The dark forces driving discontent across the developed world

Disillusion is rapidly turning to discontent and open conflict.

Over the weekend, demonstrators took to the streets across France, Spain, Portugal, Italy and Belgium, battling police, torching public buildings and looting shops.

The scenes have mirrored events on the other side of the Atlantic, as the political chasm dividing America has grown, with outbursts of public anger against authorities gaining momentum.

Across the developed world, including here in Australia, political momentum has shifted from the centre to the fringes in an increasingly bipolar world that, if it continues, ultimately will render any attempt at consensus futile.

Populist leaders, experts at whipping up fury for personal gain, are in the ascendancy despite offering little in the way of solutions.

While the catalysts in each country may differ, the root cause largely is the same: the economy

The compact — the unwritten agreement — between workers and the democratic state is fraying.

Lower and middle-income workers feel they're going backwards. And they're not imagining it.

Wages have not kept pace with inflation as asset prices have soared. Property ownership in many Western nations is almost out of reach of ordinary workers while rents have skyrocketed.

That has concentrated wealth in an increasingly smaller cohort of wealthy households.

The "cost-of-living crisis" has become a transnational phenomenon.

And as prices continue to surge, central banks have responded in unison by raising interest rates, piling further pressure on those already most affected.

The cost of inequality is beginning to manifest itself.

Why you feel poor

Here's a snapshot of why workers are angry.

If you take inflation into account, Australian incomes are back to where they were in 2011.

There was the post-pandemic inflation hangover, piled on top of Russia's invasion of Ukraine, which sent energy prices into orbit that's now been followed by America's war in Iran.

The combination has not just obliterated income growth. It has sent it into reverse.

It's a story writ large across the Western world.

Just how intractable the problem has become is on full display right here at home.

The opposition and a large posse of economic commentators point to federal government spending. It's firing up inflation, they argue, and driving interest rates higher.

That's not entirely true. For a start, there are huge global forces at work. But let's look at the domestic situation.

Spending alone isn't the problem. It is the imbalance between tax revenue and spending. There's not enough tax to pay for all that spending, and the shortfall, the deficit, must be funded by debt.

There are two levers you can pull here. One is raising taxes, which no-one will ever support. And the other is cutting spending, which no-one will ever support.

From 2013 to the pandemic, Australia, a resource-exporting nation, ran up deficits during the greatest resources boom in history.

The government of the day decided to throw away a resources tax, a decision which has cost the country dearly.

And to this day, we continue to sell our resources, charging a fraction of the taxes other nations apply.

In the meantime, lobbyists continually agitate for cuts to income and company taxes, even as we stare into the abyss of ongoing deficits.

Their universal fix is to raise the Goods and Services Tax, which, if you hadn't already guessed, hits low- and middle-income earners the hardest.

Remember the three-stage income tax cuts, the ones that really benefited higher-income earners?

Apparently, they were going to be self-funding. They were going to generate so much economic activity that the cuts would increase government revenue.

Instead, they've created a structural imbalance in our federal finances.

And whenever the idea of spending cuts is raised, there is an almighty burst of outrage.

Just ask Joe Hockey. His 2014 federal budget was howled down.

This year's budget, meanwhile, targeted welfare payments to the wealthy which, given our circumstances, should have been a no-brainer.

The hugely generous discounts to capital gains tax and the loophole created by negative gearing were wound back, along with a tightening of the generous tax arrangements surrounding family trusts.

Five months later, and the outcry against the changes continues.

Tax concessions may not seem like spending, but, in essence, they are. That's because they cost the budget as revenue is foregone while the benefits accrue to a targeted cohort.

Other taxpayers, paying the full rate, end up subsidising the beneficiaries.

And it is wealthier households that overwhelmingly benefit from those concessions.

The Trump legacy: higher interest rates

RBA governor Michele Bullock has confirmed what many of us feared.

Higher interest rates are here to stay.

"I don't know if this particular level is the new normal, but what I do know is that we're not going back down to interest rates of zero or very close to zero, policy rates of that," she said after the RBA rate hike this month.

Inflation is no longer an Australian-only concern. It's rising across the developed world.

The US Federal Reserve has already raised rates once this year and, after hotter-than-expected inflation stats this month, could go again before Christmas.

In the past few weeks, bond markets have pushed interest rates on longer-term US government debt dramatically higher as concerns about US government debt continue to rattle investors.

Tax cuts for the wealthy, under Donald Trump's Big Beautiful Bill, coupled with huge outlays for the war in Iran, have sent US debt into orbit.

As you can see below, America's debt-to-GDP is now at 126 per cent, far higher than during World War II.

The interest bill on that debt is now the second biggest expense in the US Budget and outstrips defence spending. With soaring US bond rates, that bill is now becoming ever more expensive.

As a much smaller nation that imports capital for investment, longer-term Australian government debt rates have soared alongside the greenback.

Add in the trillions of dollars earmarked for artificial intelligence investment over the next few years, and the global demand for debt funding is likely to keep interest rates elevated for years.

Higher inflation and higher interest bills eat into worker salaries.

When did the rot set in?

Some point to the Global Financial Crisis.

Governments and central banks bailed out the culprits while workers were left to fend for themselves.

What followed was mass unemployment and an acceleration of the globalisation trends that sent much of the world's manufacturing industries to China.

Inflation all but disappeared and interest rates, in what now appears to be an aberration, plummeted.

Stock markets boomed, and real estate soared, giving a false impression of rapidly rising national wealth across the Western world. The gap between the have-mores and the have-nots grew ever wider but was largely ignored.

But the GFC was merely a flashpoint when the tectonic forces that had been building for years finally snapped.

For decades, the great economic experiment of the 80s appeared a resounding success.

Reagan and Thatcher pushed through financial deregulation and allowed market forces to dominate, liberated debt markets, allowed trade to flow freely, increased wealth and raised living standards across the globe.

There was a dogmatic application of the theory of free markets and globalisation as detractors were denigrated and discarded.

For more than 30 years, it seemed to work, until it all blew up.

But even then, it appears we only paid attention to one side of the Yin and Yang of an economic revolution.

And now the costs are mounting.