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Democracy’s Depression

Last week’s note (‘The Roaring ‘20s’) I invoked the possibility that maybe in 2021 the world might party with an end to the coronavirus crisis in sight, and that a range of new, positive trends may also take hold. For the time being, partying is off the cards as governments respond to the second wave in COVID with new restrictions. For instance, Ireland is unfortunately now entering a six-week lockdown.

One of the threads to have been made very clear by the crisis is the importance of civic society, competent government and the way in which different political systems have dealt with the crisis in disparate ways. In this light, an excellent piece of research by Cambridge University’s Bennett Institute for the Future of Democracy caught my eye.

Their contribution has been to build a panel of data on citizen views of democracy (which they take to be the functioning of political systems) going back to 1973. To this end they have time series data that allow them to map satisfaction (or not) with democracy across countries.

In the context of a world turned upon its head, it is not a surprise that dissatisfaction with ‘democracy (political systems)’ is at an all time high (58%), with that dissatisfaction prominent in developed countries like the US and UK. The Cambridge figures confirm the view of political scientist Larry Diamond that we are in a global political recession.

Some developed countries – notably small advanced countries like Norway, Denmark, the Netherlands and Switzerland do not suffer from this and have near record levels of satisfaction with political systems (as noted in ‘Micro-powers’, 26 September) – they however are the peak of the democratic pyramid here, accounting for only 2% of the world’s population.

Parts of Eastern Europe and Asia are also ‘happy’ with their political systems. In time it may be that political systems in larger countries need to devolve power – in France to its regions, in the UK through Scottish independence and perhaps even more to its regions as politicians such as Andy Burnham are stressing.

There is a lot to dig into beyond these results – the apparent demise of democracy hand in hand with that of globalization, the growing perception that the Anglo-Saxon countries and their political economic model are failing (i.e. inequality), and the allure of less or un-democratic political systems that marry social control with economic growth, notably in China.

My own ‘Levelling’ view is that the end of globalization, the diminished credibility of some political systems, falling productivity, rising indebtedness and climate damage are closely linked causes and effects (they feed off each other) of the end of an era in world affairs. Righting them will require a hugely ambitious program of investment in human development.

What is more curious is the response to disenchantment with political systems. It is easy to think that populism is the beneficiary of dissatisfaction with political systems, though the coronavirus crisis must now surely have disabused populists of the view that government is easy (dissatisfaction with politics is at an all time high in ‘populist’ countries – US, UK, Mexico and Brazil). What is surprising is that there has not been a counteraction to populism (even in the US with a crucial election in view, turnover will still fall below 60%).

One reason is supply of labour. Participating in political life is physically demanding, vexacious in terms of trial by media and often frustrating in terms of what one can achieve. My sense is that countries that want to attract new blood into politics will require less strident media, better political financing laws and more ‘decorum’ in political debate.

At the present time, this is a tough ask, and for me the key trend to watch is the evolution in the relationship of ‘big tech’ with public life, a titanic struggle that has been expertly laid out in Shoshana Zuboff’s book ‘The Age of Surveillance Capitalism’.

Better policing of social media content, more reliable internet user identity checks and improved filtering of facts should make social media richer, and a better platform for discussion. This is one policy task of a potential Biden administration, where they may well work closely with the European Commission.

Another important job will be to limit the apparent ease with which other states can financially influence political figures, and more so, curb their advance in ‘information wars’. I am not quite sure how this is to be done, and the absence of free and fair elections in countries like Russia and China makes any retaliation harder.

A final point. One development that, in the two Anglo-Saxon countries (US, UK) has surprised me in the light of record levels of dissatisfaction with political systems is the persistent of two party systems, and in particular of their parties (Republicans and Democrats, Tories and Labour). My overly rationale view of politics is that the failure of these parties to address the deep seated issues facing their countries might result in their extinction (like Pasok in Greece, Socialists and Republicans in France). Instead these hoary old vessels remain unbroken. Young aspiring politicians still see them as obvious channels to power.

In that respect, and in the light of my ‘Roaring 20’s’ thesis, the challenge is either for the Millennial generation (and younger) to seize one of these parties as a vehicle that can represent the issues they worry about (high asset prices, inequality, climate change, mental health) or to successfully establish a new party that does this. The Cambridge survey showed that 55% of Millennials (as opposed to 45% of Generation X) are dissatisfied with political systems. Let’s see if Millennials have a revolutionary spirit.

Have a great week ahead,


The Roaring 20’s

Let’s avoid Gatsby this time

The parties were bigger. The pace was faster. The shows were broader. The buildings were higher, the morals were looser and the liquor was cheaper’

This quote from F Scott Fitzgerald’s ‘Great Gatsby’ is the antithesis of the COVID stricken world, though might also describe what many now yearn for. And, despite the onset of more severe lockdowns, a new, maybe more sober, roaring 20’s could be upon us.  

We need to first get through the US presidential election. One underestimated gift a Biden victory can give is calm, a diminution in political noise that allows the contours of a post-COVID world to become clearer and that potentially helps to channel the enormous frustration and stress that billions have experienced into something positive.

