UNtied Nations

The most startling comment from Dominic Cummings, formerly chief adviser to Boris Johnson, in his parliamentary committee testimony on his previous boss was ‘In any sensible rational government, it is completely crazy that I should have been in such a senior position”. This and the swathe of Cumming’s performance underlines the attractions of British politics as the very best (blood) sport in international political economy. The ‘Brexit’ series has only heightened this sense of entertainment and stupefaction.

It also emphasises that many governments face fiercest opposition from within, and the degree of disorder and degradation that have beset the workings of Downing Street. Boris Johnson’s poor response to the outbreak of COVID (he was apparently writing a book on Shakespeare) is masked by chaos elsewhere, and the absence of both decisive international leadership, and a coordinated global response to the crisis. As I write, two of the major news items refer to the lack of a coordinated global roll-out of vaccines, and to President Biden’s commissioning of a report into the origins of the virus.

To put it mildly, this is not a great way to embark on the road towards a ‘new world order’ as many politicians now term it, or the building of the post COVID economy. The success, productivity and durability of that new world order will depend very much on the kind of ‘rules of the game’ and institutions that marshal it. As the recent cyber-attacks on an oil pipeline in the USA and on the Irish health system show, we do not yet have frameworks in place to deal with the negative outcomes of new technologies.

Democracy, the mechanics of government and institutions need massive investment.

In the ‘new order’ we will need institutions that can bring order to issues such as ‘the future of money (digital currencies, crypto)’, ‘cyber warfare and cyber crime’, policing climate damage’, ‘the incorporation of mental health into healthcare systems internationally’ and genetic editing, to name a few of the challenges looming on the horizon. In this context the crucial question, given the context of a multipolar world driven by very different values, is how to realise the institutions of the 21st century. Here, I can think of maybe four options.

‘Crash and crisis’ – the first option follows the thread of recent history, in particular the policy responses to the global financial crisis and the euro-zone crisis where apparently obvious risks and imbalances caught policymakers off guard, and where they then scrambled inelegantly to put in place rules so that a debt crisis could ‘never happen again’ (I give it three years).

I worry that a major and catastrophic (in terms of resulting human fatalities) cyber-attack could be the catalyst that, following a direct military response, forces the introduction of ‘rules of the game’ for cyber.

‘East versus West’. It is worth remembering that the current international institutional order (i.e. UN) has its origins in the desire of the prospective victors of the second world war to shape the post war world order, and the location of institutions like the UN, IMF and WHO is testament to that balance of power. More recently as the economic centre of gravity in the world shifts, we are beginning to see China both infuse itself into the bureaucracy of the UN (it controls a number of committees) and cultivate Asia centric institutions such as the Asian Development Bank. A world where we have ‘Western’ and ‘Eastern’ multilateral institutions would be a truly divided one, though there is the hope that these institutions could speak to each other, and that this dialogue might be facilitated by smaller nations from Switzerland to the UAE.

Multiple Actors – Two cojoined elements of the ‘new world order’ that are striking are the facts that the challenges posed by innovation and technology (genetics, data, cyber) are closely tied to the corporate and financial worlds and those corporations are of such a size that they are now important global actors in their own right (25% of US stock market capitalisation is made up of the top five technology companies). Under this approach, the institutional solutions to climate damage are collaborations between disparate actors – mayors of large cities, large strategic corporations (i.e. Microsoft), governments, activists and some universities.

‘Santa Fe’ – a variant on the above approach is that it is driven by experts, from very different fields and who bring both a specific expertise and an appreciation of the interlinking causes of many of the challenges the world faces. I term this approach the ‘Santa Fe’ one after the Santa Fe institute which is likely the exemplar in applying a cross disciplinary approach to complex problems and systems. In many ways this is the most enlightened approach to building the institutions of the future, though a somewhat less democratic one.

I suspect that this last option is the least likely. World wars spurred the creation of the League of Nations and the United Nations, let’s hope we don’t need the world to get worse so that it can get better.

Have a great week ahead,



On February 25th the Zuger Woche newspaper popped through the letterbox with the front page headline, ‘Bitcoin – was ist das?’ (German is so alike English that readers need no translation). I was sufficiently struck by the headline that I took a photograph (now posted on social media), the reason being that Zug is known as the epicentre of Europe’s ‘Crypto Valley’, with growing concentration of crypto currency firms establishing there. While it’s not quite the same as Le Monde asking, ‘What is the Mona Lisa’ the headline does illustrate the disconnect between new areas in finance and technology and the ‘real world’.

