The World After Davos
What is the Great Recalibration, why is it happening and what does it mean for you?
There’s been a blizzard of coverage but little enlightenment over the past few weeks, culminating at Davos. The purpose of this newsletter is to share some analysis that may help in seeing what’s happening and why.
After surging against all paper currencies, gold is finally making it to mainstream Irish media in multiple headlines and articles. It only took 25 years! It is no wonder. This week gold breached over $5000 or €4200. Gold’s lack of long-term attention by economists, mirrored by asset managers almost everywhere, was an ideological trap wrapped in uncritical acceptance of Keynesian money printing. By contrast and closer to the Austrian school of economics I’ve been advocating, gold, in books and broadcasting, since it hovered at $250 in the noughties. Naturally, it’s hard to think in long cycles when the news is in short ones, but what is now unfolding is a logical recalibration. The Pivot, a book I wrote in 2017, is about how the world pivots off the debt unsustainability path.
The current and dramatic pivot in US strategy is part of the pathway. Leaving aside the hyperfocus on President Trump’s modus operandi, the USA is precisely following a playbook to address its deep structural problems, which stem from decades of overextension mirrored across many developed economies but added to by its reserve currency status and the costs of Pax Americana. The USA debt is €38 trillion, the servicing costs of which exceed its defence spending to 2025 at $1 trillion.
You can concisely summarise many of the fault lines commonly shared across the developed world with hindsight:
Long-term deficit financing that has led to highly elevated national debt to GDP and left many countries on unsustainable trajectories and pricing up bond yields
Globalisation that delivered cheap goods but at the huge cost of unsustainability and deindustrialisation
Security and economic vulnerabilities from weaponised supply chains into opponent regions like China (and especially for Germany, both China and Russia).
Destabilising transfers in wealth to the oligarchical class from workers, leading to political change.
Flat real wage growth and the hollowing out of the middle classes facing higher taxes and unaffordable housing for the young.
Destructive zero-carbon strategies on unachievable timelines hammering energy affordability and sustainability where economics was subverted by ideology
Social movements that turned inward, leading to fragmentation of cohesion in societies. This includes DEI policy built on ‘white privilege’ and transgender movements absent scientific grounding like the Cass study.
Open borders without volume or quality limits that erode social safety nets and are widely perceived to be at the expense of native populations.
The global financial landscape is undergoing a profound recalibration, driven by unsustainable debt trajectories that have pushed government borrowing beyond sustainable thresholds across many nations. Debt-to-GDP ratios remain elevated, with global government debt surpassing $100 trillion and approaching or exceeding 100% of world GDP in recent assessments. Interest payments on this debt continue to strain budgets, even as short-term rates have eased following cuts by major central banks like the ECB, Fed, and Bank of England. Yet long-term government bond yields have largely stabilised or flatlined through 2025 and into 2026, reflecting lenders’ growing caution.
Major investors and creditors are scrutinising national balance sheets more rigorously, demanding higher compensation for funding sovereign liabilities amid rolling debt maturities and persistent fiscal pressures. This dynamic marks a departure from past norms, underscored by gold’s role as a reliable indicator of shifting confidence in the fiat currency system established after the 1971 end of the gold standard.
A pivotal development came in 2019 when the Bank for International Settlements recognised gold as a Tier 1 reserve asset for banks. Since then, aggressive accumulation by central banks worldwide has accelerated, with net purchases often exceeding 1,000 tonnes annually in recent years. By 2025–2026, foreign central banks’ gold holdings surpassed their U.S. Treasury holdings in value for the first time in nearly three decades—reaching near or above $4 trillion in gold compared to roughly $3.9 trillion in Treasuries. This shift highlights a strategic pivot toward assets free from counterparty risk, portability, and neutrality over yield-dependent instruments.
At the heart of this evolution lies the United States’ recognition that the burdens of global leadership—including extensive military commitments and the costs of maintaining the dollar’s reserve status—are increasingly difficult to sustain on current trajectories. U.S. policymakers have pursued a deliberate strategy to rebalance responsibilities, stepping back from the role of sole global guarantor and urging allies to assume greater self-reliance.
This approach has manifested most clearly in transatlantic relations. Through direct engagement and firm expectations, the U.S. has compelled European NATO members to accelerate defence investments. What began as pressure for the longstanding 2% GDP target has evolved into commitments toward significantly higher levels—potentially 5% of GDP when combining core military outlays (around 3.5%) with related infrastructure and resilience spending. Nations like Poland, Estonia, and Lithuania have led the way, while broader European alignment has gained momentum, particularly at key summits. This reallocation might have unfolded more gradually through multilateral talks, but the urgency injected by U.S. policy has hastened progress, prompting Europe to bolster its own capabilities rather than rely predominantly on American cover.
Ireland, too, faces this reality. Long benefiting from the security umbrella provided by NATO and U.S. commitments, Ireland’s historically low defence outlays must evolve to reflect a changing environment, with adjustments already underway.
Parallel to security shifts, fiscal recalibration is underway in major economies. Government spending as a share of GDP has climbed steeply in places like Germany and Italy (nearing 50%), with the UK, Spain, and others not far behind. High public expenditure—including expansive NGO ecosystems—limits growth potential and crowds out private-sector dynamism. The path forward demands smarter allocation: protecting essential social safety nets while driving efficiency gains across public and private sectors to boost productivity and real wage growth.
This broader reorientation means facing long-standing imbalances from globalisation, including wealth concentration and middle-class erosion. By prioritising domestic resilience, industrial strength, and fairer trade practices, these inevitable strategies will seek to rebuild economic foundations. US tariffs have played a dual role here—not merely as a revenue tool (generating substantial inflows, with customs duties soaring in 2025) but as leverage to reshape global trading relationships and encourage reciprocal commitments.
For financial markets, the outlook hinges on how decisively governments address these unsustainable paths. Bond yields reflect elevated debt concerns, resisting sharper declines despite policy-rate cuts. The consensus forecasts by asset managers point to relatively stable bond performance in the near term, with potential upside if credible fiscal discipline emerges. Equities are expected to have a volatile but moderately positive 2026.
Gold’s surge—fuelled by central bank demand and recognition as a foundational reserve—signals expectations of incremental or more profound changes to the global monetary framework. Rather than a wholesale digital overhaul, a partial reanchoring to tangible assets like gold now appears more plausible and likely, aligning with historical precedents and broad understanding.
Davos demonstrated that the longstanding North Atlantic order is being reshaped at pace, with no return to prior arrangements. By focusing on underlying logic—fiscal sustainability, shared security burdens, and productive growth—countries and economies can navigate toward greater resilience. The pivot is here; adaptation defines the path ahead.
Eddie Hobbs
PS: The above isn’t investment advice, which requires a regulated advisory process that includes profiling, researching and reporting.
If you’d like to go into more detail or undertake an overall strategic review, you can contact my financial firm, Hobbs Financial Practice Ltd, at +353 (45) 409354 or eddie@eddiehobbs.com