When, together with Barack Obama, Joe Biden left the White House just less than four years ago, globalization was alive but ebbing, democracy had its integrity and America was troubled though still widely respected.

Today, these ‘pillars’ of the last thirty years are cleaven down, and the rhyme between the world of today and previous, similar periods in history (i.e. 1910’s) is deepening. The lack of collaboration between governments during the coronavirus crisis is a particular cause for concern here.

We should not however lose sight of the fact that this great trial of humanity has also given cause for optimism and that it will have exciting consequences, not unlike the ‘roaring 1920’s’. Many of the innovations of the 1920’s happened in human areas – culture, media, the role of women in society. In the 2020’s the great innovations may occur in ethics, values based policy making, mental health and finance – all areas to have been stress tested by the coronavirus crisis.

For example, the health sector is ripe for a revolution in at least three respects. Economically, it is enormous – for example health spending accounts for 18% of US GDP. Yet, the coronavirus crisis has uncovered a wide variance in the quality of health care systems, though a resulting universally held admiration for health workers. In 2021, governments – aided perhaps by the OECD – should perform a post mortem on the policy aspects of the coronavirus crisis and the lessons to be learnt, especially for health.

One outcome is that the delivery of health care can be changed in radical ways. Another lesson that may become manifest in 2021 is the importance of mental health, and the need to uncover the links between stress, life cycle events such as retirement and conditions like heart disease and incorporate this better into health practice. Health may be further revolutionized by virtue of having attracted the attention of capital markets during the crisis, and it may well be that we see the reemergence of a biotech bubble, and that health care stocks edge out IT companies in quality growth portfolios.

The intersection of healthcare, technology and finance shows how fields are increasingly overlapping. One such overlap is the novel encroachment of values into policy making. The EU is an example – during the period of globalization it was a creature of economics and geography (it added 14 new members since 2004, most of whom are in Eastern Europe).

Now Europe is slowly and so far unconvincingly embarking on a values based approach whereby aid to the likes of Hungary is tied to that country’s respect for values such as democracy, the rule of law and the role of the LGBTQ community in society. In time, a values based approach to politics will give the EU more coherence and the focus to become a leader in environmentally friendly technologies.

Another way values based policy making can be expressed is through taxation, where initiatives on corporation and digital taxes suggest a tax revolution is building. Part of this might incorporate an approach to tax workers according to the social contribution of their role, reflecting one of the lessons of the coronavirus crisis.  In that way the taxation system may adapt to a changing age.

Similarly, we may find that ethics, philosophy and new laws need to spring up to marshal the impact of social media on politics, of genetic editing on society and to better police ‘total’ forms of conflict between nations.

One presumption of a ‘roaring 2020’s’ outlook is that all of the change takes place in Berlin, New York and Shanghai. This time it might be different. The countries with greatest potential in terms of large, growing populations and scope to build economies and societies are the likes of Indonesia, Ethiopia, Nigeria and Brazil.

The challenges they face – sustaining economic productivity, designing urbanization and building household wealth are well known, and the best way to face them is to focus policy around human development. The decisive factor for governments in these countries is the extent to which they create societies that like Europe are free or that like China, are controlled.

Back to F Scott Fitzgerald. The Great Gatsby ends badly, with the American Dream and Gatsby himself tarnished. It may well be that near record indebtedness and climate damage might do the same for the 2020’s, but the great surprise may be that longevity, political entrepreneurship and the blossoming of large emerging societies are what end up distinguishing the 2020’s.

Have a great week ahead,


In the LongRun

Tylers are still going

The Long Run

Two weeks ago, Lyon Tyler Jr. passed away in Tennessee, aged 95. He is survived by his brother Harrison, aged 92. The two Tyler brothers are remarkable because they are the grandsons of John Tyler, US President from 1841-1845. When President Tyler was 63 (in 1853) he conceived Lyon Tyler, the fourth son of his fifteen children. Then, in 1925, Lyon at the relatively ripe age of 72, fathered Lyon Tyler Jr, and then Harrison Tyler in 1928.

President Tyler is generally seen as occupying a low rank in the league table of great Presidents. His Presidency was not a success – his nickname was ‘His Accidency’. He took over the role in 1841 when President William Harrison died, only 31 days into the start of his term (Tyler was his Vice President).

Given then that Tyler’s Presidency is synonymous with Presidential ill health and poor stewardship, and of course longevity, his example echoes today in the light of the US Presidential election. It also serves to show how relatively young America is and we might also draw the conclusion that one firm trend through the lives of the two generations of Tylers above, the USA has generally seen steady upward progress, something that may now be running out of steam.

At this stage – and granted we have already had a couple of October surprises – it looks highly likely that Joe Biden will be President. In a recent note (July 18, https://thelevelling.blog/2020/07/18/the-restoration/), I have predicted that his Presidency will be a ‘restorative’ one – re-establishing order in government and allowing capable people back in control of the likes of the State Department. It is however doubtful that a Biden Presidency will automatically reset the damage done by President Trump, notably in relations with Europe, though Russia will come under much greater pressure.

