AI should do no harm

This could be the central bank of the future

Last week the excellent MIT Tech Review came through the letterbox – it is reassuring that in a hyper tech age some people still have the grace to publish printed material. Part of the Review was devoted to a listing of the top 35 innovators under 35, about which two things struck me. The first is that 23 of the 35 innovators were born outside the US, a fact that should temper the belligerence of the ‘send them home’ crowd.

The second is that at least one fifth of the innovators are working with Artificial Intelligence (AI). It reflects a broader trend. Whilst these scientists and entrepreneurs are at the forefront of AI science, I have a growing feeling that like blockchain two years ago and the ‘dot.com’ mania some twenty years ago, many entrepreneurs are injecting the term ‘AI’ into their business descriptions in order to boost their profiles.

If anything, this proves that humans will abuse and manipulate technology for their own ends, rather than the other way around. Indeed, I recently read a research paper in ‘Science’ magazine that described how false (bad) news diffused more quickly than good news, though humans rather than robots were responsible for this effect.

A cynic might describe AI as a liberated regression equation set loose on a beefed up data set. Thankfully, far cleverer minds than mine have focused on this area and two excellent books I can recommend are Shoshana Zuboff’s ‘The Age of Surveillance Capitalism’ and Kai-Fu Lee’s ‘Artificial Intelligence’ are the best ones I have come across.

One of the tricks I employ in ‘The Levelling’ is to resurrect Alexander Hamilton and ask him what advice he would give the great powers as they march into the twenty first century. With the US in mind he reminds the US that must often new technologies develop quickly, too quickly for legal, philosophical and regulatory frameworks to keep up with them. Moreover, he states that those countries that can set the standards and rules of the game around new technologies will largely control the development of those technologies.

In this respect AI is interesting in the sense that the technological know-how behind it is evenly spread between the US, China and even Europe. Yet China is far ahead in terms of the data pools that can be employed by AI technologies, and is far more permissive in terms of the applications of AI and AI datasets in socio-political settings. Partly as a response, there is now a project at Harvard that aims to educate US and Chinese data scientists on the ‘social’ dangers associated with the use of AI by governments.

Of course the USD 5bn fine that the US Federal Trade Commission has hit Facebook with is an even grander signal that regulators are taking bolder action, though of course the fact that it took Netflix less time to produce a film based on the Cambridge Analytica debacle shows that the regulatory pace may need to be increased.

Thankfully, the OECD has now stepped into this space and in a recent, detailed book (‘Artificial Intelligence in Society’) they lay out five Principles on Artificial Intelligence. I don’t at all do justice to the fine work of the OECD here but essentially the principles state that AI should ‘do no harm’ – respecting humans and the rule of law, benefit the planet and value transparency and accountability in its use. It is a useful framework but to my earlier point, I suspect that the appetite to enforce this will vary greatly across regions.

The OECD book is also useful in underlining the extent to which capital is now attracted to AI – for example AI start-ups attracted 12% of global private equity investments in the first half of 2018. This not surprising given the potential of AI applications such as transport, healthcare and medical diagnosis and financial services.

This trend will likely continue and may well exacerbate some of the odder macro trends we have seen during this business cycle – lower spend on capital expenditure (because more capital lean business models), the dampening of inflation, the disruption of labour markets and an ambiguous impact on productivity. As it grows, the effect of AI on economies may for example make the job of central bankers more difficult. But, like medicine, it might be that artificial intelligence could prove more accurate than humans in diagnosing what ails our economies. Imagine if Christine Lagarde was the last human to chair the ECB, and her successor was a machine, sitting high in the ECB tower in Frankfurt.

Have a great week ahead,

Mike

The State of Politics

I passed through London last Wednesday and after lunch had the good luck to pop into Chatham House to see Prime Minister Theresa May’s last public speech. Truth be told, the invite I received specified only that a senior politician would be speaking, and as I trundled down the motorway towards Bordeaux airport early that morning, I was expecting be treated to a last hustings hurrah from Jeremy Hunt. Instead, Theresa May turned up to deliver a speech on ‘The State of Politics’ (though not under Chatham House Rules).

