“The big-state monetary and fiscal system is over because it is no longer credible financially, economically, or politically. The bond market is making clear that there is no permanent escape from fiscal arithmetic.”
The Big State Monetary And Fiscal System Is Over
ZeroHedge, Sep 22, 2026 – Authored by Daniel Lacalle via dlacalle.com,
Excerpts:
In 2021, The Economist ran an entire number hailing “The Return of Big Government” as the end of the so-called – but inexistent in practice – “austerity” paradigm and the evidence that more spending and a big state was the solution to the post-covid world, delivering economic growth, social spending, and sustainability.
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Since 2021, developed economies have gone over their three limits.
The economic limit occurs when each additional unit of government debt produces progressively less growth. Governments can inflate headline GDP through deficit spending, transfers, and public consumption, but the result is not the same as creating wealth. In the developed world, the expansion of government expenditure has coincided with weak productivity growth, anemic private investment, and a rise in living costs.
The fiscal limit is when interest costs and entitlement obligations displace productive investment. Governments may attempt to delay this moment through financial repression, artificially low interest rates, regulatory pressure on domestic financial institutions, and central-bank purchases of sovereign debt. As debt stocks grow and bonds have higher rates, interest expenses consume a larger share of public budgets. Governments borrow more simply to finance existing commitments.
The inflationary limit is reached when repeated monetary financing and persistent fiscal deficits undermine confidence in the purchasing power of fiat currency. Inflation is not only an annual change in a price index. Families suffer its cumulative effect in food, energy, housing, transport, insurance, and essential services. More money creation and debt-financed public spending do not resolve that crisis. They risk prolonging it by weakening the currency, distorting capital allocation, and transferring resources from savers and wage earners to the state.
Government bond yields have risen across the G7. In September, the average ten-year yield of the G7’s largest economies reached 4.285%, its highest level since mid-2008. US ten-year Treasury yields moved above 5%. However, these were not the worst performers. Long-term yields rose faster in Japan, France, and the United Kingdom.
The synchronized nature of this rise is important. Japan faces rising yields despite decades of yield-curve control and massive central-bank intervention. Germany, despite a lower debt burden than many peers, has seen yields rise to their highest levels since 2011. US thirty-year Treasury yields have reached their highest point since 2007.
Markets are repricing fiscal risk, inflation risk, and the declining credibility of monetary institutions at the same time.
Investors no longer assume that high-debt governments can inflate away their liabilities without consequences, nor that central banks can endlessly monetize debt without damaging the purchasing power of money.
The fiscal model of the past fifteen years depended on a false premise, built on the idea that government debt was virtually free. As long as interest rates stayed close to zero, governments could claim that debt ratios did not matter because debt-service costs remained manageable. The “Japan is a model, not a cautionary tale” recommendation given by Stiglitz proved to be very attractive for governments. It also proved to be awfully wrong.
Debt does not become sustainable merely because a central bank suppresses its price.
The International Monetary Fund estimates that global public debt rose to 94% of GDP in 2025 and will reach 100% of GDP by 2029. The world’s major economies are driving the trend, as high deficits, rising interest burdens, and structurally higher spending demands destroy fiscal space.
The interest-cost problem is becoming critical. Global government interest spending is estimated to have risen from about 2% of GDP in 2020 to 2.9% in 2025. It is expected to continue increasing through the end of the decade. This is the deadweight cost of believing that Japan’s Keynesian excess is a model.
Every additional unit of taxpayer revenue devoted to interest payments destroys money in the economy. Governments will inevitably respond by raising taxes, borrowing more, and demanding further monetary accommodation. Each of these responses weakens growth and affordability.
The modern welfare state has been unsustainable for years and has become dependent on low borrowing costs that no longer exist.
The predictable political response will be to call for another, even larger, round of quantitative easing, larger fiscal transfers, massive public-investment plans, industrial subsidies, and “strategic” spending programs.
This will be a massive mistake… Again.
Quantitative easing only disguises imbalances for a short period of time. It cannot solve a solvency problem.
Central banks can purchase government bonds, but they cannot create real savings nor productive money. They can expand their balance sheets, but they cannot increase productivity, restore competitiveness, or create the capital necessary for a sustainable recovery.
Printing money does not make a nation richer. It is a massive transfer of wealth from savers and wage earners to the state and the first recipients of new money. It distorts the price of capital, encourages malinvestment, and eventually feeds inflationary pressures.
Artificially low interest rates send a false signal to markets. They make unsustainable spending, borrowing, and investment appear viable. Furthermore, the newly created money is used by governments for current spending. The eventual slump is not caused by capitalism or market failure. It is caused by the prior distortion of money and credit.
The same principle applies to public finances. Governments have treated zero-rate policies and QE as a substitute for reform. They have used monetary intervention to preserve spending structures that taxpayers cannot sustainably finance. They have delayed necessary adjustments in pensions, public administration, subsidies, entitlement programs, and regulatory burdens.
The result has not been robust growth. It has been an unstable combination of weak productivity, high debt, elevated inflation risks, financial repression, and social frustration.
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