In other parts of the world, the reality on the ground has changed. For instance, Turkey is emboldened, nurturing a growing arms manufacturing sector and replacing its former foreign policy maxim of ‘no trouble with neighbours’ with ‘trouble in the neighbourhood’. More importantly, China has grown its navy and has become manifestly more belligerent with its neighbours, especially those that like Australia and India are democracies.

In the eyes of Europeans and surely many Americans, the risk is that Biden merely slows the forces acting to pull America apart (Trump accelerated them) and that in four year’s time, they manifest themselves – in speculatively, a more extreme election contest between a hard right Republican ticket of Tom Cotton and Josh Hawley, versus an Elizabeth Warren/AOC (Alexandria Ocasio Cortez) ticket.

For now, the best that Biden can give the world is calm. A sense that we will no longer be disturbed by tweets, that violent extremists will no longer be egged on from the White House, that diplomatic relations will no longer be torn asunder on a whim and that greed and corruption will no longer be rewarded.

More broadly, Biden’s potential role, and I feel I am exaggerating a bit here, is as a Gandalf type President, who can take the new, younger generation (people in their 60’s?) to the start of a new path. If his presidency is to be remembered as one that will have a long run appeal, he can perhaps do at least three things.

The first is to delve beyond the idea of a ‘Green New Deal’ and craft a long-term policy program that targets a sustained improvement in human development (healthcare, education and civil society). A ‘New American’ rather than ‘new deal’ program may well touch a chord with the lives and problems of Americans and would help reverse the deterioration in human development that has been witnessed across the US in recent years and that clearly, has produced political dislocation.

A second theme might be to launch a strategic competition with China (and Europe) on reversing climate damage and investing in transformative environmental technologies. Framing the race to repair the climate vis a vis China (whose commitment to be carbon neutral by 2060 has perhaps not got enough attention) will help build momentum and coherence to the US’s commitment on climate change.

A third way in which a Biden presidency can have a long lasting impact is to reclaim its geo-political hinterland. For many years now, Latin America has been the ‘Forgotten Relationship’ in terms of the relative lack of attention that American politicians and policy makers have paid to Latin America. Washington needs to refresh its engagement and relationship with Latin America, from an economic, security and political point of view. The region is crucial in terms of food security, demographics, and the encroachment of China’s Belt and Road strategy and deserves greater policy energy from the next occupant of the White House.

Given expectations that a Biden presidency might only be an ‘interregnum’ the challenge to him is to sow the seeds of policies and structures that will carry America through the next fifty years.

Have a great week ahead


God’s Work?

A little misunderstanding

One of the more interesting events of the past week was the sacking of Cardinal Giovanni Becciu, who amongst other duties was responsible for the Vatican’s ‘sainthoods and beatification department’. He was, as a circuit court judge might put it ‘no saint himself’, and despite his pleadings of innocence that it was all ‘a misunderstanding’, his involvement in a number of dubious property transactions was enough to end his career.

This is not the first financial scandal in the Vatican to put it mildly, and in general the relationship between finance and religion is usually not a close one (relatedly German academics have found an inverse relationship between trustworthiness and willingness to work in the financial services industry).

Apart from the pronouncement by the former chief executive of Goldman Sachs that the bank was doing ‘God’s work’ there are few people who think religion and finance go hand in hand. One exception was Sir John Templeton, whom I had the honour to meet a number of times.

However, the idea that finance can do good, and shape the world in a progressive way has gained some credence with the rise of ESG (Environmental, Social and Governance) investing. Together with the fast growing ETF (Exchange Traded Fund) industry, ESG is now one of the hottest areas in investment management (ESG ETF’s are therefore very hot).

The premise of ESG investing is to better direct capital away from ‘sinning’ companies (e.g. tobacco companies, miners, weapons manufacturers) and towards those who behave in a socially responsible way. In practice, investors use ESG ratings to score companies according to their ESG contribution, and in most cases avoid companies with poor ratings. In reality however, this does not work that well.

First, ‘sin’ companies tend to have a very good performance track record. The work of academics Elroy Dimson, Paul Marsh and Mike Staunton shows that the tobacco and alcohol stocks are amongst the very best performers over the past one hundred years. Secondly, many companies are adapting to ESG ratings and in some cases, can appear superficially ‘ESG’ friendly whilst their underlying instincts do not change much.

Thirdly, the age of QE (quantitative easing) has lowered the cost of capital for companies, so that in a market climate of plentiful liquidity, there is arguably less of a penalizing effect from ESG active investors. Facebook for example, does not have a good ESG rating, but as a mega sized social media company with high expected earnings growth, it is in the ‘fashionable’ part of the stock market.

So, if finance is to steer capital in the right or ‘good’ direction, ESG as an investment style needs to acquire ‘teeth’ or real impact. There are several emerging avenues here.

