France In Chaos: America's Debt Crisis Could Be Next | Matthew Piepenburg

David Lin (0:00)

France erupted in violent protests over the weekend with an estimated 550,000 to 800,000 people taking to the streets on Saturday and Sunday across Paris, Marseille, Lyon, Bordeaux and other major cities. What began as demonstrations against rising living costs, high energy prices, education funding costs and deteriorating public services escalated into widespread riots, looting and arson. Shops were ransacked, Marseille City Hall was breached and the historic city hall in Limoges was devastated by fire. According to France's Interior Ministry, 2,400 people were arrested so far, while almost 1,000 police officers in Gendarmes were injured seven seriously. The unrest represents one of France's most severe episodes of civil disorder in decades, adding to the political pressure on President Emmanuel Macron. Today, we're looking at the underlying problems with the economy of France that led to these riots, which are merely the symptom of a pressure cooker buildup of civil discontent in the way the government has run its finances. Many people protesting may not even know the numbers behind the crisis, but just know that they feel angry about their livelihoods. What's happening in France is a cautionary tale for the rest of Europe and even North America.

We're also going to be looking at whether the private sector, namely AI stocks, are facing a similar debt crisis of their own. Joining us now is Matthew Piepenburg, partner at Von Greyerz in Zurich. Welcome to the show, Matthew. Good to see you.

Matthew Piepenburg (1:24)

Oh, it's great to be back, David. I'm sure we'll always have much to discuss, especially when it comes to debt.

David Lin (1:29)

You've been warning us about exactly what's happening now.

And I guess with interest rates soaring as fast as they have in the last year, it's been coming to light. Now, it's not just in the US in the 10 years been going up in Europe, in Germany. It's up 87 basis points in the last one year. In France, it's up 157 basis points. In Japan and in Asia, it's up 128 basis points. In Switzerland, where you're usually based, it's not that big of a problem. It's only up 37 basis points compared to the rest of Europe. It's relatively benign. In China, it went the other way. But today, we're talking about what the West is facing. You're currently in France, right? And I'm sorry to bring this up, but the country is literally burning right now. This is the biggest civil unrest case in decades, I read. 2,400 people arrested as of now, probably more by the time this airs.

There's images of churches burning, as you're aware. Let me just play for you this short clip of Bloomberg explaining the dead situation in France. They've been covering this non-stop, and then I'll get your perspective on what's happening on the ground, why people are reacting the way they are, and what this means for not just Europe, but also America. Take a listen first, we'll react together.

SPEAKER_3 (2:38)

Since the COVID pandemic, France's debt servicing costs have soared and a forecast to rise further. This means tens of billions of euros being spent servicing yesterday's borrowing rather than today's scores.

SPEAKER_4 (2:49)

France is facing a fiscal reckoning in that it's spent its way through multiple crises in the last few years and has a very large deficit now that it's struggling to contain. With inflation going up, central banks are raising rates. And so the new debt that France is acquiring has a much higher interest rate. So instead of replacing expensive debt with cheap debt, that's what was happening here. France is replacing cheap debt with expensive debt.

SPEAKER_3 (3:16)

Investors measure French debt against Germany, the euro area's benchmark. When they get nervous about French bonds, they demand a higher return and the gap widens.

David Lin (3:25)

Okay, I'll stop here.

And for years, I've asked this question, look, the debt situation is getting worse in the Western countries, debt that GDP is soaring, they're replacing debt with more expensive debt. But what does that mean for the average person? And I think we're seeing a manifestation of this question right now. How would you answer that? Why does the average person care about the charts that Bloomberg just presented?

Matthew Piepenburg (3:45)

That's a really important question. And frankly, and for no fault of their own, the average person isn't really expected or even keen to look at bond yields or the spreads between the German 10-year and the French 10-year or the US 10-year. They're not really looking at CPI or PPI prints or hanging on the seat of every ECB or FOMC meeting.

They have other things to do. And I think the average citizen doesn't need to be an expert in inflation or deflation debates or strong or weak currency debates versus precious metals or sovereign deficits. What they just see is the price of things going up and their wages not going up with it and life getting more painful. So they don't need to be experts on inflation. They can feel it and they can see it in their daily lives. And I think that's what we're seeing in France right now. I mean, at the academic level, there's a million explanations. The simple fact is there's more obligations from the French government that there is income coming in from tax receipts or GDP. And of course, with the war and inflation and fuel prices and all these things in a blender, it really goes way beyond the straight of horror moves or recent headlines. Governments for years, including the US, have been spending and living beyond their means to get elected. And what we've seen in France right now is a Jean Aima moment. I'm sick of it moment. They've just something cracked. And the question is, at what point does it crack? At what debt level in the US or in France? At what interest rate does it simply crack? And I think it is a political, fiscal bond and social crisis in a blender. You and I have talked about this for years. I said a debt crisis always leads to a debasement of the currency to monetize it. So a debt crisis always leads to an inflation crisis. And an inflation crisis always leads to social unrest. And what we're seeing from Paris to Limoges, to Toulouse, to Bordeaux, and certainly in Marseille and Lille and other cities is, they say the trigger is a lycée crisis, a high school crisis, not enough budget to put enough desks or books in the classroom, and the students are furious. I think that's the trigger, but it's really the symptom in France and elsewhere of a much larger socio-economic crisis. It's a lost generation, a generation perdue in France, that even if you get an education or you pass the BAC or you go through schools, there's not a lot of great opportunities or jobs. And there are really grievances well beyond underfunded classrooms. There's massive wealth inequality in the US, but it's very felt in France. Résentement or resentment is a key emotion among the French. And there's a strong feeling, and it's probably accurate, that there's a privilege discrepancy, especially privileged children get better schools, better access. And so that is what's causing theoretically the student protests right now. It's important to remember that in May of 68, there was major protests in Paris and throughout France, and that really started as a student protest, but it grew into a much bigger kind of economic and labor changes in France. So this is alarming. It goes back to the points you and I have talked about, that when the people feel inflation and they feel that there's no hope and they can't pay for their monthly expenses, something cracks. In this case, it was an academic start, but I think it's a symptom of a larger trigger.