The first panacea of a mismanaged nation is inflation of the currency; the second is war. Both bring a permanent ruin. But both are the refuge of political and economic opportunists – Ernest Hemingway
Emmanuel Macron of France and Keir Starmer of Britain are both anxious for war with Russia. Why? Neither has the dominating militaries of yesteryear, having traded guns for welfare over the past 50 years. Furthermore, the populations of both nations have no reason to kill Russians.
Despite this, the French government has instructed hospitals across the nation to prepare for a major military engagement by March 2026. Is it a coincidence that the French government has collapsed for the second time in a year? This time, Macron will be forced to call for a new election despite his approval rating plummeting the depths of the Parisian catacombs.
The French elite have gotten themselves into a pickle and are turning to war to distract and/or create new opportunities. At the heart of their problem has been the influx of Islamic immigrants creating social chaos and ballooning welfare expenses. Outgoing Prime Minister Francois Bayrou attempted to force 10% spending cuts through the National Assembly that would have dramatically changed the social contract French citizens had with the government. Both the left and the right of the French political spectrum voted him out.
Only Poland has the land forces to contend with Russia. The Baltic nations are well-armed and well-trained but their forces are geared for a defensive posture. Germany is dreadfully unprepared for martial conflict and the UK has hardly any army left. Europe can only contend with Russia if the US commits to such a war.
I don’t expect it to work although recent possible “false flag” Russian incursions into Polish airspace have the European warmongers itching for a fight. Instead, I expect the European citizenry to re-establish control over the increasingly unstable European political establishment.
France
When Paris sneezes, Europe catches cold – Klemens von Metternich
The French social contract is the bedrock of French society. The French people accept relatively high taxes and regulation in return for cradle to grave economic and social stability. It’s uniquely French and it is inviolate in the minds and hearts of the French people. They will fight for it.
As mentioned, Macron’s government is attempting to break this social contract to pay the heightened welfare expenses of the mass of mostly Islamic immigrants. The current budget deficit is 5.8% of GDP and debt is piling up. To this point, the French people have tolerated the social chaos but breaking the social contract is an act of war on the people.
The chart of French government debt below tells the story. My data series is limited to 3Q2022 and dollar-denominated. Current levels are shown by the X or $3.93 trillion.
It’s a disaster and the private sector of the French economy can no longer support this level of spending. Something must give. Either France reverses their immigration policy and repatriates the mass of people back to their original homelands or the social contract between the French and their government must end.
I wrote about this eventuality ten years ago when I suggested that Europeans would eventually turn against the newly arrived immigrants once economic stress built to a fracturing point. A British friend was shocked that I would suggest such a thing because nobody he knew felt that way.
It’s here and the proof is Jean-Luc Melenchon has joined Marine Le Pen to oust the Bayrou government. It shows us just how sacred the social contract is to the French people when mortal enemies join sides.
Macron may want to drag France into a war but his electorate is about to turn inward to fix their domestic problems and Macron will be out of a job. Given that Macron is a front-man for the French bankers, it appears that the Rothschilds are facing their second major defeat this decade after losing the Sahel in central Africa.
The good news for France is that they stuck with nuclear power for electricity generation, unlike Germany and the UK who embraced green energy to the detriment of their respective economies. This suggests that France has one less obstacle to overcome than Germany or the UK.
Europe
A man who as a physical being is always turned toward the outside, thinking that his happiness lies outside him, finally turns inward and discovers that the source is within him – Soren Kierkegaard
Like the US, I suspect that Europe will be forced to turn inward to fix their problems. Yes, they have all promised to increase defense spending but I believe that Russia only poses a threat to the European financial interests that want to prey upon the commodity riches of the old Soviet Union.
Russia does NOT pose an existential threat to Europe unless it’s the use of nuclear weapons and Russia won’t use nukes unless they are severely threatened. They lack the logistics, training, and resources to invade Europe. They also lack the advanced weaponry to directly challenge NATO. Anyone who has followed the war in Ukraine can readily see Russia’s limitations.
Without the explicit backing of the US, NATO won’t confront Russia. I suspect once governments in France and the UK are tossed out, the Russian threat will disappear, allowing for a Ukraine deal.