Having written about crypto last week I had little intention of returning to the topic this week, though the collapse in the crypto complex is worth a few words (Ethereum halved in value in about four days). The extreme volatility confirms that bitcoin and most of the other crypto currencies are not money, and likely have no economic role (blockchain, tokens may be different) and as an asset class could best be described as a ‘bauble’ – a tacky trinket of an asset. Even tacky trinkets have their place, but in the case of finance they lie somewhere on the asset spectrum between art and race horses.

Having rubbished bitcoin, there are two other more important points to make. The first is to reiterate last week’s note which is to restate that there is a storm brewing between centralized finance and decentralized finance. Last week’s crypto volatility was spurred by China curbing financial institutions’ use of crypto currencies (twice announced), and by the US Treasury’s move to draw cryptocurrency holdings into the remit of the taxation system. Note also that this summer the Federal Reserve will launch a discussion on digital currencies.

Bitcoin, whose coding incorporates a news item regarding the global financial crisis, is an affront to the staid world of central banking and a threat to governments’ taxation programmes, and indeed to the probity of financial systems. As such, the crypto world should continue to expect attacks from finance officials. The exception may be the likes of Switzerland, where, in the case of Zug the authorities have set out the technological and regulatory backdrop for a new eco-system to grow (Zug allows taxes and train fares to be paid in bitcoin).

The second point to garner is that despite a number of policy moves, the crypto complex is still standing. I am not sure if this can be attributed to the workings of the decentralized finance system (I don’t know enough about it), or its lack of liquidity and more simply to the risk appetite and deep pockets of those who invest in crypto.

I wont dwell any more on crypto. Back to the Zuger Woche, whose editors have reinforced a trading strategy – my rule is that newspaper, and magazine covers are often a good, contra indicators of market and economic trends.

In a previous note I have highlighted how 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.

The staff at the Zuger Woche just about got it right, on February 25th bitcoin traded at 55,000 and pretty much stayed close to that high level until the recent stumble. I will keep an eye out for any Zuger headlines that worry about the bitcoin collapse as a sign to jump into bitcoin.

Another related trading signal is the IPO (initial public offering) as a sign that a trend has peaked. It was the case with the mining sector and Glencore (a Zug company!) in 2011, and the recent market listing of crypto trading firm Coinbase (its down nearly 40% since).

In both cases – newspapers and IPO’s – the common factor is that the public are the last to discover financial innovations. Robinhood’s IPO is next week. Buyer beware!

Have a great week ahead,


It will never catch on!

When the euro was introduced just over twenty years ago, there were tales of people around Europe refusing to exchange their national currency notes for the single currency, on the basis that the euro ‘will never catch on’. When the hacking group Darkside ransomed the dataset controlling the Colonial pipeline last week, the ransom was paid in a cryptocurrency.

These two, different tales from opposite ends of the ‘money’ spectrum tell us much about how finance, and money in particular is evolving. At one end, we see the development of a new, traditional money (euro) and the centralised financial and capital markets (to an unsatisfyingly incomplete degree), that go with it. At the other end of the spectrum is decentralised crypto finance, that exists on a largely anonymous, unregulated way beyond the ‘old’ global financial system.

These two worlds are soon set to collide. Regulators, witnessing the speedy rise of cryptocurrencies, the lurid ways in which they are traded (e.g. dogecoin) and the threat they present to the incumbent financial system, will I suspect soon take a heavier hand in overseeing the architecture around crypto currencies like bitcoin which currently can’t be regulated, though the infrastructure or architecture that trades it can be overseen.

For context, these two approaches criss-cross many other related debates – the rise of sophisticated organised crime, the future of the dollar as the world’s reserve currency and the need to build emerging market financial systems that can curb corruption.

A potentially decisive development is the acceleration in the rollout of central bank digital currencies (CBDC). Central banks are set to issue digital versions of their currencies to accompany outstanding reserves and bank deposits. Theoretically, central banks will give each of us a retail account, and households can exchange money directly with them (as opposed to going through the banking and economic systems). The logistical and communication aspects of this project will be fiendishly complex to the extent that ‘it will never catch on’ echoes through my head.

