From global debts to Europe and much more
This week we explore how big-debt nations are planning their path forward. Further, we explore protectionism, alternate tobacco industry, Dexit in Germany and finally OpenAI working with Pentagon.
World debt & global bonds - is that the path forward?
As of today, global debt has hit a record of over $307 trillion. The sudden rise in inflation has pushed global debt to new highs. In the second quarter of 2023, global debt was at record levels, largely driven by developed countries like the US, Japan, the UK, and France. Despite the increasing debt, governments are not cutting spending but are resorting to more borrowing through government bonds.
In the coming months, governments of the US, UK, and the eurozone are poised to saturate the market with bonds, a strategic move to fund their 2024 spending plans, which have swelled by 7% compared to the previous year.
This trend is not exclusive to these nations; Japan is also partaking in this fiscal strategy, collectively contributing to a net issuance of $2.1 trillion in new bonds.
Faced with unprecedented deficits, these countries find themselves in uncharted fiscal territory. The era of central banks actively absorbing bonds to stimulate economic growth has waned, necessitating governments to appeal to global investors for buy orders. The prevailing thought is that enticing investors will require offering higher yields.
Bond yields have already experienced an upward surge this year, with the 10-year rate currently hovering around 4%.
The escalation of public debt in advanced economies paints a striking picture, soaring to over 112% of GDP from a comparatively modest 75% two decades ago.
Of particular concern is the United States, currently running annual deficits equivalent to 6% of GDP, doubling the historical norm.
Insights from research conducted by the Bank of England and Harvard University indicate a notable correlation. For every percentage-point increase in a country's debt-to-GDP ratio, market rates tend to rise by approximately 0.35 percentage points.
As governments navigate this intricate landscape of fiscal challenges, the dynamics of bond markets and their implications on global economies become pivotal points of analysis.
Regional protectionism on the rise?
Northvolt has achieved a significant milestone as the inaugural European company to produce battery cells from a gigafactory, denoting a substantial manufacturing facility dedicated to electrification.
The recently inaugurated factory has the potential to cater to the needs of up to 1 million electric vehicles annually, contingent upon the battery's size, with full production capacity expected to be reached by 2029.
Initially facing challenges, the Swedish company had contemplated abandoning its plans for the Heide plant in Schleswig-Holstein, expressing concerns over more favorable subsidies offered in the United States through President Joe Biden's $783 billion Inflation Reduction Act.
A noteworthy development is Brussels' approval of €902 million in state aid for Northvolt's German facility, marking the inaugural application of a new mechanism enabling governments to augment funding for companies facing more lucrative subsidies elsewhere.
Despite initial hesitations, Northvolt committed to the Heide project in May, following Berlin's promise of support under a novel EU state aid framework.
This framework empowers national governments to match subsidies offered outside the EU, particularly when a project of "strategic importance" is at risk of relocation.
The funding package includes a €700 million grant and a €202 million guarantee, emphasizing the collaborative effort to ensure the success of this strategic venture.
Notably, concerns have been raised by some member states about potential market fragmentation, fearing that allowing major economies like Germany and France to inject substantial funds into their industries might disrupt the unity of the single market.
Snus and the alternate tobacco market
Sweden stands as a notable and somewhat contentious case study in the pursuit of effective tobacco control. The challenges of quitting nicotine are well-documented, with associated health risks such as elevated blood pressure and heart disease.
Enter snus, nicotine-filled pouches resembling miniature teabags, discreetly placed under the upper lip. Traditional snus employs moistened tobacco, pasteurized and flavored, while a newer variant called white snus utilizes plant-based fibers instead of tobacco to deliver nicotine. Despite the distinction, Swedes refer to both simply as snus—a key player in Sweden's remarkable decline in smoking rates.
As of 2022, only 5.6% of the population in Sweden is still engaged in regular cigarette use, the lowest rate in Europe.
If the current trajectory persists, Sweden is poised to declare itself "smoke-free" as the figure drops below 5% in 2024.
This achievement sparks a broader discussion on whether encouraging smokers to transition to alternatives like nicotine pouches, vapes, and heated tobacco sticks is a positive step, or if these substitutes merely normalize a less harmful yet still highly addictive behavior.
A significant development in this landscape is tobacco giant Philip Morris International Inc.'s $16 billion acquisition of Swedish Match AB, the leading snus provider and maker of popular Zyn pouches.
Sales of Zyn pouches witnessed a notable 17% growth in the four weeks leading to December 31.
The prevalence of snus usage in Sweden is now at approximately 14% of the population, according to the Swedish Public Health Agency. Interestingly, as snus usage has surged, smoking rates have witnessed a substantial decline.
In 2004, around 14% of men and 19% of women smoked daily.
By 2022, these rates had dropped by about two-thirds, attributed in part to increased cigarette taxes and a ban on smoking in public places
The global market for nicotine pouches alone is anticipated to skyrocket from $2 billion in 2022 to a staggering $17.4 billion by 2029.
Additionally, heated tobacco and vapes, other popular cigarette alternatives, each boasted an estimated global market size of around $23 billion in 2022.
The evolving landscape raises pertinent questions about the role of these alternatives in reshaping smoking habits globally.
Is “Dexit” on it’s way?
One of the growing political parties in Germany has aired their views that it might be good for Germany, if they come out of the European Union, ie a “Dexit”.
Alternative für Deutschland, AfD, is a political party in Germany. They were polling at 22 percent—surpassing the support for all three parties in Chancellor Olaf Scholz's coalition, namely the Social Democrats, Greens, and Liberals.
As Germany heads towards crucial elections in September, particularly in the eastern states of Saxony, Brandenburg, and Thuringia, the AfD's rising influence poses uncertainties regarding potential coalition agreements.
In addition to their stance on Germany's relationship with the EU, AfD expressed a controversial opinion on the 1.1 million Ukrainian refugees currently residing in the country, suggesting that they have no long-term prospects and criticizing the decision to allow them to receive welfare payments.
These statements highlight the complex and divisive nature of the political landscape, with implications for both domestic and international policies.
OpenAI working with US military
OpenAI has entered into collaborations with the Pentagon for various initiatives, notably in the realm of cybersecurity, marking a shift from the organization's previous stance of refraining from supplying its artificial intelligence to military entities.
Additionally, OpenAI has announced an intensified focus on enhancing election security. The company is actively allocating resources to safeguard against the misuse of its generative AI tools for the dissemination of political disinformation.
It's noteworthy that OpenAI has recently revised its terms of service, eliminating the prohibition on the application of its AI in "military and warfare" contexts.
This evolution in approach underscores the dynamic nature of OpenAI's engagements and its commitment to addressing contemporary challenges.