One relatively strict approach is to forgo the prospect of decent returns on ‘sin’ stocks and restrict the universe of stocks in a portfolio according to certain criteria. Islamic Sharia based portfolios do this, as do portfolios owned by various branches (i.e. Germany) of the Catholic Church. Practically these portfolios would exclude stocks in sectors like weapons, mining, alcohol etc.

Another approach that is slowly on the rise is ESG activism, where an activist fund will take a position in the security of a company with the aim of campaigning to make its business better in terms of governance, less environmentally unfriendly and more socially responsible. If and where these activists are sincere about improving corporate behaviour, there is scope to find mechanisms where passive investors can pledge the voting rights of shares they hold to be voted in an ‘ESG friendly manner’, especially in areas like executive compensation.  

A third more telling reform, would be for central banks to adopt a very strict ESG approach to their asset purchases, in the manner of the ‘Quid Pro Quo’ this note had discussed in March (https://thelevelling.blog/2020/03/22/quid-pro-quo/).

In the light of the finding by the US Select Subcommittee on the Coronavirus Crisis found that that ‘383 companies whose bonds were bought by the Fed paid dividends to their shareholders, including 95 that also conducted layoffs, and 227 companies had been accused of illegal conduct sometime in the past three years’, central banks in general and the Fed in particular have room to make a significant impact on corporate social responsibility by only buying assets of firms who have credible ESG credentials.

If they were to do so, and technically there is no reason why not if they follow clear data based ESG frameworks, it would be a corporate game changer. In reality many regulators are well behind the curve here, if the behavior of BaFin (German financial regulator) in the face of egregious corporate governance breaches at Wirecard is anything to go by.

So, there is an enormous public policy opportunity, which is to make finance more values based. There are already echoes of this in the debate amongst EU countries to tie aid to member states to their adherence to its values (notably in the case of Hungary and Poland). If such a trend does materialize, then it will be one of the positive changes in the post globalized world order.

Have a great week ahead,



Emirates a micro power

Magazine covers can often offer the best guide to the future – though upside down. I am thinking of the famous BusinessWeek cover of August 1979 that proclaimed ‘The Death of Equities’ before the beginning of the 1980’s bull market, the 2014 Time magazine cover with the headline ‘Can anyone stop Hilary ?’, or the Economist cover ‘Brazil takes off’ in November 2009 just before its markets collapsed, and then ‘Has Brazil blown it ?’ in September 2013 as the country was about to boom.

In this light, I was wary to recently read the Economist magazine (August) declare Ireland as an ‘unlikely diplomatic superpower’ because of the array of important policy seats it holds (UN Security Council, Chief economist ECB, etc). The Economist curse soon struck, and Ireland lost hold of the EU Trade Commission.

In many respects, Ireland is very powerful diplomatically, not least compared to other similar sized states. This largely due to the performance of its superb diplomatic service (which is very much underestimated in Ireland) and outward focused state organisations like the IDA (Industrial Development Authority). Also, Brexit has been an excellent proving ground for Irish diplomacy and in addition, should Joe Biden be elected as US President, this will significantly bolster Ireland’s place in Europe (Biden is likely the most fervent Irish American President).

However, the secret of Irish diplomatic success is that in general Irish people do not take themselves too seriously, and many would laugh at the notion of being a diplomatic superpower.

Maybe a ‘micro-power’ is a better term for a geopolitically influential small state. I’ve derived this from former French foreign minister and commentator on diplomacy, Hubert Vedrine’s term ‘hyper-puissance’ which means ‘hyper power’, or more than a superpower.

The idea of the ‘micro-power’ really came to mind when Israel and the United Arab Emirates recently normalised diplomatic relations. Both are powerful, small states. Israel’s power derives from its military, its diaspora and technology industry while the Emirates is politically powerful across the MENA region and financially and economically very influential (Indeed, one expert, Afshin Molavi, has described Dubai as the ‘Hong Kong of India, or the Singapore of the Middle East’).

While the deal between the two countries very much sidelines the cause of the Palestinians, it reflects the speed and complexity of political change across the Middle East, and, in my view the ambition of both states to be considered ‘micro-powers’. The deal means both Israel and the UAE will gain new markets, cement relations with the White House, and deepen their collective rivalry with Iran.  

In a world that is quickly leaving globalization behind, entering a multipolar world order, the idea of the ‘micro-power’ may be one of the new diplomatic constructs of the 21st century. Regular readers will know that I have written a lot about the small, advanced economy model (and David Skilling’s newsletter on this is worth a read https://davidskilling.substack.com/) but not all small, advanced states are micropowers – Austria, Finland and New Zealand all top the list in terms of socio-economic models, but their diplomatic reach is not overawing.

My criteria for a micro-power are that it must be regionally dominant, count upon a significant resource (in Ireland’s case its diaspora, in the Emirates’ case its wealth and reputation for vision), and must be durable (Switzerland is the best example here).

As the idea of the ‘micro-power’ takes hold (I hope), there will be a number of considerations to bear in mind. One is that like superpowers, we already have the first ‘micro-power’ cold war between the Emirates and Qatar (it has thawed in recent months). Another question is what micropowers are for, beyond bolstering their own influence in the world.

