Last week at Denver Airport, I saw an advert for Not Your Dad's Shoe Company with the tagline: "Unless your dad knows what's up." As a marketer, I couldn’t help but admire how perfectly it nailed the passing-of-the-baton vibe—a clever nod to millennials taking center stage as consumers while boomers fade more to the background.
But this campaign isn’t just about targeting younger generations. It reflects something bigger that we all feel: a broader paradigm shift in our world. Some might call it a wealth transfer or a wave of innovation, but these are just symptoms of a deeper transition in how we think and operate.
Anyone following global trends would see the writing on the wall for macroeconomics as well. The global economy is in a period of flux, with several notable challenges converging at once.
Notable intersecting trends are at play: unsustainable levels of public and private debt, policy shifts towards deglobalization, the push for reindustrialization, and demographic shifts or imbalances. These forces are reshaping economic priorities and strategies, demanding innovative responses to navigate an era of uncertainty and renewal.
As I've laid out in my last post, I think there is a broader paradigm shift underway that impacts the way we think just as much as our global commerce. Here we'll explore the concurrent macroeconomic realignment that underpins this shift, focusing on the trends at work, the strategies emerging to tackle the debt crisis, and the synergies between these dynamics.
It highlights the necessity of growth by disruption, financial repression, and the emerging interest in alternative fiscal theories as pillars of this realignment while emphasizing the critical roles of automation, advanced manufacturing, and digital assets in shaping the future.
Key Trends Shaping the Realignment
Deglobalization and Reindustrialization
The global economy is pivoting away from the hyper-globalized model that dominated the late 20th century. Rising geopolitical tensions, supply chain disruptions, and the strategic vulnerabilities exposed by the COVID-19 pandemic have prompted nations to prioritize domestic production and localized supply chains. This deglobalization trend is accompanied by a reindustrialization imperative, particularly in the West, where decades of financialization and outsourcing have hollowed out industrial capacities.
Energy policy emerges as a critical lever in this transition. You may have heard recently about the sudden renewed interest of non-renewable energy (does "Drill baby, drill!" sound familiar?). Renewables alone, given their scalability and supply chain challenges, struggle to address energy prices in a way that is, well, sustainable for our today's financial and geopolitical circumstances.
The need for stable, affordable, and scalable energy sources—likely from a diverse mix of renewables, fossil fuels, and nuclear technologies—is paramount to sustaining industrial growth and mitigating inflationary pressures. Investments in infrastructure and technological innovation will determine the long-term trajectory of this realignment, but the sudden needs of today make fossil fuels the only real option for rapid, inflation-beating growth.
Demographics as Destiny
Demographic imbalances amplify the challenges of deglobalization and reindustrialization. It turns out that rich nations don't have many kids, and aging populations in developed nations strain labor markets and social welfare systems, necessitating higher productivity per capita.
This problem requires us to rapidly improve productivity with robotics, AI, and automation. Conversely, youth-dense regions in developing economies like India, Bangladesh, and central Africa grapple with high unemployment and/or political instability, requiring targeted strategies for job creation and sustainable development.
Some areas might be racing to generate breakthroughs in AI and robotics, while others are likely to outlaw these to protect their young populations. These demographic shifts underscore the importance of long-term economic planning, as both challenges and opportunities hinge on effectively leveraging labor and technology.
The Real Issue: Loads of Debt
Global debt levels have reached historic highs, encompassing both public and private sectors. Global debt levels surpassed $300 trillion in 2023, equating to more than 345% of global GDP, according to the Institute of International Finance (IIF). Developed economies face the lion’s share of this burden, with varying degrees of risk.
The United States, while holding a staggering national debt of over $32 trillion (approximately 120% of GDP), remains less encumbered relative to nations like Japan (260% of GDP) or the Eurozone, where several countries exceed 150% of GDP.
Private debt exacerbates this precarious landscape.
Private debt is out of control as well. Household debt in the U.S. alone exceeds $17 trillion, with significant portions tied to mortgages and student loans. Meanwhile, corporate debt has reached historic highs, with global non-financial corporate debt topping $90 trillion. Over-leveraged households and corporations, particularly those accustomed to historically low-interest rates, face mounting challenges as global rates rise, threatening financial stability and underscoring the urgent need for systemic reforms.
Developed economies, in particular, face the dual burden of consumer price inflation, which erodes household purchasing power, and asset price inflation, distorting investment priorities and deepening inequality. Interest payments on sovereign debt now consume significant portions of national budgets, limiting fiscal flexibility and heightening vulnerability to economic shocks.
