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FT editor Roula Khalaf has chosen her favorite stories in this weekly newsletter.
The author is a financial journalist and author of More: The 10,000-Year Rise of the World Economy.
Political turmoil seems to be everywhere these days. Not only in the Middle East, but also in countries such as France and Germany. In other countries, such as the United States, political polarization has increased. The root cause may be different, but the underlying problem seems clear. It’s hard to keep democratic voters happy when living standards aren’t improving.
In the midst of all this public discontent, the stock market couldn’t be happier. U.S. stock indexes regularly hit new all-time highs, with the S&P 500 index up nearly a quarter this year. The FTSE 100 index topped 8,000 in April and hasn’t fallen below that level since then, keeping the index up around 5% in 2024. Even Germany’s Dax 40 is up about 18% since the beginning of 2024, despite the country’s economic downturn. economic and corporate issues.
What is the cause of the disconnect? Certainly it is not a growth prospect. The latest OECD report shows that European countries, like Japan, will keep their GDP growth rates within the 1-1.5% range over the next two years. In the United States, growth is expected to slow in 2025 and 2026 from the nearly 3% growth achieved over the past two years. We are a far cry from the “Roaring Twenties” that some had hoped for at the beginning of the decade.
The main reason is that the experience of ordinary voters and that of the corporate sector are quite different. According to Jefferies research, profit margins at large U.S. companies are nearing record highs. While some of President-elect Donald Trump’s plans look deeply alarming, including sweeping tariffs and mass deportations, investors aren’t too worried. They believe President Trump will back away from his most radical policies and focus on market-friendly deregulation and tax-cut programs. They are betting their whole family on American exceptionalism. The US stock market is a global behemoth, accounting for 73% of the MSCI World Index at the end of 2023, compared to the US’s share of global GDP of 26%.
Nevertheless, the United States, like Europe, is suffering from voter dissatisfaction. America’s strong growth record was not enough to reelect Democrats, as inflation eroded voters’ living standards. The long-term problem is that while voters are willing to demand public services, they are not satisfied with paying the taxes that fund them. Once upon a time, this circle was squared by economic growth. Without growth, economic policy becomes a zero-sum game, with gains for one group only coming at the expense of another group. And losers are always more angry than winners are grateful.
In the aftermath, developed economies appear to be heading toward either plutocracy or economic stalemate. The plutocracy is clearly winning in the US, with the world’s richest man, Elon Musk, helping finance Donald Trump’s campaign and being given instructions to cut government spending.
Traffic congestion prevails in Europe. The proportional representation system causes political parties to split, making it difficult to form a stable coalition government. Traffic congestion makes it difficult for governments to pass budgets (as demonstrated in France) or implement reforms that could boost economic growth (as in Germany).
And it’s hard to see how growth could accelerate significantly. Europe’s working-age population is expected to decline by 15% by 2070. The EU fertility rate is 1.46 births per woman. This means that immigration is needed to increase the population. But the need for immigration has sparked a politically toxic debate in which anti-immigrant parties are steadily gaining votes, making it even more difficult to form a stable government. The United States is not completely exempt from this problem. At 1.8, our fertility rate is better than the EU, but below the replacement rate. According to BCA Research’s Dhaval Joshi, from mid-2023 onwards, growth in the U.S. labor force will come solely from immigration (legal and illegal).
Because this column takes a long-term view, it is very difficult to be optimistic about the future of democracy. As mentioned above, plutocracy can become self-sustaining and can spread outside the United States. If a nationalist party gains power, gridlock could degenerate into one-party rule. As we saw in Hungary, governments can maintain their own rule by undermining the bulwarks of liberal democracy, such as a free press and an independent judiciary.
Ultimately, all of this could come back to investors. Profit rates will not rise forever, and populist parties may eventually focus their attacks on the corporate sector. Furthermore, a world where nationalists control the government is a world in which the free movement of not only people, but also goods and capital, will eventually be restricted.
Investors have benefited enormously from the post-1945 international order, in which governments generally play by the rules. But now that rulebook is about to be broken. The stock market may turn out to be like a first class passenger on the Titanic. They toast each other with champagne as their boat runs aground on an iceberg.