In general, in a world that is transitioning from being driven by geographical to values based alliances, micropowers such as Norway, Ireland and Switzerland can act against the denigration of the rule of law and democracy internationally, and can and in my view should take the lead in pushing the remaking of international institutions – from the UN to the World Health Organisation (WHO).

Some micro-powers in the making, like Singapore, may choose to dodge competing value systems – they risk being subsumed in the crush between the USA and China – and try to foster a form of regional neutrality. Others, like Scotland, have a long way to travel if they want to become micro-powers, but at least they have their history to guide them. Scotland was once the intellectual fulcrum and centre of innovation of Great Britain, and in time could again take on this role.

Have a great week ahead


A Change for Banking

The elevation of Jane Fraser as CEO of Citi bank is a welcome sign for women in finance, especially with the UN General Assembly discussing the status of women next week. She joins a growing roster of prominent women in finance – the head of the IMF, head economists at the OECD and World Bank, President of the ECB, former Chair of the Fed and amongst others, the very effective Governor of the Russian Central Bank.   

In general, the rise of women to the top of large institutions is a marker of social development, openness and the transition to the new economy – a debate that notably is also led by a number of female economists (the World Economic Forum Futures Council for the New Economy is my reference point). However, the top of the pyramid can often be misleading. For instance, there are numerous accounts by female economists of how they have been denigrated in the academic job markets or through their careers (have a read of some of the recent interventions by Claudia Sahm).

Back to Citi. Jane Fraser faces a considerable challenge running a legacy bank. Running an enormous bank in the context of low interest rates, potentially peaking markets, complex regulation and the legacy of past balance sheet accidents and IT projects (more of a problem for European than American banks) is a difficult ask and likely to test her patience.

However, at a time when the scope for transformative mergers in banking is very small (cost cutting seems to be the only rationale for consolidation), having a woman run a bank may itself be transformative.

Let me explain myself. Many years ago I was engaged in some work on behavioural finance, specifically so in terms of how people view risk, how much risk they take as investors and how they manage it. One research finding of note is that in finance, and other walks of life, women take less risk than men.

In fact, much of this phenomenon is due to a small group within the sample of males, who take very high levels of risk. The comparison of risk taking between men and women got a lot of interest and I ended up presenting it to groups of women as far away as Sydney and Singapore. In time, and with the benefit of feedback, this risk story became one about what ‘a bank for women’ might look like.

Here, there is a risk that some people consider a bank for women is one staffed entirely by women (Ellevest is an example). I am not so sure. The idea of a bank for women comes about largely because many women are more open about what they don’t like and understand about banking than men are.

To that end, a bank for women is one where there is clarity about the function of the services a bank offers, an absence of condescension and obfuscation, transparency over costs and transactions, encouragement of financial education and a general lack of jargon around products, and a bank where customers are not encouraged to buy products that are too costly or too risky. This somewhat idealized concept of a bank should also be one that men like.

At a time when the valuation of European banks has hit its lowest level since 1992, and where large US banks still trade close to the levels of this March, ‘a bank for women’ along the lines described above may be an interesting and viable alternative. To my knowledge, there have been a few attempts (at a ‘bank for women’) but none has yet been a great success (the Women’s World Bank and several microfinance initiatives stand out). However, fintech may help.

One attraction is that the algorithms that greet customers of digital banks can be set up to treat men and women the same way (some weeks ago I wrote about Joy Buolamwini’s Algorithmic Justice League). Another innovation is that the standard building blocks in portfolios (e.g. global equity portfolio) are now much cheaper and accessible because of the growth and competition in the ETF (exchange traded funds industry). Another trend to watch, which is more prevalent in China than say Europe is that the wealth of data on our consumption habits, should in principle make credit scoring more accurate.

If these trends continue, a ‘bank for women’ type approach might revitalize a tired sector.

Have a great week ahead,


Going West

Biggles, euro fighter?

Going West

‘A Camel (Sopwith Camel – first World War fighter plane), blue skies, and plenty of Germans is the height of my ambition…’ p. 362, ‘Biggles flies East’ Capt W.E. Johns.

The above quote from one of many ‘Biggles’ books, written in 1935, comes from a very different time with different sensibilities, but is worth dragging up because I feel it captures the spirit that Boris Johnson and his Brexiteers want to portray to their followers – a Britain that is superior, in charge and powerful.

If only Brexit could be as simple as ‘buzz across the Channel, give the foreigners a bloody nose…get home in time for tea’. It’s not.

The ‘Biggles’ quote strikes a chord for at least two reasons. Unlike say Germany and France – it seems to me that many British politicians (the majority on the Brexit side) are locked in history. Their reference points are manifestly not a coherent vision of what Britain will look like in future, but more an attachment to a Downton coated celebration of past victories (notably the two World Wars).

That helps us to understand that Brexit is a crisis of national identity, rather than say a quibble with the regulatory complexities of EU membership. This view may also help to explain the chaotic ‘Game of Thrones’ nature of the Brexit process. A crisis of identity will, like a financial crisis, burn its way through the body politic until leadership and clarity emerge. This is not yet the case. More political careers will be spent and arguably sterling has a few more convulsions left before this all ends.

