Western liberal democracies are confronting a combination of fiscal, political and institutional pressures that deserves to be considered in a much broader historical context.
Although the comparison with past empires should not be taken literally - modern democratic states are not ancient Rome, Tsarist Russia, the Ottoman Empire or the British Empire - their institutions, economies and political structures are fundamentally different; the history of their rise and fall is still a useful framework for identifying recurring patterns.
Empires and political systems rarely collapse because of one isolated event. More often, they experience a gradual accumulation of pressures: excessive expenditure, growing bureaucracies, political fragmentation, declining confidence in institutions, increasing demands on the state and an inability to reconcile those demands with the resources available to finance them.
The question facing the West is therefore not whether history will repeat itself in precisely the same form. It will not.
The more important question is whether the underlying pressures that have destabilised political systems in the past are beginning to reappear in a modern form.
History Does Not Repeat Itself — But Patterns Do
Karl Marx famously observed in The Eighteenth Brumaire of Louis Bonaparte that great historical events and personalities appear twice, “the first time as tragedy, the second time as farce.” The quotation has subsequently been shortened and popularised into the familiar expression that history repeats itself, first as tragedy and then as farce.
The point is not that contemporary Western democracies are destined to reproduce the history of previous civilisations. Rather, political systems can encounter recurring structural problems even when the circumstances are entirely different.
The progression is simple:
- Large states accumulate institutions.
- Institutions create constituencies.
- Constituencies create political demands.
- Political demands create expenditure.
- Expenditure creates taxation and borrowing.
And borrowing creates a future obligation that eventually constrains the choices available to governments.
This process can continue for a remarkably long time, particularly when economic growth remains strong and the cost of borrowing remains low. But eventually the relationship between government commitments, economic capacity and public confidence becomes more difficult to maintain.
That is where the present situation becomes particularly interesting.
The Historical Warning From Russia
The Russian experience of the revolutionary period provides one of the clearest warnings about what can happen when economic, political and institutional pressures converge.
The relevant comparison is not simply Tsarist Russia in 1919. The Russian Revolution occurred in 1917, followed by civil war and the increasingly centralised economic policies of the Bolshevik government between 1918 and 1921. What matters for the present comparison is the great speed with which an established political and economic order was displaced when the underlying system lost legitimacy.
The lesson is not that Western democracies are approaching a Russian-style revolution.
Rather, the lesson is that political systems can appear stable until a combination of economic hardship, institutional distrust and political polarisation reaches a point at which previously accepted assumptions are suddenly challenged.
Once that happens, the political debate can move much faster than the underlying economic system can adapt.
The danger is therefore not necessarily revolution. It may instead be a fundamental change in the relationship between the individual, the market and the state.
Rome and the Problem of Monetary Debasement
Ancient Rome offers another useful historical analogy, particularly in relation to the relationship between state expenditure, monetary policy and public confidence.
The Roman state faced enormous expenditure requirements, including military costs, administration and the provision of public benefits. One response was the progressive debasement of its coinage. The silver content of the denarius declined substantially over successive centuries, with the process becoming particularly pronounced during the third century AD. An interesting read is from American Numismatic Society where it documents the progressive reduction in silver content from the reforms of Nero through the Severan period.
Sound familiar?
The analogy with modern quantitative easing must, however, be treated carefully.
Modern central banks are not simply melting down precious-metal coins and replacing silver with base metals. Quantitative easing is a very different monetary mechanism. It theoretical, at least, involves central-bank purchases of financial assets, financed through the creation of central-bank reserves, with the objective of influencing financial conditions, interest rates and ultimately economic activity.
Nevertheless, the historical analogy is useful at a higher level.
When governments face extraordinary expenditure requirements, they must ultimately finance those commitments through some combination of taxation, borrowing, monetary policy and economic growth. The mechanisms change over time. The underlying constraint does not.
The state cannot escape the economic resources of the society that supports it.
Quantitative Easing and the New Monetary Environment
The scale of modern monetary intervention is therefore important.
The Bank of England’s Independent Evaluation Office reported in January 2021 that quantitative easing, originally introduced as a temporary response to the global financial crisis, had become substantially larger, broader and more persistent than originally anticipated. By November 2020, the Bank’s announced asset purchases had reached £895 billion, equivalent to more than 40% of annual UK GDP.
The Bank’s Asset Purchase Facility was still operating at extraordinary scale in early 2021. Its first-quarter 2021 report recorded a target stock of £895 billion, consisting of £875 billion of UK government bonds and £20 billion of corporate bonds.
