Two and a half years after the pandemic ended, the developed world is still spending money it doesn’t have to solve problems it can’t fix.
The "temporary" stimulus of 2020 has calcified into a permanent fiscal regime. But unlike the post-2008 era, where central banks could print away the excess with zero consequence, the bill has finally arrived.
In the last twenty years, the debt-to-GDP ratio in developed countries has more than doubled, nearing 100%. The market, once complacent, is now twitchy. Bond yields are rising, and the era of cost-free borrowing is over.
The lesson policymakers took from 2008 was that austerity is political suicide. So, when the next crisis hit, they pivoted to infinite liquidity. It worked, GDP recovered, and unemployment stayed low, but it created a dependency that governments are now terrified to break.
The US is running a 6.5% deficit in a non-recession year, a feat of "financial exceptionalism" that defies economic gravity. China, battling a property collapse, forecasts a 4% deficit.
But the cracks are showing. In Europe, the fiscal hangover is already dictating policy. Belgium, facing a debt-to-GDP ratio of 106.8%, has been forced to hunt for liquidity, slashing tax breaks and introducing a capital gains tax on crypto to plug a €500mn hole.
In Italy, the government is eyeing the central bank’s gold reserves. In France, pension reform has become a third rail. The political cost of austerity is high, but the market cost of profligacy is becoming higher.
This fiscal splurge, accommodated by central banks, has moved the "neutral rate" of interest permanently higher. The days of the zero lower bound are dead.
This creates a dangerous feedback loop. As central banks step back from Quantitative Easing (QE) to fight inflation, governments are left to finance their massive debts at market rates. This increases financial fragility.
We saw this with Liz Truss’s mini-budget disaster, and more recently with the market jitters following President Trump’s "Liberation Day" announcement. The market has evolved from a passive passenger into an active disciplinarian.
For crypto, this macro shift is existential.
The asset class has recently functioned as a "high-beta tail" of global liquidity. It rallies when money is cheap and collapses when the tap tightens. Currently, we are seeing a negative asymmetry: positive news produces muted gains, while macro shocks trigger outsized declines.
Why? Because crypto is the purest gauge of excess liquidity in the system. As central banks prioritize repo market stability over broad intervention, and governments are forced to tax assets to service debt (as seen in Belgium), the liquidity tide that lifted all boats is receding.
We are entering an age of higher volatility and policy uncertainty. The "temporary" fix is over. Now comes the withdrawal.