Europe has little choice but to turn inward and restructure the systems in place since their colonial empires. Its flirtation with green energy has left much of the Continent with ultra-high-cost electricity. Austria wants to charge it’s citizens a 6 cent per kilowatt hour “social tariff” for electricity. Why? It’s because they signed high-cost contracts for wind and solar energy which will be part of their rate-base for decades.
This leaves Europe out of the AI race – electricity is too expensive compared to the US and Middle East. It also leaves Germany and the UK out of basic industry because their energy costs are uncompetitive. In Germany, the average cost per kilowatt of electricity for industrial customers ranged between 17-20 cents. This compares to 8.32 cents per kilowatt hour in the US. Where do you want AI servers to be located?
Natural gas costs between $3.00 to $5.50 per MMBtu in the US compared to $14 to $15 per MMBtu in Germany. If you want to open a new chemical plant, where do you think you’ll go?
Europe is EXTREMELY uncompetitive and it’s going to get worse with the Trump Administration slashing regulations and offering incentives for companies to move industrial operations to the US. This is why Europe is going to have to turn inward and restructure their way of competing in the world. If they don’t, they will be borderline a third-world region in a generation or two.
I don’t favor the US dollar because our finances are sound; I favor the US dollar because all of our major competitors are much worse. I expect the US dollar to spike when the Western banking system loses control of the markets. When that happens, the British pound is going to get crushed.
Beyond Europe
I think frankly when it comes to chaos, you ain’t seen nothing yet – Nigel Farage
Japan’s prime minister Shigeru Ishiba just resigned due to the loss of his coalition’s majority in Japan’s upper house in July’s elections. Shigeru was the 3rd PM in Japan in three years since Abe’s assassination. It’s safe to say that Japan’s electorate is in chaos.
Nepal is experiencing a bloody coup as the Communist party is being deposed in this Himalayan nation. Xi Jinping is facing the potential of being replaced at the Fourth Plenum in October. Even if he retains power, he’ll be weakened.
In Brazil, the ruling party is attempting to keep former President Jair Bolsonaro off the ballot, much like Marine Le Pen was sanctioned by the courts in France. Brazil’s Supreme Court is expected to rule on his fate very soon.
Venezuela is in play now that the US has parked a fleet off its coast to put an end to drug trafficking. Israel continues to raze Gaza and recently bombed Hamas officials in the formerly safe Qatar. The Houthis are still making the Red Sea unsafe for commercial traffic.
The US is experiencing major change with the current Administration. They have set their sites on making the US the pre-eminent industrial hub in the world and are willing to beggar the rest of the world in the process. The political assassination of Charlie Kirk will only heighten the domestic chaos in the States.
Conclusion
In the same manner if any nation wasted part of its wealth, or lost part of its trade, it could not retain the same quantity of circulating medium which it before possessed – David Ricardo
The world is in the state of extreme flux yet the equity markets continue to move higher. Keep in mind that equity represents residual ownership of an asset where lenders need to be satisfied in liquidation before equity sees a penny. The extreme volatility in the world is at odds with implied volatility in the capital markets. One or the other will need to give ground.
I believe the greatest losses will be borne by Europe and Asia, particularly China. We can already see the impact of David Ricardo’s definition of circulating medium where China had to add 20% to their money stock. The People’s Bank of China was responding to deflation.
The chaos is just beginning and when it’s over, I expect the US economy to remove the political governor on economic growth and pull ahead of the world. In this way, I believe the US economy has the potential to grow out of its debt burden on a debt/GDP basis where Europe and Asia will succumb.
This is why I believe the US dollar will ultimately spike, despite the well-known profligacy of our past governments. The US enjoys too many competitive advantages relative to the world. Our domestic issues are manageable and we have relatively little need for the rest of the world.
But it’s not going to be smooth sailing because we have significant assets that will be written down in value ranging from real estate in uncompetitive regions to excess retail space to excess office space. We also have a bubble in technology stocks that will ultimately deflate particularly the companies that are over-investing in AI.
The longer the Fed waits to slash interest rates, the more we’ll ultimately have to write-off…
If you’re interested in learning more, visit us at https://geovestadvisors.com/ and contact Paul Hurley.
Philip M. Byrne, CFA