Back to Biggles. One thread that comes through in the Biggles books is the importance of honour, bravery and sticking to the rules. In the books, Biggles is sound on these points, foreigners less so. This is now changing.

In a recent post entitled ‘Fantastic Corruption’ (July 25th) I cited the importance of the rule of law (and noted Tom Bingham’s book on this), and how in the post globalized age we have entered, this is being degraded in both Washington and London.

The latest crisis in the Brexit saga, the introduction of a bill in Parliament that contravenes the Brexit Withdrawal Act, exacerbates the trend of the degradation of the rule of law, which in the eyes of so many has historically been exemplified by Britain. That politics can trump the law is dangerous and distasteful.

Boris Johnson’s move may well be a negotiating ploy to force the EU to close a deal as the October deadline approaches, and the behavior of financial markets (notably sterling) suggests that this is the case. If ‘breaching international law’ is a tactic, it is a costly one, and will rob Britain of respect, trust and credibility – all of which it will need if it is to make a go of ‘Global Britain’ or whatever comes after Brexit.

I have resisted writing on Brexit for some months partly because it is so unpredictable, partly because it is difficult to find new things to say and partly because events elsewhere are equally mind grabbing. The overall pattern of these events, of which Brexit was the first, points to a post globalized world, where boundaries and ties are being broken, and where laws, institutions and ways of doing things are being challenged.

The implications of this are manifold.

One is that the fracturing of ties (NordStream 2 is next?) and the remaking of nations (i.e. Belarus, Lebanon?) will encompass Scotland and Ireland. Scotland will likely vote for independence within the next six years, and it is now a matter of conceiving how independence can be achieved in as successful and less disruptive way.

Equally, there is now much talk of a united Ireland, especially I find, in the US. The first step here must be an imaginative plan to reshape Northern Ireland’s economy and society. For all the talk about protecting the peace process, very little has been done to transform Northern Ireland.

Yet, one somewhat positive side-effect of the Brexit debate is to shine a light on many of these issues and illuminate the lack of appreciation many in Westminster have for Northern Ireland in particular and Irish history in general. Arguably, a film (‘Titanic’) and tv series (‘Game of Thrones’) have done more for Northern Ireland’s fortunes than its local and London based leaders.

What is coming is a transformation of the political realities of the two islands off the west coast of Europe to an extent not seen since perhaps the thirteenth century. Ireland and Scotland will be European, rule of law countries. Boris Johnson’s England may sadly be the odd man out.

In a better Brexit world of the 21st century, Biggles might fly a Euro-fighter, with an Austrian co-pilot, and alternately fly out of Dutch and German airbases. In the evening he would return home to his Norwegian wife, and drink Italian wine. That would be the height of his ambitions.

Have a great week ahead,


A Tax on Bullshit Jobs?

To the rescue?

In last week’s note I outlined how the financial and economic worlds exist under a heavy monetary shroud. The cover of central banks deprives fiscal policy, supply side reforms and financial market reforms of the urgency that is needed for them to activate and innovate.

In particular, fiscal policy is still very much in emergency mode – governments are focused on the need to restart economies, and less on their longer term structural needs, though the recently announced 100 bn Eur recovery plan in France is a step in the right direction.

However, with the monetary pendulum at an extreme, the post COVID policy environment might usher in a transition from a decade of (over) aggressive monetary policy to more inventive fiscal policy, and supply side reforms (changes to the rules, regulations and structure of the economy). There are several reasons for this.

Monetary policy is now arguably reaching its limits in terms of the deployment of central bank balance sheets, and also in the plain fact that many of the problems central bankers declare they are trying to fix – the climate, inequality and racism (there is a Democratic proposal in Congress to change the mandate of the Federal Reserve to reduce racial inequality)  – are much better left to politicians and policy architects than the blunderbusses of central banks.

Central to the problems of our day, productivity, will in my view remain suppressed by the inefficient investment caused by oversupply of liquidity, and can only be repaired (for instance productivity in the UK is at multi decade lows) by ongoing investment in education, technology and reskilling.

Against this background, the potential for the passing of the policy baton from central banks to finance ministers is made more interesting by at least two new trends. The first is the way in which the labour market in changing, and the second is the percolation of ‘values’ into policy making.

In continental Europe, the coronavirus policy response has shown the value of flexible work practices and has so far staved off large redundancies. In other countries it is not so kind and in recent years I have a sense that labour markets are becoming ‘tinder-ized’ in that workers are ready to sacrifice security for a sense of liberty. The worry here is that in atomised labour markets, aggregate wages will be depressed by competition, workers won’t have the level of pension and healthcare benefits they might enjoy in more traditional systems, and across the board there is less structured learning by workers.

The economic consequences of the coronavirus have made these risks clear, and the public emergency around the virus has also managed to illicit appreciation for public sector workers (nurses for example), many of whom have, in recent years, been consistently deprived of resources by the governments they serve. To a certain extent, one accomplishment of the coronavirus has made clear the social value of certain occupations.