It is however, catching on. Nearly twenty million Chinese are hooked up to an experimental digital yuan run by the People’s Bank, whose intention is that the 2022 Winter Olympics in China will serve as a showcase event for the digital yuan. Small, advanced economies – notably Switzerland and Singapore (not forgetting the Bahamas’ Sand dollar) are to the forefront in planning digital currencies as is the Bank of England, which egged on by the strategic urgency created by Brexit, may be the first large central bank to roll out a digital currency (the Fed and ECB also have blueprints).

It strikes me that the ingredients necessary for this sort of manoeuvre are a well banked and financially literate population, one that is well penetrated technologically, and a central bank with a very good policy and regulatory brains trust. (I attach a link below to a good overview from the BIS)

Digital central bank currencies can achieve a range of aims – from making the transmission of money a cheaper and faster process (though I am not at all sure that this is good for payment companies and banks), a potentially more secure banking system, and the possibility to rebuild decrepit banking systems (stablecoins – that are linked to an underlying asset/currency – can play a role here). Two other factors are prominent.

One is the ability of central banks to better tailor monetary policy. As it stands, quantitative easing is delivered through financial markets. With a digital central bank currency where households have retail ‘accounts’ at the central bank, it can drop money directly into household accounts, with even a bias towards certain types of households. For example, if the central bank decides that families with two children tend to have a particularly strong impact on the economy then it can funnel relatively more money to them.

The other aspect of the CBDC that deserves greater attention is the enhanced power that it will give central banks. In opening up accounts with the public and businesses there is the risk that central banks assume a Leviathan level of control over financial systems, and to a very large extent subsume them. In China where the government aggressively policies social media content, it may seem automatic that an institution like the central bank can have immense power over people finances, and to an extent act like a fiscal authority as well.

So, if central bank independence and their outsized role in the political economy will be called into question, the counterveiling argument, for the larger central banks at least, is the geopolitical value in rolling out digital central bank currencies. Indeed, China’s announcement that it was advancing its digital currency project has prompted the Fed and the ECB to flag their own programs.

This trend raises many questions, the most prominent of which is the long term role of the dollar. What is perhaps more pertinent is to think how the architecture of central bank digital currencies will evolve – to what extent will central banks have power over household finances and economic behaviour, and to what extent will digital currencies change banking systems (I half suspect that the Chinese authorities’ attempts to rein in Alibaba is conditioned on its plans for the digital yuan).

Two of the important structural issues are outstanding. One relates to emerging countries, whose currencies and relatedly central banks are not as liquid as the ‘old’ monies – will they try to launch their own digital currencies or will we see competing waves of dollarization, euroifciation and yuanificiation across countries like Argentina, Serbia and Malaysia? What is promising here is that countries like Colombia and Uruguay are already active in terms of either mobile payments systems or digital currencies, and in Africa Kenya’s MPESA is a notable digital success story.

The second issue relates to the way in which ‘centralised’ digital currencies will interact with decentralised finance (cryptocurrencies and stablecoins). There is a vision of how these systems can join harmoniously together (see Giles’ excellent DigitalEconomist post on this below). The concern is that by definition the evolution of the crypto world is happening at such a rate, and in such a disorganised way that it presents a threat to the established financial order, and that the two systems grow in parallel, competing ways.  It is an exciting and potentially very messy clash, though ultimately CBDC’s might just catch on.

Have a great week ahead,




Forecasting is difficult, especially the future

Nils Bohr, the Danish physicist is rumoured to have stated ‘Prediction is very difficult, especially if it’s about the future!’. I agree.

Last March with the pandemic in full, terrible flight, I laid out three scenarios for how the coronavirus hit world and its financial markets might develop (https://thelevelling.blog/2020/03/28/why-did-nobody-notice-it/). To a certain extent, each of my optimistic, medium and pessimistic scenarios played out – such was the unpredictability of the virus and the ways in which it and other forces caused economies and political systems to contort themselves.

In particular, my prediction of a nasty, second wave was largely correct –

Under this ‘pessimistic’ (20%) scenario, much of the world’s workforce is disrupted by the virus, and second waves become the norm. Social unrest, political disunity and a breakdown in diplomacy between nations (US and China for instance) are some of the resulting side-effects. Monetary and fiscal policies cannot contain the full effects of bankruptcies and unemployment, to the extent that central banking ‘accidents’ crop up. The 1930’s is the nasty template to follow here. Property markets and alternative asset classes like private equity are hard hit

What is striking is the part I got wrong, that financial and market collapse was not the natural consequence of the second wave of COVID and the economic damage it has caused. That much is due to the speedy arrival of vaccines, generous fiscal packages and the seemingly never ending supply of central bank liquidity. This last factor is the one that has made the difference between an ebullient market environment and a cruel and testing real world.