The point is not to argue that quantitative easing is equivalent to Roman monetary debasement. It is not.
The point is that governments and central banks have entered an environment in which extraordinary monetary intervention has become increasingly normal.
Measures introduced as temporary responses to crises have a tendency to become part of the institutional architecture.
That creates a difficult question.
What happens when extraordinary policy becomes ordinary policy? Although I do digress, I distinctly recall from my studies that the introduction of income tax in Canada in the early 20th century was a temporary measure to finance that country’s involvement in the First World War.
The Pandemic Changed the Scale of Government
COVID-19 accelerated this process dramatically.
Governments were forced to intervene on a scale that would have been politically difficult to imagine only a few years earlier. Businesses were closed by government order. Workers were supported through public expenditure. Governments guaranteed loans, subsidised wages, expanded healthcare spending and provided direct financial support to households and companies.
The policy response was understandable given the nature of the crisis. It would be intellectually dishonest to analyse the fiscal expansion without acknowledging that governments were responding to a perceived extraordinary public-health emergency.
But the economic consequences are nevertheless significant.
The IMF reported in April 2021 that governments around the world had announced approximately $16 trillion of fiscal actions in response to the pandemic. In advanced economies, public debt had risen by more than 16 percentage points to above 120% of GDP.
The IMF’s April 2021 Fiscal Monitor projected average gross government debt in advanced economies at approximately 120% of GDP in 2020 and 122.5% in 2021.
These figures are not merely accounting statistics.
Debt represents future claims on economic resources.
Interest rates may remain low. Economic growth may exceed expectations. Inflation may reduce the real burden of certain liabilities. Governments may successfully grow their way out of some of the problem.
But none of those outcomes is guaranteed.
The higher the level of debt, the greater the sensitivity of the fiscal system to changes in interest rates, economic growth and investor confidence.
Debt Changes the Political Equation
This is where public debt becomes a political rather than merely an economic issue.
When governments borrow during a crisis, the political benefit is immediate while the economic cost is deferred.
The government can spend today.
The taxpayer pays tomorrow.
This asymmetry creates a powerful political incentive toward continued expenditure. Once a programme exists, eliminating it creates a visible group of losers. Maintaining it, by contrast, can often be presented as protecting an existing entitlement.
The result is what might be described as institutional ratchet pressure.
Government expands during a crisis.
The crisis ends.
Some of the emergency expenditure disappears.
But other programmes remain.
The bureaucratic infrastructure created to administer them remains.
The political constituencies that benefited from them remain.
And the expectation that government should continue providing support remains.
This is one of the central reasons why temporary expansions of government can become permanent.
The Expansion of the Administrative State
The issue is therefore not simply the amount of government spending.
It is also the size and complexity of the machinery required to administer that spending.
Modern governments have developed extraordinarily complex regulatory and tax systems. The complexity itself creates an economic cost because individuals and businesses must devote increasing amounts of time and resources to understanding rules that are often difficult even for specialists to interpret.
For large international investors, this has become particularly significant.
A wealthy individual may now need to consider income taxation, capital gains, inheritance, corporate taxation, controlled foreign-company rules, beneficial-ownership requirements, reporting obligations, anti-money-laundering regulations, exchange-of-information regimes and residence rules across multiple jurisdictions.
The trend toward greater transparency and disclosure is also unmistakable.
As I noted in US Ends UBO Privacy, the international system is moving toward greater beneficial-ownership disclosure and information exchange.
This is not necessarily an argument against transparency. Financial crime, money laundering and tax evasion are legitimate policy concerns.
The larger point is that the regulatory state is becoming increasingly intrusive and increasingly interconnected.
For businesses and investors, the cost of navigating that system is itself becoming a factor in jurisdictional decision-making.
Taxation Becomes the Next Pressure Point
Eventually, governments must confront the fiscal consequences of the expansion in expenditure and debt.
There are only a limited number of options.
Governments can grow.
They can reduce expenditure.
They can borrow.
They can tolerate higher inflation.
Or they can increase taxation.
In practice, they are likely to use some combination of all of these.
The debate over taxation of wealth was already becoming increasingly prominent by early 2021. In March, Senator Elizabeth Warren and Representatives Pramila Jayapal and Brendan Boyle introduced the Ultra-Millionaire Tax Act, proposing an annual tax on household net worth above $50 million, rising at higher levels of wealth.
That proposal was not simply a tax-policy debate.
It represented a broader political question:
Who ultimately bears the cost of an expanding state?