This particular thought was reinforced by the sad death last week of the polemic American anthropologist David Graeber. He has many claims to fame – inspiring the Occupy movement in the early 2000’s, coining the phrase ‘we are the 99%’, author of ‘Debt – the first 5,000 years’ and also more recently the book ‘Bullshit Jobs’.

In the book he strips away the real social value of certain roles, to quote from one of his articles ‘A world without teachers or dock-workers would soon be in trouble, and even one without science fiction writers or ska musicians would clearly be a lesser place. It’s not entirely clear how humanity would suffer were all private equity CEOs, lobbyists, PR researchers, actuaries, telemarketers, bailiffs or legal consultants to similarly vanish’.

Graeber’s view is a relevant and provocative one. I will let readers do the ‘bullshit job’ test in the privacy of their own home, or office. What interests me is what governments can do about this, especially in the light of the lessons of the coronavirus crisis for public service.

I think that from this starting point, especially for the Anglo-Saxon countries and some emerging economies, there are broadly two things that can be done. The first, simply put, is to reintroduce the narrative around the importance of public projects in economies and societies, and back this with investment.  In the US and UK public projects like education, healthcare and the civil society in general are being devalued. For instance, the latest gossip in Washington is that Donald Trump is alleged to have asked his generals ‘why did you serve?’, ‘why didn’t you want to make money?’.

The second is to start a policy experiment that explicitly ties the social value of jobs to economic policy. One approach, though extreme, might be to have a tax reduction for doctors and a tax hike for derivatives traders.

A first, more subtle approach might be to grant greater incentives for workers to build up human capital in certain areas. This might be more relevant in countries where education fees are high and student debt burdensome.

An enlightened government might ask a body like the OECD to draw up a broad, internationally recognized code of job roles, categorized by social impact. Then governments could add (or subtract) a tax (or incentive) depending on the social relevance of specific jobs. In such a system, a plastic surgeon might pay higher taxes, but more young doctors might be incentivized to work as accident and emergency surgeons.

An example that is close to me is that Cork Fire Brigade have for the first time since 2012 begun a recruitment campaign – we can ask what incentives could be put in place (in a historically tight labour market) to attract suitable candidates, who might otherwise work as property brokers?

I don’t know of governments who are explicitly tying the social value of occupations to tax policy, but I expect that in the post COVID world, it is an experiment that will soon be taken up.

Have a great week ahead,


Time for a Panic?

This week, some one hundred and sixty three years ago, the ‘Panic of 1857’ began. As is typically the case, the panic was preceded by years of overinvestment by banks and investment trusts, much of it in land and railway infrastructure. The fuel for this speculation was provided by a rise in the supply of gold.

Several factors – a sudden drop in the availability of gold (the sinking of the SS Central America with gold bullion on board didn’t help), falling grain prices and a prominent bank failure in Ohio set in motion a protracted market and economic slump. Political turmoil was also an ingredient, especially so in respect of slavery, which was to then lead to the US Civil War.

There are several parallels to recall the ’57 panic today, not least being the coronavirus market panic of March. The US is troubled politically, new technologies are on the rise (i.e. the telegraph in the 1850’s), there are geopolitical stresses afoot (the Crimea War had just ended) and plentiful money supply coupled with exuberant investment deals are a sign of our times. Notably in markets, the investor mood is described by euphoria rather than panic.

Amidst today’s financial market euphoria, many find the apparent contradiction between successive records in the stock market (mostly the Nasdaq) and multi-decade highs in unemployment, growing credit stress, a global public health emergency and generalized political chaos, to be troubling and also, a moral quandary. I share this view but, would also stress that the real world and the market world can remain at odds for extended periods of time.

One clue to this is central banks. The numerous ‘panics’ of the 19th century were brutal though often short, because central banks in the sense we know them today, did not exist then. Market crises tended to resolve themselves in violent ways. The Bank of England did play an important role though it was perhaps not until after the ‘Panic of 1866’ that the crisis fighting playbook was written up in Walter Bagehot’s ‘Lombard Street’.

In contrast, today’s central banks are monetary deathstars, towering over markets and economies and blasting them with liquidity shots. This much was clear in the speech given by Federal Reserve Chair Jerome Powell to the (virtual) Kansas Fed Banking symposium where he outlined the Fed’s intention to effectively overshoot its inflation target.

In so doing, the Fed risks further splitting American society between ‘speculators’ (those who have access to capital and benefit from asset price inflation) and those who have to live in ‘panic’ type conditions (credit stress, unemployment, rising costs of living).

One indicator that helps elucidate this difference is lumber prices – which have risen by 250% since March. Logically this might be because more people are redoing or building homes, but the ascent of lumber looks very like that of the Apple share price and suggests that in this world characterized by ‘the financialization of everything’, speculation is the driver of lumber prices.

