Spanish economist Daniel Lacalle argued at this year鈥檚 ULI Europe Conference in London that much of what people call 鈥渦ncertainty鈥� are better understood as 鈥渢hings that we know are going to happen but we don鈥檛 want them to happen鈥�.
Providing a macroeconomic picture, the chief economist at Tressis and professor of global economics at IE University and IEB, said we 鈥渆xpect to close our eyes and for them to go away鈥�. But, he added with optimism, 鈥渂elieve it or not, the world is getting a lot better鈥�.
He viewed the current economic climate as a consequence of past policies that had extended economic boundaries, identifying a 鈥渘umber of elements鈥� that have been 鈥渕assively surpassed鈥� by governments, leading to what he termed an economic crisis.
The first is that the economic limit of government debt has been breached in developed economies. He pointed out that GDP figures can be artificially inflated by increased government spending, even while 鈥減eople are losing purchasing power鈥�. The US economy鈥檚 growth in 2024, for instance, came entirely from 鈥�1.7trn of GDP鈥� deficit spending鈥�, which he regarged as 鈥渕assively unsustainable鈥� and a precursor to 鈥渉igher taxes, higher inflation, lower productivity growth and lower real wages鈥�.
Second is that the fiscal limit is now a 鈥渞eal and significant element of change globally鈥�. Governments that raise taxes rarely see corresponding revenue increases, leading to continued deficits. A stark example is Japan, where 鈥渋nterest expense, despite low interest rates, takes about 25% of the鈥� budget鈥�, a trend soon to be mirrored in the US.
The third is inflationary and Lacalle highlighted the unprecedented money supply growth between March and September 2020 鈥� 鈥渕ore than the entirety of the history of those currencies prior鈥�.
This, he said, directly led to inflation, including 鈥渕assive asset inflation鈥� during a period when official figures suggested there was no inflation, followed by significant price inflation where CPI calculations were 鈥済radually adjusted over and over again鈥�. This cycle has resulted in 鈥渆conomic stagnation鈥�, which he deems 鈥渢he big challenge鈥�.
Lacalle also spoke about a big change in global finance, saying that 鈥済old has already overtaken the euro as鈥� the leading central bank reserve asset鈥�. This reflects a growing distrust among central banks towards 鈥渟overeign issuers鈥� as reliable reserve assets, as these are 鈥渘ot providing stability to their currency, are not providing returns and are not providing price, price improvements鈥�.
Meanwhile, for the third consecutive year developed economies鈥� central banks 鈥渁re losing money鈥� on their purchased assets, undermining confidence in their own currencies and debt. He said: 鈥淧ublic debt and currency is exactly the same.鈥�
Lacalle said that, while the US is solidifying its position as a 鈥済lobal leader in energy, as a global leader in technology鈥�, and China is 鈥渃ompeting鈥� for its role as a financier, both nations possess 鈥渧ery, very strong weaknesses鈥�. The US鈥檚 weakness is its 鈥渇iscal position鈥�, with unsustainable deficits driven partly by 鈥渢remendous trade barriers鈥� implemented globally.
He said 鈥渢ariffs are the norm in global commerce鈥�, and their widespread use has contributed to 鈥渟tagnation鈥�, lower productivity and investment growth.
Gold reins in spending, signals optimism
鈥淕old is playing the role that central banks should have played鈥� in curbing excessive government spending, Lacalle said, and he welcomed the fact that governments 鈥渃annot issue all the debt that they want whenever they want and however they want鈥�.
This shift is even 鈥渨aking up the European Union鈥� to the reality of fiscal responsibility, challenging the assumption that spending can continue without accountability.
Despite current anxieties, Lacalle presented a notably optimistic forecast 鈥� 鈥�2025 is going to be the best year of humanity鈥�, he said as he explained this optimism by forecasting 鈥渞eal wage growth instead of nominal wage growth鈥� as 鈥渋nflationism is on the way out鈥� as an alleged solution.
He pointed to encouraging signs including China addressing its real estate challenges with supply-side measures, the Chinese central bank buying gold over government bonds and the US beginning to debate mandatory spending. Lacalle highlighted Asia as 鈥渓eading the world economy in terms of innovation鈥�, particularly demonstrating that 鈥渁rtificial intelligence creates more jobs, not less鈥�.
Despite its 鈥渆xcessive regulation鈥�, Lacalle said he saw a 鈥渇antastic opportunity鈥� for Europe, with its capital and human talent, provided it sheds the illusion of 鈥減rinting more money鈥� as its way out of challenges.
Lacalle urged attendees to avoid 鈥減resentism鈥�, thinking current woes are the worst ever, 鈥渘ostalgia鈥�, believing the past was easier, and 鈥渄ystopia鈥�, predicting no jobs or growth.
Instead, he foresaw 鈥渁n incredible period of innovation that is going to burst in terms of not only innovation productivity, but wage growth and improvement, precisely because we are abandoning鈥� the inflationist policies that have destroyed productivity and real economic growth in the past 20 years鈥�.
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