Reinhard Panse's Perspectives
Reinhard Panse's Perspectives
Podcast
30.11.2023
It is certainly no injustice to the former German footballer Jürgen Wegmann, known as "Kobra", to say that economy was not his core competence. It was rather scoring goals, which he did very successfully in the 1980s for Borussia Dortmund, Schalke 04 and FC Bayern Munich, among others. Nevertheless, he has left the world a piece of wisdom that describes the current situation of global public finances better than any trained economist could: "First we had no luck, and then bad luck came along."
This lack of happiness has been evident since the end of gold backing for currencies. States have taken on and continue to take on debt in order to expand and support social systems. They try to end every economic crisis (oil crises in the 1970s, Iraq wars in 1991 and 2003, collapse of the European monetary system in 1992, Lehman Brothers bankruptcy in 2008, coronavirus in 2020) with more spending, also financed by debt. The hope is always that such economic stimulus programs will result in higher tax revenues and thus offset borrowing costs. A nice theory, but it hasn't really worked so far. (Evil tongues would perhaps claim that it is not due to luck, but to the basic idea...)
Bad luck is now taking three forms. Firstly, many Western societies are ageing rapidly - the USA is an exception here - geopolitical problems are increasing and global warming also needs to be tackled. The International Monetary Fund (IMF) estimates that the additional annual costs resulting from these three special burdens will amount to an average of 7.5 percent of national income in industrialized countries in the future.
Traditionally, states would tackle this debt problem in two ways: tax increases and spending cuts. A look at the current budget wrangling in Germany already shows that neither approach is politically feasible, either in this country or in other industrialized nations.
In the short term, countries could be helped by the fact that inflation is quite high and interest rates are still comparatively low. As a pleasant consequence of high inflation and low interest rates, government debt has recently fallen in western industrialized countries, as has overall debt. However, this will not be a solution in the long term, as a recession is looming as early as 2024, which will drive debt up again.
This could theoretically be remedied by future economic growth and thus growth in government revenue from taxes and social security contributions. If this is high enough, state budgets could bear the debt burden. However, both components of economic growth, namely the growth in the number and productivity of the workforce, have become significantly weaker since the 1950s. Even current technological innovations such as artificial intelligence are unlikely to change this trend in the long term.
Without a significant redirection of government spending from the social system to investments in education, digitalization and infrastructure, for example - and in Germany without a reduction in overregulation and bureaucracy - public finances in the major industrialized countries will fall into growing disarray.
This is a good incentive for investors to invest in shares. Historically, these have been the better form of investment in times of high financial pressure on state coffers. Investors who focus on this area do not have to worry too much about the real preservation of their wealth in the long term, despite all future problems.
Reinhard Panse's Perspectives
30.11.2023
Reinhard Panse
For decades, countries have been pursuing risky, debt-based economic policies. In times of climate change and geopolitical instability, this threatens to take its revenge. However, it is doubtful whether they will take the necessary countermeasures.
It is certainly no injustice to the former German footballer Jürgen Wegmann, known as "Kobra", to say that economy was not his core competence. It was rather scoring goals, which he did very successfully in the 1980s for Borussia Dortmund, Schalke 04 and FC Bayern Munich, among others. Nevertheless, he has left the world a piece of wisdom that describes the current situation of global public finances better than any trained economist could: "First we had no luck, and then bad luck came along."
This lack of happiness has been evident since the end of gold backing for currencies. States have taken on and continue to take on debt in order to expand and support social systems. They try to end every economic crisis (oil crises in the 1970s, Iraq wars in 1991 and 2003, collapse of the European monetary system in 1992, Lehman Brothers bankruptcy in 2008, coronavirus in 2020) with more spending, also financed by debt. The hope is always that such economic stimulus programs will result in higher tax revenues and thus offset borrowing costs. A nice theory, but it hasn't really worked so far. (Evil tongues would perhaps claim that it is not due to luck, but to the basic idea...)
Bad luck is now taking three forms. Firstly, many Western societies are ageing rapidly - the USA is an exception here - geopolitical problems are increasing and global warming also needs to be tackled. The International Monetary Fund (IMF) estimates that the additional annual costs resulting from these three special burdens will amount to an average of 7.5 percent of national income in industrialized countries in the future.
Traditionally, states would tackle this debt problem in two ways: tax increases and spending cuts. A look at the current budget wrangling in Germany already shows that neither approach is politically feasible, either in this country or in other industrialized nations.
In the short term, countries could be helped by the fact that inflation is quite high and interest rates are still comparatively low. As a pleasant consequence of high inflation and low interest rates, government debt has recently fallen in western industrialized countries, as has overall debt. However, this will not be a solution in the long term, as a recession is looming as early as 2024, which will drive debt up again.
This could theoretically be remedied by future economic growth and thus growth in government revenue from taxes and social security contributions. If this is high enough, state budgets could bear the debt burden. However, both components of economic growth, namely the growth in the number and productivity of the workforce, have become significantly weaker since the 1950s. Even current technological innovations such as artificial intelligence are unlikely to change this trend in the long term.
Without a significant redirection of government spending from the social system to investments in education, digitalization and infrastructure, for example - and in Germany without a reduction in overregulation and bureaucracy - public finances in the major industrialized countries will fall into growing disarray.
This is a good incentive for investors to invest in shares. Historically, these have been the better form of investment in times of high financial pressure on state coffers. Investors who focus on this area do not have to worry too much about the real preservation of their wealth in the long term, despite all future problems.
About the author
Reinhard Panse
Reinhard Panse is Chief Investment Officer and co-founder of FINVIA Family Office GmbH. Until February 2020, Reinhard Panse was a member of the Management Board and Chief Investment Officer for HQ Trust GmbH, which is owned by the Harald Quandt family. From 2004 until joining HQ Trust GmbH in 2011, Reinhard Panse was Chief Investment Officer of the UBS Sauerborn business unit created within UBS Deutschland AG. From 2001, Reinhard Panse was a member of the Management Board of Sauerborn Trust AG and its legal predecessors. He was responsible for the investment strategy and played a leading role in the holistic asset management and administration of large private assets. Reinhard Panse began his career by taking over capital market and client support activities at Feri GmbH in 1989, after having founded and managed his own wealth management as managing director.