There are other indicators – the presence of a growing number of market anomalies such as the 30% rise in the price of Tesla and Apple as a result of stock splits (ordinarily this move would not have much of a price effect).

Since the global financial crisis, the side-effects of very generous monetary policy have been a rapid accumulation of indebtedness by governments and companies, and the detrimental impact of negative interest rates on the profitability of banks (note that while Apple has doubled in value since March, Wells Fargo’s equity trades close to its lows). Both factors – high indebtedness and constrained banks – weaken the link between monetary policy and the real economy.

The additional risk with the Fed’s stance is to create inequalities across generations. Allowing inflation to overshoot, in the absence of strong wage growth will make it more expensive to fund a pension, to buy a house and also to afford private education and healthcare.

In a world where America has a President who is uniquely (tweets) attached to the fortunes of the stock market, the vapours of speculation create the illusion that all is well, that debt and deficits can continue to rise and that growing poverty and long-term unemployment can be cured by Robinhood.

Finally, some of you may be asking the question as to whether we have another market ‘panic’. I don’t like trying to predict big market moves – those who do usually need to be lucky and/or patient. However, bear in mind that stimulus programs are petering out, bankruptcies and restructurings are on the rise, geopolitical skirmishing nearly pandemic (Russia-USA in north east Syria, China-US in the South China Sea, Turkey v the rest in the Mediterranean, together with tense wargames in the Baltic).

We may not have a ‘panic’ in September, but volatility will rise.

Have a great week ahead,


Did I miss anything?

In early March, Daniel Thorson who works in a ‘mindful learning’ centre in Vermont went on a seventy five day silent retreat. When the retreat ended in late May, one of his first acts on reconnecting with society was to tweet ‘Did I miss anything? What about the Australian wildfires?’

He may well wish he had not broken the tranquility of his retreat, given the flood of extreme events we have witnessed this year from the assassination of an Iranian commander, to the suppression of democracy in Hong Kong to the odd combination of double-digit unemployment and record highs for stocks.

The latest such event this year, the tragic explosion in Beirut last week, has amongst many other things contributed to a sense that 2020 is an inordinately event rich year.

The logical, in my view, explanation for this is that many of the tectonic or volcanic shifts that have been slowly building in recent years, are now surfacing, and in particular have been catalyzed by the coronavirus crisis.

Climate damage is one such risk whose side-effects are now more and more manifest. To also take Lebanon as an example, long running geopolitical tensions, profound corruption and a dysfunctional bureaucracy have already spurred a debt crisis in Lebanon, and now they have combined to produce a more deadly crisis.

In this sense, 2020 is a turning point, and a great stress test of the world order. With the holidays (at home!) now upon us, its not a bad idea to look back and trace the trends whose rise has been exacerbated by the coronavirus crisis, and those are just now starting to become apparent.

In brief – because I have covered these topics in detail in recent posts, 2020 has seen globalization well and truly crashed by the coronavirus crisis, and replaced by an emerging multipolar world the signature elements of which are the lack of collaboration between the large regions (EU, China and US) and their increasingly different responses to economic policy, democracy, and the internet to mention a few areas. Economically, the dominance of central banks has been augmented, indebtedness has risen towards levels (relative to GDP) not seen since the end of the Napoleonic Wars.

This means that at very least, the idea of the economic cycle is dead. Markets, investment and economies will orbit around the contest between central bank death stars and the gravitational pull of credit risk. There are two implications for markets. One is that extremes in inflation or deflation will be found in asset prices rather than in real economies. Relatedly, it will be some time before we understand how 2020 has scarred consumer preferences (and savings habits).  

Second, it means that investors will increasingly seek out ‘new assets’ (new assets are really old assets whose ownership and risk characteristics have been adjusted) that are created through new types of debt issue (such as EU bonds), distress and bankruptcy, asset sales from restructurings and then more inventive securities in sectors like healthcare and biotechnology.

One of the other important discoveries of 2020 is the disparity in policy and adaptability between countries. This was evident across Europe, and tellingly across states in the USA. Europe has however emerged stronger from the crisis, or the knee jerk reaction that the European project would fall apart has been proven wrong. In contrast the US has emerged weakened and arguably more divided.

To a certain extent this has been reflected in recent dollar weakness. A glance at Turkey gives a good illustration of how the degradation of a country’s institutions can translate into diminished financial credibility (the lira has fallen sharply this year). The rule of law has rarely been a factor in markets, but in developed countries like the US, sustained attacks on institutions and the rule of law can have economic consequences. Here, while falling interest rates have also helped to push the dollar lower, a sustained crisis of confidence in the US (and its currency) is one of the risks to watch into the second part of the year.

The post holiday period is very likely to be filled with noisy predictions on the shape of the economic recovery, and the outcome of the US election. My instinct is to continue to track the outcomes associated with a multipolar world (i.e. Europe regulates tech, builds a green economy but fails to drive banking consolidation and a capital markets union), the financialization of everything (healthcare is next after technology) and the accelerated rise and fall of nations.

I’m taking a ‘silent retreat’ of my own from this missive and it will return on August 30th.

With very best wishes