I had not seen her speak before and after I did many things fell into place. As she is at the end of her tenure as PM she deserves at least a ceasefire from the criticism that has been directed at her. However, the general lack of emotional investment in her comments and her willingness to avoid engagement on questions led me to think that she naturally won few passionate political friends in Westminster and Brussels.

To be fair, some comments did strike a chord and her thoughts on the antagonistic, negative and now habitually hostile approach to politics in the UK and US were worth listening to. In particular she lamented the lack of compromise in politics today, the deepening of divisions (the ‘Squad’ debate in the US is a very good case in point) and the rise of absolutism. What she meant here is much less the enforcement of the primacy of principles, but the conviction of those with extreme views that their perspective is right to the point that other competing views are excluded. That at least is my too wordy definition of what she said.

Absolutism can have many political effects – some voters are drawn by strong views while others are put off. In general, what we can call absolutist views get more media and social media attention than more moderate views. Bad ideas fly faster than good ones. In the longer-run, absolutism may end up breaking apart very well-established political parties, further destroying bi-partisanship and generally producing bad policies.

We might well argue that absolutism is everywhere, even in financial markets. A pronounced trend in recent months has been the strong rise of bond and equity prices in tandem, to the point that the correlation between them has reached historical extremes. The price action in each, major asset class suggests a strong degree of conviction, almost to the point of absolutism.

Surely, neither equities nor bonds can both be right? Indeed, both could be wrong. Bond prices reflect weaker economic growth, potentially lower trend growth and the apparent willingness of central bankers (Korea cut rates last week for instance) to force rates lower.

Equities exuberantly reflect this ‘surrender’ of central bankers, but in my view do not reflect lower growth. In that respect an ongoing macroeconomic shock (a longer, deeper, sillier trade dispute is the likely cause in the near term), in the context of very low unemployment may well be the signal that equities have peaked.

One remarkable offshoot of the absolutism in equities and bonds (in the sense that both have risen together) is that wealth – at least financial wealth has risen sharply. Indeed, I would hazard that with house prices generally now more choppy, the mass of household wealth (financial plus housing wealth less debt) is close to a peak. There are other signs that this may be the case, such as generous IPO (initial public offering) pipelines that suggest that business men and women want to sell businesses,

Ironically, whether we are at a peak in wealth will depend very much on the major central banks, whose overly generous approach to quantitative easing has spurred the creation of financial wealth, and at least in the case of the USA has pushed wealth inequality to historic highs. The Fed in particular is now wrapping itself in policy knots, because any change in policy could produce a large wealth effect, at least for the middle classes.

Central banks are however likely to treat any recession as an excuse to cut rates and open up the policy toolbox. This means that household balance sheets in developed countries should be relatively solid, and that financial risks will be focused mostly on corporate balance sheets (in the US and China) and on government balance sheets (in China and select EU and EM countries).

The exceptions are perhaps Hong Kong and Australia – where property prices and leverage are high. I would also put the UK in this bracket. As I left the May speech on Wednesday, I picked up a copy of the Evening Standard, whose headline read ‘property slump accelerates with biggest drop in prices in a decade’. If this continues, the ‘state of politics’ will become even more complicated. May is leaving at the right time!

Have a good week ahead,

Mike

Diplomacy

An ambassador should be ‘an honest (wo)man sent to lie abroad for the good of his country’ according to Sir Henry Wotton, a seventeenth century British diplomat, writer and politician. It is something of a surprise then that this sage advice was unheeded by the seasoned British diplomat Sir Kim Darroch, lately UK Ambassador to the US.