In last March’s note I wrote that the distinguishing feature of the coronavirus’ passage through societies and economies was its speed, and this continues to be the case. Vaccines have been developed at a record pace, in many countries – the US for example – the economic rebound is speedy and the adjustment of businesses to a more digitally driven economy has been rapid.

With vaccination rates rising quickly in developed countries – Switzerland and France for instance are accelerating their programs – it is now time to take stock, and offer a few more predictions, or at least frame some broad scenarios.

As background, we know the following ‘truths’ in the light of the coronavirus crisis. Central banks continue to be the force that holds markets together and loftily above the reality of an at times wretched world. In coming weeks, the beginning of the debate on the Federal Reserve’s tapering strategy may induce more volatility.

Then, at a country level we do not yet know what kind of ‘model’ has best withstood the side-effects of the virus, though it is clear that populists (Modi, Trump, Bolsonaro for instance)  struggle with the health, social and economic effects of the virus.

In addition, the rise of the digital economy and manifest changes to the way we work are increasingly well understood. What is altogether less welcome is the general lack of collaboration between nations (the spat between Britain and France over fishing rights near Jersey is another example of this), and the emergence of a steadfast geopolitical rivalry or ‘Great Game’ between the USA and China (and Russia), that increasingly incorporates a scramble for scarce resources (rare earths, computer chips, and the Arctic for example).

Looking ahead, pent up demand and hefty fiscal and monetary stimuli, together with the fact that different countries are exiting the coronavirus crisis at different times, and the background factor that the crisis begun at the end of one of the longest periods of expansion in economic history, makes forecasting the near future all the more difficult. Notwithstanding that I can think of three scenarios to bear in mind till the end of 2021.

‘Brave new World’ (30% probability)

The ‘Brave New World’ is one of extremes. In this scenario, the large economies have emerged from the coronavirus and growth is barrelling forward. Despite manifest inflation, central banks are slow to rein in activity. Investment in new technologies is booming – Europe leads in green technology, the USA has a 5G revolution and China is the quantum computing leader. Central banks introduce digital currencies faster than many think necessary, drones become the frontier military technology and a debate begins on a new world institution to police the internet. Climate change becomes a significant driver of security across Africa and Asia.

In finance, investors increasingly differentiate between ‘new’ industries and companies and ‘old’ ones, such that many long established banks, consumer brands and energy companies trade at record high dividend yields. At the margin, asset managers and large family offices build portfolios that include sizeable private asset portfolios (private debt and venture like investments), crypto currency and stablecoin portfolios, agriculture centric assets in Latin America.  

High food price inflation slows growth in many emerging countries, and in the developed world, falling bond prices cause pension fund crises across Europe.

‘Two Armed Economist’ (45% probability)

This scenario is more probable, but less clear – if that makes sense. The reason for this is that once the initial ‘post-COVID’ bounce is over, we will enter a world where imbalances are met with market and policy responses, and overall economic and market outcomes will be volatile. For example, it is now clear that the Biden administration is reacting to wealth inequality in the way it is framing fiscal policy, and that in addition extreme price moves in eclectic assets – from Ethereum, semiconductor chips to lumber – are causing real world economic pain and confusion.  

This pattern of ‘equilibrium’ building continues – in many countries economic activity becomes better distributed away from capital cities (Paris to Bordeaux, Dublin to Galway) and across regions (Amsterdam to Barcelona, Zurich to Nice?) such that there is a new wave of infrastructure spending on telecoms and public services, and property market growth follows a similar path. There is a slow but meaningful revolution in healthcare and education, and at the universities level, the multidisciplinary ‘complex systems’ approach is in vogue (again, following Nils Bohr’s example).

In markets, the lingering coronavirus (and inflation) slows growth in emerging markets, the trend towards the democratisation of risk continues and the apparent rise of inflation causes both the major asset classes, developed world equities and bonds, to underperform somewhat. The surprise is the ongoing failure of the dollar to rise, though printing presses may have something to do with that.

‘Reckoning’ (25% probability)

A reckoning scenario, where many of the risks that are building in the global system (climate damage and super high debt levels) begin to erupt, is in my view likely between now and 2024, but just not in 2021 (I sound like a two armed economist or a central banker!).

