The bond markets are closely watching Britain and France and are expected to demand higher government bond yields due to their demographic declines, loss of households, and a failure to assimilate immigrants.
In Britain, tax receipts have not kept pace with spending, so government borrowing is now at a 5-year high. Prime Minister Keir Starmer’s higher taxes on wealthy British citizens have backfired, resulting in capital flight. Furthermore, Britain is in the midst of a severe demographic decline, so it is losing households, and new immigrants are not being successfully assimilated. As a result, Britain is expected to slip into a recession that will cause the Bank of England to further cut key interest rates and weaken the British pound.
Meanwhile, the budget crisis in France, with the fourth prime minister since 2024 (the third and fourth prime minister is the same person) persists because negotiating with Marine Le Pen’s National Party that controls Parliament remains futile. Le Pen is obviously trying to force President Macron to declare an election. Even though Le Pen was banned from the EU for becoming president for 5 years, her lieutenant, Jordan Bardella, is expected to become the next French president, even though he is under 30 years old.
This is a good time to remind everyone that I am expecting the U.S. dollar to strengthen amidst the weakness overseas, since the U.S. (1) has stronger GDP growth, (2) is still creating new households, and (3) better assimilates immigrants. A strong U.S. dollar is also deflationary, since it lowers the cost of imported goods.
Markets on Close Watch as US Dollar Rises Amid Europe’s Economic Strains