His failing was to tell the truth about the court of Donald Trump, and even boringly, to be caught stating the obvious. At least, the outgoing, flamboyant French Ambassador to Washington Gerard Araud waited till he had retired to speak his mind (‘unpredictable’, ‘uninformed’, ‘America Alone’).

Darroch’s resignation, in diplomatically unusual circumstances following the President’s decision to boycott him, tells us much about the conduct of diplomacy today, the demise of Britain as a world power and importantly, America’s place in the world today.

Historically, since the foundation of nation states and the rise of the idea of the balance of power, the role of the diplomat emerged in the middle of the 17^th century, with Venice as a particular centre of power. Then, diplomats were a mixture of spies, messengers, entertainers and persuaders and many still are today. Comfortingly, commentary on Sir Kim reveals that holding decent parties is still a prerequisite for the job.

A more formal definition of the role of diplomacy comes in Sir Harold Nicholson’s book ‘Diplomacy’ where he pins responsibility for foreign policy on elected governments, and assigns ‘negotiations’ as the preserve of diplomats. In the US today, we might well hold that the foreign policy of the government is very hard to identify while the art of negotiation has become the sole preserve of the President.

In days gone by, the opposite was the case with certain diplomats setting foreign policy and negotiating it. One example that comes to mind having just read George Packer’s excellent book ‘Our Man’ is Richard Holbrooke. The book tracks Holbrooke’s career and illustrates how his ambition and intensity were both his strengths and failings. Holbrooke was far more forceful and cutting in his views than most other diplomats, but in the end his career too was cut short by a President (Obama). There are relatively few characters like Holbrooke in world diplomacy today. Financial crises, social media, cyber espionage and the cult of the political personality have made the job of the diplomat more difficult and arguably more important.

I am biased but one success story of recent years is Irish diplomacy, which was mobilized on the European and world stages in the aftermath of the global financial crisis, and then again more recently in the case of Brexit and is now adding new embassies in countries like Columbia.

The same cannot be said of the State Department which has been denuded of talent and expertise under the current administration, and its budget curtailed to such a degree that it has needed the helping fiscal hand of the Pentagon. Outside the State Department though, there are interesting developments in the ‘science of diplomacy’ notably at Harvard’s Belfer Centre where for example there is now a very interesting Economic Diplomacy Initiative spearheaded by Profs Nicholas Burns and Larry Summers.

I am not sure if ‘divorce through diplomacy’ is on the curriculum at Harvard but the UK could do with some help in the area of geopolitics. To my mind, the resignation of Sir Kim destroys once and for all the notion of the ‘special relationship’ and confirms that what ails Britain is not Brexit per se but a national identity crisis in the contest of a decline in power. Britain and its political class need to urgently open up a debate as to what its place in the world is, and how realistically it can remake and reposition itself diplomatically.

One person whose advise might be worth listening to is Henry Kissinger. At 96 he is still going strong, and while I recognize that some will object to his views, his written work is superb and a great example of pithy, thoughtful writing.

On hearing of Sir Kim’s exit I picked up Kissinger’s book ‘Diplomacy’ and found it remarkable in two respects, one for its foresight (it was written in 1992/93) in international relations, and the other, for the way the values driven American foreign policy that Kissinger described is now being undermined by the current President.

Kissinger wrote that America was the first country to adopt a values based approach to foreign policy and that in this context there were two schools of thought as to how to prosecute this – either America would simply be a beacon of democracy that would inspire others or that it would be an active crusader for democracy abroad. Sadly, that beacon is fading.

Have a great week ahead,

Mike

‘I Struggle, I Overcome’

Bismark wonders what is going on in Europe

The Iron Chancellor Otto von Bismark is said to have remarked that ‘if you like laws and sausages, you should never watch either one being made’. These wise words might well also apply to the making of government, with the recent political scramble in the EU being a case in point. Like a good horse race, or even decent murder mystery, all of the leading candidates at the start of the week (i.e. Timmermans, Weber, Vestager) dropped out of sight and we ended up with some surprise nominations.