If governments cannot or do not wish to reduce expenditure, the pressure to identify new sources of revenue will inevitably increase.
The wealthy are an obvious target because their assets are substantial and politically visible. But wealth is also highly mobile.
Capital can move.
Businesses can move.
People can move.
And investment structures can move.
This creates a tension between the fiscal requirements of governments and the mobility of the tax base.
The Wealthy Have Increasingly More Options
This is where the question becomes directly relevant to international investors.
As governments increase taxation and regulation, wealthy individuals have more incentive to consider jurisdictional diversification.
That does not necessarily mean abandoning one’s home country.
It may mean establishing another residence, creating a second investment base, diversifying banking relationships, moving investment structures or simply maintaining the ability to operate internationally.
The principle is one of optionality.
In Wealthy Beware, I argued that high-net-worth individuals should pay increasing attention to investment migration and jurisdictional diversification as governments respond to fiscal pressures and political change. The point is not that every wealthy individual should leave. The point is that the wealthy should understand that the rules governing capital and residence are not static.
That distinction will become increasingly important.
The investor who has only one residence, one banking jurisdiction, one corporate structure and one tax environment is exposed to changes in that jurisdiction.
Diversification is not only an investment concept.
It can also be a jurisdictional concept.
Political Polarisation Complicates the Problem
Fiscal pressure does not occur in a political vacuum.
Western democracies are experiencing increasingly intense political polarisation. The debate is no longer simply about the size of government. It increasingly concerns what government should be expected to provide, who should pay for it and how far the state should intervene in the economy.
This produces competing political pressures.
One side argues that inequality requires greater redistribution and a stronger state.
The other argues that excessive taxation and regulation discourage investment, entrepreneurship and economic growth.
Both positions contain elements of truth.
A modern democracy has a legitimate interest in protecting vulnerable citizens and providing essential public services. At the same time, economic growth ultimately depends upon private investment, entrepreneurship and the willingness of individuals to take risk.
The difficult question is where the equilibrium lies.
When political systems become unable to find that equilibrium, polarisation tends to intensify.
The Tax System Becomes More Byzantine
The result can be an increasingly complex tax system in which governments introduce targeted measures to address particular political concerns.
One group receives an exemption.
Another receives a credit.
Another faces an additional surcharge.
A further group is subject to an anti-avoidance rule.
Then a reporting requirement is introduced to prevent circumvention of the previous rules.
The system becomes progressively more complex.
The United States provides an obvious example of this broader phenomenon, with successive layers of federal, state and local taxation combined with increasingly sophisticated reporting and disclosure requirements.
The problem is not merely the amount of tax.
It is uncertainty.
An investor can price a known tax.
It is much harder to price a tax regime whose direction is unclear.
That is why policy predictability becomes economically valuable.
COVID-19 and the New Role of Government
The pandemic may ultimately prove to be a watershed in the relationship between governments and their citizens.
Before COVID-19, there was already substantial debate about inequality, climate policy, healthcare, infrastructure and the appropriate size of government.
The pandemic demonstrated how rapidly governments can assume extraordinary powers when a sufficiently serious crisis is identified.
Again, many of the measures were justified by the circumstances.
But institutions rarely emerge from major crises completely unchanged.
Governments have learned that they can mobilise enormous fiscal resources.
Businesses have learned that government intervention can determine whether they remain open.
Citizens have learned that government can directly influence where they can travel, work and conduct their businesses.
The psychological and institutional consequences of this experience should not be underestimated.
Climate Policy Will Add Another Layer
The next major area of government intervention is likely to be climate policy.
By January 2021, the Biden administration had already placed climate change at the centre of US domestic and foreign policy. Executive Order 14008 declared climate change a central policy priority and directed a broad range of federal actions around climate and environmental policy.
The argument here is not about whether climate change is real or whether governments should respond to it.
The economic question is different.
What happens when climate policy becomes embedded throughout taxation, regulation, energy, infrastructure, finance and investment?
The transition can create enormous opportunities for capital. It can also create significant regulatory costs for industries that become politically disfavoured.
For investors, the consequence is that government policy will increasingly become a direct component of investment analysis.
The investor will not simply ask:
“What is the return?”
The investor will also ask:
- What will the government permit?
- What will the government tax?
- What will the government subsidise?
- What will the government prohibit?
Those questions are becoming increasingly important.
From Globalisation to Jurisdictional Competition
This brings us to perhaps the most important consequence of the emerging paradigm shift.
If governments become more interventionist, more indebted and more dependent upon taxation, then jurisdictions will increasingly compete for mobile capital and mobile people.
