• Immigration is spiking and voters are angry
  • Politicians are increasingly offering an anti-migration option
  • Why less immigration means more inflation in a debt-filled world

I still follow the daily news cycle in the different countries I’ve lived in: the UK, Australia, Germany, Japan and more occasionally Austria and Ireland. And, of course, I begin each day with the key news cycle for financial markets: the US.

A bit like what occurred for net zero earlier this year, I’ve noticed a dramatic change in the political winds in each country at the same time. A change that portends a big social, economic and financial change to come. This time, the topic is immigration.

What had been unquestionable, pro-immigration gospel can now be openly challenged. The mixed consequences of immigration now get a mention in even the mainstream newspapers. Countries that embraced high rates of immigration, like Sweden, have gone from being described as a model to a predictable mess. More and more people of ever more moderate persuasion are turning on migrants, sometimes in dramatic fashion.

In the US, sending busloads of illegal immigrants to regions that support open borders has changed minds… and political incentives.

In Germany, the anti-migration political party Alternative für Deutschland is soaring in the polls, right up to second.

In Australia, migrants are being blamed for the lack of housing, which is especially ironic given the housing shortage is being caused by a lack of qualified labour, but the government recently carved tradesmen out of their fast-track visa policy for immigration…

I’m sure you know the state of things in the UK.

Of course part of the reason behind the shift in discourse is in the data. Immigration numbers seem to be exploding everywhere at the same time.

It all reminds me of the European migration crisis of 2015. I was living in Austria at the time and watched Syrian refugees get chased across fields by the police. They filled railway stations in the local town. They spoke near fluent English and didn’t hesitate to tell me where their final destination would be…

The more interesting thing I noticed was the shift in the attitudes of locals over time. Although I was in Austria when the crisis was at its height, I then lived in the UK for about nine months before returning to Austria again. This gap highlighted the dramatic change in attitudes towards migrants over that time.

I think seeing a Syrian refugee herd cows in the traditional march down from the mountain pastures was the last straw. He was wearing a Metallica t-shirt instead of lederhosen and a felt hat…

Years before 2015’s migrant crisis, the same shift occurred in Ireland, where I lived as a child and returned to visit as an adult. People who had welcomed migrants from Eastern Europe, and had helped many of them integrate, were now furious with the secondary impacts.

Housing shortages, disruptions at schools, pubs where only foreign languages were spoken, and the violence between the groups of immigrants were all causing local resentment. The sheer numbers of migrants had turned the people who had welcomed me as a child against those who came after. It was a stark contrast.

Given the list of countries I’ve lived in, it’d be a bit odd if I railed against immigration here. I’d like to do the opposite, in a moment, because of the economic and financial impact of immigration.

However the real point is that there is a growing backlash against the migration flows we’re seeing. One that comes with awkward political shifts that present a threat to investors. So let’s turn to the economic impact of migration and what the attempt to stem the tide might mean.

There are two ways to grow an economy: population growth and productivity. Each person can produce more, or more people can produce.

Because of our demographics and productivity crisis, GDP growth is becoming harder to come by. Immigration being the obvious solution.

This matters disproportionately when government debt is high. (The UK surpassed 100% of GDP recently.) This is because more taxpayers are needed to pay the interest. However, it’s worth digging into the precise dynamics of this to discover the scope of the problem.

Imagine an economy with no government debt. Would it be a problem if the economy were to shrink in size overall thanks to demographic decline? Not necessarily, if the GDP per capita (per person) were still rising. Individuals would be getting richer even as the national GDP falls.

This effect is part of what happened in Japan, but to a lesser extent than an outright decline in overall GDP. GDP per capita kept rising during Japan’s so-called lost decades, even as nominal GDP flatlined.

Debt does not adjust for population decline like GDP per capita can. Even if a country with declining demographics runs a balanced budget and has decent per capita GDP growth, it could eventually become overwhelmed by its government debt because there simply aren’t enough taxpayers to repay the nominal amount. The amount of debt would grow per person as the population falls.

So, if you want a country with poor demographics to be able to afford its government, you need to somehow generate nominal national GDP growth. There are three ways to achieve this: immigration, productivity growth and inflation.

The question is which balance of the three is politically viable. What happens if the government pursues the wrong combination?

The backlash to immigration rates seems to be causing serious political unrest in a large and growing number of countries. Political parties are shifting to an anti-immigration stance fast, including the European Commission. Where there is no such shift, alternative parties are popping up to give voters the option.

The trouble is that Nigel Farage is rather rare – a politician in favour of reducing net migration and free-market economic policies (which improve productivity). In other words, your typical anti-immigration political parties are against the policies that use productivity gains to keep government debt under control.

The result is predictable. The burden of keeping government bond markets stable shifts to someone else, but who has the money? Or… who can print it?

Central banks always fund governments that get themselves into fiscal trouble, with the possible exception of the German Bundesbank. However central bankers stepping in to fill the productivity and demographic void leads to inflation – the other way to grow your economy out of debt.

Because inflation devalues money, it devalues debt too. The national debt was £27 billion in 1946 – peanuts by today’s standards, because of inflation over time.

My point is that the current turn against immigration at the political level will likely come with a turn against productivity too. They are proposed by the same sorts of politicians. This implies we’re on an inflationary path in the long-term future in order to keep government debt under control.

It’s time to protect yourself from this.

Until next time,

Nick Hubble
Editor, Fortune & Freedom