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. In 2025, the same publication ran a number called “The Coming Debt Crisis.” The outcome of the return of big government was the return of persistent inflation, stagnation, and unsustainable debt. Who would have guessed it? Anyone doing the numbers and everyone who understands that government stimulus and so-called public spending multiplier effects are simply myths of statism.
For more than two decades, the dominant policy assumption in the developed world was that there were no meaningful limits to government spending, public debt, monetary intervention, or regulation. Interest rates were near zero, central banks absorbed government bonds, and politicians concluded that budget control was an obsolete idea.
That illusion is over.
The rise in unison of sovereign bond yields across developed economies is not simply a market move. It is the financial system’s verdict on a model that has exhausted its credibility, even for those bond investors accustomed to believing all that governments and central bankers say as if it were the truth revealed. Permanently expanding government, structurally unbalanced budgets, central-bank financing of fiscal excess, and the political belief that every economic problem can be solved with another “stimulus” package seemed like a comfortable solution, but it delivered the same results, including persistent inflation, high deficits, and economic stagnation.
The state-led monetary and fiscal regime surpassed all its limits many years ago, but some still believed that it could all be disguised by central banks’ quantitative easing. They were wrong.
First, we saw central banks enter losses. No one seemed to care. Then we saw bonds slump on fears of persistent inflation. No one seemed to care. Now we see that all sovereign bond yields rise even when central banks maintain all the liquidity measures, and when they hike rates, the relief only lasts a couple of market sessions.
The choice now is not the fake austerity of 2008-2012, which basically perpetuated big government and raised taxes. It is between a return to sound money, fiscal balance, lower taxation, deregulation, and a smaller state. Unless citizens start demanding their governments for more freedom and less intervention, the result will be a larger and prolonged period of stagnation, inflation, debt accumulation, and declining living standards.
Many will blame geopolitical events and say that the solution is socialism. If socialism was the answer, France would not be in stagnation, with an enormous fiscal problem and rising social discontent.
The answer to the economic stagnation and affordability crisis is not more socialism. More subsidies, price controls, redistribution, and direct state intervention have always delivered the opposite of what the politicians promise.
Socialism never works because it is a system of control, not progress. It destroys the incentives to generate wealth and creates a dependent and submissive population unable to defend itself. Socialists know that their promises do not work, but by the time citizens find out, they are already hostages of a powerful state machine.
Across Europe, governments that have continually expanded public spending, taxation, transfers, and regulation have not produced prosperity or relief from living costs. They have instead accumulated debt, weakened growth, raised the economy’s cost base, and deepened social discontent. Governments do not reduce prices; they increase them.
The political appeal is easy to understand. Subsidies and transfers seem to offer immediate, visible relief. The government makes you blame the person or business that puts the price tag, not the one that destroys the currency’s purchasing power, which is the government itself. Thus, those “subsidies” are always paid with units of currency that are constantly losing value. They do not address the reason prices rise in the first place. Price increases are a consequence of monetary inflation, which is created when governments print more currency than the private sector demands through spending and debt.
Big corporations do not increase prices; governments do.
Socialism has one objective: control. Subsidies leave recipients dependent on political discretion while denying them the opportunities that come from productive employment, rising real wages, investment, and a dynamic private sector. At the same time, taxpayers are asked to finance an ever-larger state with less disposable income and fewer incentives to save, invest, hire, or start businesses.
Politicians then blame “the rich,” corporations, or markets for an affordability crisis that their own policies have created. Furthermore, no government can redistribute wealth from a private sector that is being steadily weakened by higher taxes, punitive regulation, inflation, and rising borrowing costs.
Affordability is not created by government control or by shifting existing income from one group to another. It is created when the private sector thrives, real wages rise alongside productivity, competition lowers prices, investment expands supply, and housing, energy, transport, health care, and essential services can be provided more efficiently and abundantly.
When governments confront structural supply constraints with redistribution, subsidies, price intervention, and debt-financed spending, they also undermine the incentives to invest, build, innovate, and improve productivity. The result is always a more expensive economy, greater dependency, and fewer opportunities.
For years, governments could disguise fiscal fragility because central banks repressed yields. Quantitative easing was presented as a magic wand and a technical monetary-policy tool, but in practice it became a mechanism through which governments financed unsustainable spending at artificially low rates, crowding out the private sector and making the public finances unsustainable.
The consequences were predictable. When the price of debt is manipulated downward, politicians borrow more. Quantitative easing was never a tool to give time for governments to reduce debt and spending, but to justify higher expenses.
Now the market is imposing the discipline that policymakers tried to avoid. However, politicians refuse to cut spending and, instead, pass the rising interest cost to taxpayers.
Monetarily sovereign states do not have an unlimited capacity to issue currency or accumulate debt. They can postpone adjustment for a time if their debt is denominated in their own currency and domestic institutions remain credible. However, they cannot abolish the limits imposed by economic reality.
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.
Advocates of ever-larger government frequently argue that fiscal stimulus creates growth. The evidence from developed economies is the opposite.
After years of extraordinary deficits, public spending programs, central-bank asset purchases, and industrial-policy initiatives, most advanced economies face low trend growth, weak private investment, declining productivity, unaffordable housing, high tax burdens, and increasingly poor public finances.
The problem is not just that governments spend too much. It is that governments spend resources in the worst possible way, worse than private actors, and direct capital according to political priorities rather than consumer demand, profitability, or long-term productive value. Governments are exceptionally bad at picking winners and even worse at picking losers.
The problem is also in the economics world. GDP accounting treats public spending as an addition to output. But real prosperity depends on whether resources are used productively. A government can borrow and spend billions while leaving the economy poorer in productive terms as that spending crowds out private investment, raises taxes, sustains unproductive activities, or fuels inflation.
The solution is not to borrow more in hopes the next stimulus will succeed where the last failed. The solution is to remove the obstacles that prevent private-sector growth.
Developed economies need a policy reversal based on four principles.
First, they need sound money. Central banks should shut down. However, since this will not happen, they must return to their mandate: protecting the currency’s purchasing power. Monetary policy should not be used to fund deficits, manipulate sovereign-bond markets, or protect governments from the consequences of fiscal irresponsibility.
Second, governments must balance their budgets through durable spending reductions, not cosmetic measures, tax hikes, or optimistic growth assumptions. Spending cuts should focus on eliminating inefficient subsidies, duplicative administration, corporate welfare, politically directed investment schemes, and entitlement commitments that cannot be financed.
Third, policymakers must cut taxes, particularly those that penalize work, investment, savings, entrepreneurship, and capital formation. A tax-increase strategy is politically convenient because it avoids confronting the expenditure problem. However, it reduces incentives to produce, invest, hire, and innovate precisely when economies need more dynamism.
Fourth, advanced economies need an ambitious deregulation agenda. Lower barriers to business formation, energy production, housing construction, labor-market flexibility, and investment would do more for sustainable growth than another decade of deficit spending.
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 reader may say that governments will choose more intervention, more debt, more monetary distortion, and more stagnation. However, for the first time, we are seeing citizens all over the world rejecting these promises. Governments and large political parties may have to change their policies because the failure is evident and the voter base simply says enough is enough. That is why the cultural battle is so important. The goal is to make voters understand that the solution is not more government, but less. A lot less.