The competition will not necessarily be between countries offering the lowest tax rates.
It will be between different combinations of taxation, regulation, stability, investment opportunities, infrastructure and quality of life.
Some jurisdictions will choose higher taxes and larger public sectors.
Others will choose lower taxes and smaller states.
Some will prioritise environmental regulation.
Others will prioritise energy security.
Some will seek to attract international investors.
Others will focus primarily on domestic redistribution.
The result will be a much more competitive international environment.
For the investor, that means jurisdiction itself becomes an asset.
Investment migration should therefore be viewed in this broader context.
Residence and citizenship programmes are often discussed as immigration products. Increasingly, however, they are also mechanisms through which governments compete for internationally mobile capital.
The investor is not simply purchasing a residence permit.
The investor is acquiring optionality.
That optionality may involve residence, taxation, investment access, family security, business opportunities and the ability to diversify political risk.
The paradox is striking.
A New Paradigm for Wealth
The traditional model was relatively straightforward.
A wealthy person lived in one country, operated businesses there, banked there and paid taxes there.
That model is becoming less common among internationally mobile wealth.
A modern investor may live in one jurisdiction, operate a business in another, hold investments through another, maintain banking relationships in several countries and possess residence rights elsewhere.
This is not necessarily an attempt to avoid taxation.
It is often a form of risk management.
The same way an investor would not normally place an entire investment portfolio into one company, there is an increasingly compelling argument for not placing every aspect of one’s economic life under the control of a single jurisdiction.
The central issue, therefore, is not whether Western civilisation is about to collapse - at least not in such a dramatic fashion as history has shown us.
Rather, the observation is that the post-war assumptions surrounding the relationship between governments, markets and individuals are under pressure.
- Public debt is substantially higher.
- Government has become more interventionist.
- Taxation is under political pressure.
- Regulation is expanding.
- Political polarisation is increasing.
- Monetary policy has become extraordinary by historical standards.
And climate policy is likely to create another major area of government intervention.
None of these developments necessarily leads to economic or political collapse.
But together they represent a paradigm shift.
The old assumption was that governments would generally retreat after extraordinary interventions.
The new possibility is that some of those interventions will become permanent.
The old assumption was that globalisation would steadily reduce the importance of national borders.
The new reality may be that borders matter more because taxation, regulation, residence and political risk differ increasingly between jurisdictions.
The old assumption was that wealth management was primarily about allocating capital between asset classes.
The emerging model is broader.
It is about allocating capital between asset classes and jurisdictions.
What Comes Next
History teaches us that systems rarely change because one event suddenly causes them to fail. More often, a series of apparently manageable pressures accumulates until the existing institutional structure becomes incapable of responding in the same way it once did.
Rome did not cease to exist because of one decision.
The Ottoman Empire did not disappear because of one policy.
The British Empire did not end because of one event.
Political and economic systems evolve, weaken, reform and eventually transform over long periods of time.
The West is no different.
Inevitable decline will occur for it is the natural order of things. The existing Western democratic model will not remain unchanged indefinitely.
That is the point of the paradigm shift.
The world is moving toward a period in which governments will have to reconcile unprecedented levels of public debt with demands for social spending, climate investment, infrastructure, healthcare and economic support. At the same time, internationally mobile capital will increasingly have the ability to compare jurisdictions and respond to changes in taxation, regulation and political risk.
That creates a new competitive environment.
Governments will compete for capital.
Investors will compete for opportunity.
Jurisdictions will compete for wealthy individuals.
And individuals will increasingly evaluate jurisdictions in the same way that they evaluate investments: by considering risk, return, stability and optionality.
The Strategic Implication for Investors
The consequence for private capital is straightforward.
The investor should not assume that today’s tax regime will be tomorrow’s tax regime.
The investor should not assume that today’s regulatory environment will remain unchanged.
The investor should not assume that today’s political consensus will survive indefinitely.
And the investor should not assume that one jurisdiction will remain the optimal place to live, invest, bank and structure wealth for the next generation simply because it has been attractive for the last generation.
The prudent response is not panic. It is preparation.
Diversification of assets has long been accepted as a basic investment principle.
Increasingly, diversification of jurisdictions, residences, citizenships, banking relationships and investment structures will arguably become equally important.
That is the pending paradigm shift.
The next decades will be defined by something very subtle and potentially more consequential: a gradual renegotiation of the relationship between the individual, capital and the state.
And those who understand that change early will have considerably more options than those who wait until the change is already complete.