The Notebook: The consequences of spending, spending, spending

Staggering government spending has become the norm since the pandemic, but the consequences are coming, writes SocGen’s global head of economics Kokou Agbo Bloua in today’s Notebook

Budget deficits & the Original Sin

25 trillion US dollars! This is the staggering sum of money governments and central banks have injected to protect businesses and households as economies were put in hibernation during the Covid-19 pandemic. This colossal sum was made possible through a powerful cocktail of substantial government borrowing, reduced interest rates and quantitative easing.

As we approach full employment, witness rising wages and have defeated the coronavirus pandemic, demands for more spending have been growing louder. This is particularly true in 2024, a year where half of the world’s population will have headed to the polls with promises of yet another ‘whatever it takes’ response to the cost-of-living crisis, healthcare, education and the fight against climate change.

However, these massive spending measures to protect human lives have not been without consequences. As we are all only too aware, budget deficits have risen to worrying levels in countries such as the US, the UK and France leading to a series of fiscal tightening measures to prevent a repeat of the 2022 Liz Truss ‘mini budget’ crisis. 

Are we heading towards another sovereign debt crisis? The answer is no in the short term. With inflation falling closer to two per cent, the Federal Reserve and the European Central Bank have begun to cut interest rates aiming to reach neutral rates between two and three per cent. This shift indicates a move away from fighting inflation to fighting for growth. 

But the consequence of the Original Sin remains. With governments in France and in the UK having already announced significant tax increases and spending cuts, there are concerns that these measures may in turn negatively impact economic growth through reduced investments, falling hiring and decreased tax revenues. That said, if growth declines, central banks may cut interest rates more aggressively, but only if inflation remains under control!

The art of risk management

What kind of risk taker are you? Would you rather choose $100 with 100 per cent certainty or $200 with 50 per cent probability? Many of us would opt for the safer option as risk aversion is deeply ingrained in our human heritage. After all, our ancestors who took excessive risks did not live long enough to pass on their genes to the next generation. Yet taking calculated risks is the driving force behind societal progress and innovation. Whether you are a portfolio manager, a trader or an entrepreneur, managing risks is an integral part of the human experience.

In financial markets, value-at-risk (VaR) is a widely used measure of potential loss. It functions like a financial weather forecast, alerting you to the chances of upcoming storms. However, while VaR and other indicators such as cVar, delta, vega and gamma can be useful, they may not account for unknown unknowns and human emotions. As Blaise Pascal once said about love, markets too may have their reasons that reason does not know. 

The data behind populism

The Engineers of Chaos by Giuliano da Empoli. 

A friend recommended this insightful book, which I highly recommended for those interested in understanding how modern populist leaders have used sophisticated, data-driven strategies to enhance their appeal. Da Empoli sheds lights on ‘spin doctors’ who capitalised on citizens’ emotions and fears through social media and targeted messaging at scale. What struck me was how these ‘engineers’ were able to methodically harness big data and advanced algorithms to polarise societies. He makes the thought-provoking conclusion that we have entered an era where people no longer share a common reality, but rather live in their own customised bubble, akin to the transition from classical physics to “quantum politics”. 

A novel take on climate history

World without end by Jean-Marc Jancovici and David Blain

Looking for an entertaining and captivating gift for Christmas? Consider the comic book “World without end” by French physicist Jean-Marc Jancovici. I was left in awe after reading the French version a few years ago and I’m thrilled that the English version has now been released. This engaging and humorous work explores the history of climate change, the evolution of human societies and the enormous army of machines that support every aspect of modern life, with a particular focus on their insatiable thirst for energy-dense fossil fuels.