Private debt has made us addicted to low-interest rates (which may be behind us), with over-leveraged households and corporations increasingly reliant on low-interest environments. As global interest rates rise to combat inflation, the cost of servicing this debt threatens financial stability, underscoring the urgency for systemic reforms.
Strategies to Tackle the Debt
If the global debt crisis feels like a runaway train, that’s because it is—one fueled by decades of easy money, rising costs, and the occasional detour into financial denial. But a train in motion doesn’t have to derail. There are ways to slow it, redirect it, or even make it more lucrative.
Different regions, of course, have their preferences. Some will lean on the engine of innovation, others might employ financial engineering, and a few might just crank the money printer and hope for the best.
Out-Grow It: Schumpeterian Growth
As I've discussed before, the late economist Joseph Schumpeter’s theory of creative destruction provides a compelling framework for navigating the current economic landscape. By fostering innovation and entrepreneurship, economies can transition away from stagnation and toward renewal.
The US seems to be leaning in this direction with their new administration. Investments in energy, manufacturing, AI, infrastructure, and digital finance present opportunities for transformative growth, while automation and high-tech solutions address productivity gaps. Optimizing regulatory frameworks for new innovators and standing off to let monopolistic tech companies do their thing would be foreseeable steps forward in a Schumpeter-influenced paradigm shift.
Phrases from Washington like, "10 regulations cut for every new one created," borrow heavily from the Schumpeter playbook. Monopolies would be allowed to have at, but they better watch out from the newcomers, who offer wildly innovative strategies to grow the economy. It's a balancing act of creative destruction that could offer some relief to the wealth divide without taxing the rich into leaving.
Governments can support this outgrowing the debt by prioritizing industries with scalable potential, as opposed to areas with long R&D timetables like what we did under Biden's term. Reducing regulatory barriers and aligning policies with private sector investments into technological advancement follow the Schumpeterian growth model. This path emphasizes the importance of a dynamic, adaptive economy that embraces change as a path to resilience, even if it's a bit less predictable.
Massage It Away: Financial Repression Measures
Our debt and demographics situation today is reminiscent of the days after WWII, when governments around the world experienced devastation in their young populations and industrial sectors along with wildly-high debt levels. The way they dealt with it back then was through financial repression measures.
Financial repression involves policies that channel resources away from speculative markets and toward productive investments. Essentially, governments force savers to own government debt (to keep borrowing cheaper), put restrictions on equity investments, and don't try too hard to stop inflation.
Historically, such measures have included maintaining low real interest rates, implementing capital controls, and directing credit to strategic sectors. These strategies aim to reduce debt-to-GDP ratios without sacrificing economic stability.
This is basically what the world did after WWII, offering a historical precedent, and demonstrating how targeted interventions can successfully manage debt without triggering economic collapse. Some academics are saying that the stars are aligning for EU nations to move in that direction in the near future.
France's president, Emanuel Macron recently suggested it's the only path for the EU. In a dramatic speech titled, "Europe—It Can Die. A New Paradigm at The Sorbonne," Marcon made the case that the EU needs to focus on competing and industrializing in the new paradigm. Such measures would involve redirecting capital into reindustrialization and infrastructure projects, promoting long-term productivity gains for the indebted nations.
Who Cares About Debt: Modern Monetary Theory
Other suggested approaches aim to forget the debt all-together. Many economists today are advocating for a framework known as Modern Monetary theory to work around the presumption that nations should worry about paying back their debts.
Modern Monetary Theory (MMT) challenges traditional fiscal orthodoxy by saying that governments with their own currency shouldn't worry about deficits, since they can just print money to pay for whatever they want. Proponents argue that governments can prioritize full employment and economic growth, using taxation and monetary policy to manage inflation. They argue that careful spending won't drive inflation, that it will work as long as factories aren't at full capacity, and that taxes help maintain value of the currency.
While MMT remains controversial, its principles are gaining traction as policymakers grapple with unprecedented fiscal challenges. They, of course, see appeal in the idea that debt doesn't matter and that they can print the money they need rather than raising taxes. Argentina's history of similar approaches offers a cautionary tale for any country thinking they can pull this off.
Perhaps targeted applications, such as printing for the funding of careful investments into infrastructure and innovation, could complement other strategies to address debt and economic stagnation. However, it is dangerous and difficult to mitigate risks of runaway inflation and currency devaluation. The questions here are who would try this, how would they do it, and what will the long-term impact be.