Watching proceedings from Paris and Madrid, there seemed to me to be very little process to the nominations, and many Europeans will be left mystified as to how their leadership has come to power. It should be said that in other parts of the world, the formation of governments and cabinets is equally opaque. Famously Dick Cheney, appointed to lead the search for George W Bush’s Vice-Presidential candidate, ended up picking himself.

If there was a method to the creation of the new executive in Europe it is to be found in the tale of political ‘three cushion billiards’ recounted by the late Wilfried Martens, formerly Belgian Prime Minister, in his 2009 book ‘I Struggle, I Overcome’.

In 2004, faced with the prospect of that Guy Verhofstadt could become EU President – a move many Brussels insiders rejected – Martens charmed Manuel Barroso into becoming a candidate, but instead of nominating Barroso he instead proposed Chris Patten, knowing that Patten’s candidature would be rejected and thereby leaving an open space for Barroso. Europeans should be grateful to have such devious leaders.

In the end, the EU has ended up with a leadership that is reasonably well balanced in terms of gender, parties and regions. The losers in the process were the Visegrad Four (Poland, Hungary, Czech Republic and Slovakia), paying the price for their spurning of liberal democracy and the rule of law.

It is notable that two of the prominent leaders in – Lagarde and von der Leyen are women – and this is a positive development. In particular, Lagarde is a role model not just for women but for all young people in France in that her background shows that the route to career success for a French person does not have to pass through ENA. Perhaps the most significant turn in her career was her failure to gain entry to ENA, and she then spent much of her career practicing law in the US.

On a more pessimistic note, the careers of Lagarde and von der Leyen (who studied at the LSE under the name Rose Ladson because of the threat of kidnaping by the Baader Meinhof gang) highlight the risks facing Europe in the future, and worryingly, the lack of willingness to tackle them.

First, the market reaction to Christine Lagarde’s appointment was revealing. Bonds in the riskiest, most indebted nations rallied hard. Italy, which has an entirely unsustainable debt load, a track record of no growth and a reckless government now has a ten-year bond yield of 1.74%. This reflects the market’s assessment that Lagarde’s policy approach at the ECB will be to dose any manifestations of the shortcomings of the euro-zone with more liquidity.

Such an approach increases the long-term risks to the euro. My fear is that Lagarde’s approach will be to dampen crises with politics and easy money, and not to fix the structural issues that provoke those very crises. It cannot be healthy that central banks dull markets’ appreciation of risk. In my view it would be much better to have an ECB President who will pushes Brussels to complete the building out of the euro-zone financial system.

Critics of Lagarde will also point out that under her stewardship, the IMF has lost credibility and Argentina may prove this point in coming months. In my book ‘The Levelling’ I devote some space to the ways in which the institutions of the 20^th century like the IMF have become outmoded. In the case of the IMF, it may no longer have a role in a multipolar world where regional approaches to policy are gaining traction. In addition, its analytical and policy prescriptions are increasingly being proven wrong.

Then, Ursula von der Leyen’s previous appointment was as German defence minister, a posting that led some to suggest that she might become the next head of NATO. Germany’s army, where only a fifth of tanks and helicopters are combat ready and where there is a chronic problem of recruitment is emblematic of a Europe that on one hand is peaceful, but on the other is not prepared for a significant security challenge. In the EU, only France can boast of a credible military and security force.

In the near future, Europe will be increasingly confronted by a range of military and security issues – risks that security guarantees to the Baltic states might be triggered, ongoing cyber attacks on member states, the ‘soft’ incursion of Russia into Hungary and Serbia for instance, the consequences of the disintegration of Syria and Libya and the pressures created by migrants and refuges, to name just a few. Coordination, training and spending all need to be radically stepped up. My worry is that if the state of German army helicopters is a sign of readiness, then the EU will be caught out.

Have a great week ahead

Mike