsensical handling of economic matters. One after another, the big Western powers allowed themselves to fall deeper into debt. If history is any guide, that was a big mistake.

The economist Herbert Stein, who died over a quarter of a century ago, is best remembered for having pointed out back in 1986 that “If something cannot go on forever, it will stop.” Though what is referred to as “Stein’s Law” may seem ridiculously obvious to most sentient beings, politicians almost everywhere have long done their utmost to persuade themselves that, because they are well-intentioned men and women, it does not apply to them so they can defy it with impunity. This is why in recent years so many countries have piled up huge public debts that are costing their governments a rapidly growing chunk of the money they obtain from taxation and other sources. They all insist that they are about to bring them down before finding excuses to justify increasing them a bit more,

In the United States, the official public debt recently rose above US$40 trillion, which is about 125 percent of the annual gross domestic product (GDP): Treasury Secretary Scott Bessent was unimpressed, he shrugged it off, saying 40 trillion was just a meaningless round number. In France, the debt reaches 117 percent of annual output, in the United Kingdom it hovers around 95 percent and in Japan it comes to almost 250 percent. Unfortunately, these are not just statistical quirks; servicing such debts costs hard cash so the bigger they get, there is that much less to spend on welfare, defence and other items.

After years of watching what was going on with apparent equanimity, last week the markets suddenly expressed their unease about the way things are shaping up. Whether this is the beginning of the full-blown financial crisis that many fear is fast approaching or just another fit of the jitters is anyone’s guess, but you do not need to be a stony-hearted economist to understand that, unless governments throughout the West – and in China, where according to some the situation is even worse than in Japan – do succeed in reining in public spending, one day the markets will finally get really angry and start lashing out at offenders.

Politicians in democratic countries are naturally reluctant to take Stein’s Law seriously. Some because they are aware that they will soon be out of office and want to make things harder for those who take their place, others because they know that their professional fate depends on their ability to woo the electorate and that a good way to do this is to promise people material benefits and tell them that “austerity” is an immoral concept beloved by extreme right-wingers. This has been true for thousands of years; in Aesopian terms, most modern politicians are enthusiastic supporters of the happy-go-lucky grasshoppers in their ideological battle against the drearily thrifty and far-sighted ants.  

Needless to say, economists and financiers are not the only people who suspect that bad times are in the offing. The “rules-based order” underpinned by the US is falling apart: the extraordinarily erratic Donald Trump has no interest in maintaining it unless the Europeans chip in to help pay the costs. Vladimir Putin’s Russian Federation could soon go the way of the Soviet Union which he sought to restore by foolishly invading Ukraine. The population of China is shrinking at an alarming rate and there is little even a ruthlessly authoritarian government can do about it. And, despite having been fiercely battered by US air power, the Islamic Republic of Iran still retains the ability to do great damage not just to its neighbours but also to world trade by tightening its grip on the Strait of Hormuz chokepoint and fomenting  Jihadist terrorism in Europe, the Western hemisphere and elsewhere.  

The brutal conflicts that are taking place in Asia, Africa and Eastern Europe would be less dangerous if the economies of the main Western powers were in better shape and their populations reasonably content but, of course, this is far from being the case. With unnerving frequency, respected commentators warn us that France is in a situation which is unpleasantly similar to that of Greece a decade and a half ago. The mood is so bleak that every item of bad news helps undermine whatever confidence remains in the ability of her present middle-of-the-road government, or of its presumably right-wing successor, to prevent the worst from happening. As it happens, the economic proposals of Marine Le Pen can hardly be described as right-wing or liberal, let alone libertarian.  

Another cause for concern is Artificial Intelligence. Economists are less worried by the workplace disruption it is expected to bring about or by the hypothetical threat it poses to humankind than by the colossal sums of money companies are investing in it. Many think that unless AI lives up to all the hype accompanying it, an enormous speculative bubble will go pop, ruining small investors, putting a big dent in the finances of the tech giants and throwing the already edgy markets into turmoil. 

Such an event could have long-lasting consequences for millions of people. The negative effects of the collapse of the subprime mortgage market and the Lehman Brothers investment bank in 2008 put an end to a period in which, in developed parts of the world, decently paid jobs for younger folk were easy to find and opened up the far less secure one that still persists in which, for a huge number of people, precarious gig employment became the norm.