It's Not About Debt, but Rather Liquidity
While debt-to-GDP ratios are a common measure of debt sustainability, some argue that the real issue today is debt-to-liquidity ratios. Here, liquidity is not just the measure of how much money is available in the financial system, but instead refers to how easily debt can be refinanced in the market without driving up borrowing costs.
For years, low interest rates and quantitative easing (QE) provided abundant liquidity, making it easier for governments to manage rising debt. However, as inflation rises and central banks implement quantitative tightening (QT), liquidity tightens, raising the relative cost of debt.
A reduction in liquidity means governments might struggle to refinance their debt, driving up borrowing costs and potentially leading to a liquidity crunch. This could force drastic measures like money printing or debt restructuring to avoid a wider recession. As we proceed into 2025, global liquidity challenges, particularly with a strong dollar and deflating Chinese yuan, could make it harder for governments to manage debt loads without destabilizing the financial system (impacting markets).
From the lens of liquidity, the real issue isn’t just the amount of debt—it’s the availability to refinance. Policymakers need to balance fiscal and monetary policies carefully to ensure that liquidity remains available to prevent economic instability.
Integration and Synergies
Interconnections
The strategies outlined above are not isolated; they interact and possibly even reinforce one another. A moderated approach borrowing from financial repression and money printing might provide the fiscal space necessary for out-growing debt.
Trump's recent comments around eliminating the debt ceiling make you wonder about such a world, at least. And his comments about lowering interest rates and tackling inflation at the WEF Davos meeting this past week point to a moderated, "let's try everything" approach from the U.S.
Labor and immigration are also dynamic forces in today's macroeconomic wave of change that are linked to demographic trends and innovation. One nation may welcome a wave of automation, while another might forbid such developments to ensure jobs are not lost to AI and robotics. The interconnectedness of new market forces requires a holistic view and measured response to macroeconomic challenges.
The Necessity of Automation, High-Tech Manufacturing, and AI
To address demographic challenges and enhance productivity, automation and AI are indispensable. These technologies enable higher output with fewer workers, mitigate labor shortages, and reduce costs across industries. High-tech manufacturing, powered by robotics and advanced computing, will likely play a central role in reindustrialization efforts, creating a competitive edge for economies that embrace these innovations.
How Bitcoin and Crypto Are Poised to Respond
Bitcoin and other digital assets stand to benefit from these macroeconomic trends. As a decentralized store of value, Bitcoin offers a hedge against inflation and currency debasement, aligning with the realities of financial repression and monetary experimentation. Stablecoins, backed by U.S. Treasuries or other assets, could create markets for public debt and anchor financial systems during periods of deglobalization, enhancing liquidity and trust in global trade.
The broader crypto ecosystem also exemplifies Schumpeterian innovation, driving new models for finance, governance, and commerce. By fostering regulatory clarity and innovation-friendly policies, governments can leverage this sector for economic resilience.
Disruptive Forces
There have been several notable shakeups in global leadership in recent months. It began with Argentina a year ago electing a reform-hungry libertarian to fix their economic collapse with austerity. We then saw a palpable shift to the populist right in terms of moods (and vibes) for fixing economic issues and prioritizing domestic issues, impacting elections from Germany and France to Canada and Korea.
Donald Trump's re-election was the most notable headline of this period, and his recent assertion that the U.S. needs to impose tariffs and step back in its provision of security to the rest of the world has woken up world leaders (and voters) to the need for autonomy.
These populist "Us First" policies may provide more resilience for these nations in the long run, but they are going to hurt in the short run, and high debt levels present a barrier to easy solutions. In a way, it seems that Trump's shake-up is forcing the paradigm shift and macroeconomic realignment to happen much faster than we would have otherwise seen.
Conclusion: A New Beginning
The macroeconomic realignment represents both an economic challenge and an opportunity for renewal. As nations address their debt debt crises through growth, financial repression, and selective application of Modern Monetary Theory, they may be able to chart a path toward resilience and innovation. The arrival of these strategies, supported by advancements in technology and digital assets, underscores the interconnected nature of this transformation.
Of all the changes that may happen, the next 5 years will look nothing like the past 5, or even past 50 years. As we navigate this paradigm shift, the question remains: Will global leaders rise to the occasion? The answer will define the trajectory of this new era.
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