This scenario will most likely develop around the permanent effects of the coronavirus on the labour force, a macro environment characterised by stagflation, which in turn leads to widespread popular discontent as real wages fall. In such an environment, fiscal policy is effectively spent from the recent rounds of stimuli, and monetary policy is rendered ineffective by rising inflation and low growth. As such markets begin to price in the risks associated with very high debt levels and a credit crisis ensues. In this scenario credit and broad equity markets falls by up to 20%, with short-term government debt in developed world countries gaining. ‘Democratisation of finance’ type investments suffer a huge liquidity drawdown that produces a numbing ‘democratisation of risk’ retail investment crisis in the US and China.  

This is a sobering scenario, but at least it may not play out just yet, not next week anyway.

Have a good week ahead, Mike

Grün und Eisen

In last week’s note I wrote about the ‘2034’ style prospect of the next world war, ostensibly between the world’s dominant power the United States, and the rising power, China. In the back of the collective minds of those who think about such scenarios, is the rise of Prussia in the 19th century, and by extension, the rise of Germany in the early 20th century, with the resulting two world wars.

We could trace the rise of Prussia (and Germany as we know it) back to a speech in September 1862 by Otto von Bismark on the issue of German unification where he stated ‘The position of Prussia in Germany will not be determined by its liberalism but by its power … Not through speeches and majority decisions will the great questions of the day be decided—that was the great mistake of 1848 and 1849 but by iron and blood’. Bismark’s ‘blood and iron’ came to define Germany (not to forget other factors…I have Fritz Stern’s ‘Gold and Iron’ on the shelf near me).

It may well be that other countries neglect the lessons of ‘blood and iron’ and that it becomes their geopolitical mission. What I find interesting is that as a phrase it no longer defines Germany, something that is exemplified by the rise of Annalena Baerbock as the leader of Germany’s Green party, and by the rise of that party itself.

Fusty, geopolitical hawks won’t be happy with this. The Germany of the ‘well sealed windows’ to use Angela Merkel’s characterisation of her country, is one where only one sixth of the army’s tanks and helicopters are operational and the army has a major recruitment problem. Worse, most of Germany’s politicians seem to want to accommodate the actions of Vladimir Putin, offering dialogue whatever the provocation. The hawkish response is for Germany to cut off the Nord Stream II gas pipeline, invest heavily in its army and wait for the Russian tanks to come.

For better or worse, that scenario is unlikely to come to pass. While much of the international press focuses somewhat mistakenly on whether Marine Le Pen can supplant Emmanuel Macron as French President in 2022, the future of Europe lies in the hands of the successor to Angela Merkel. From afar it seems like a contest between a group of colourless, older men and Annalena Baerbock. While she enjoys a high rating in the polls, it may well transpire that Baerbock ends up leading the junior party in a coalition government. Still, her arrival on the political stage has at least three important messages.

The first is that the Green Party is moving towards the centre of the political stage in many countries. This comes at a time when banks and central banks are embracing ‘green investment’ and when many mainstream political parties are adopting the environment and the fight against climate damage as a core policy issue. Commensurately, Green parties across Europe (apart from Jill Stein and Tom Steyer the USA does not have a green party worth speaking of – though corporate America is very active here) are beginning to focus more of their attention on non-environmental centric policy issues. A good example is the recent interview that Baerbock gave to the Sunday edition of FAZ (Frankfurter Allegemeine Zeitung) where she gave a balanced centrist view on foreign policy.

Related to this is, in the context of ongoing severe climate damage across the planet, the hitherto failure of Green parties across countries and potentially across continents, to better coordinate amongst themselves. Arguably, the green or environmental cause is the only one that is universal in the sense that it is a risk all countries face, in the same way though to different extents.

To that end it is surprising that Green movements across countries are not better coordinated. This might be due to the fact that Green movements in individual countries have idiosyncratic founders, and that increasingly green policies are being adopted by centrist parties.

The second lesson from the rise of the Greens in Germany, apart from what it says about voter fatigue with incumbent political parties, is that it demonstrates the idea that values are becoming an important driver for both voters and consumers. Regular readers will know that I think that globalization is giving away to a multipolar world where large regions are defined by increasingly different ways of doing things or values.

Amongst them, Europe, led by Germany is driving a value set that prizes the green economy, protection of its citizens from the negative side effects of technology (i.e. data and AI). One of the great challenges for the first post-Merkel government is the extent to which it prosecutes this approach, notably in the way countries like Hungary are wilfully out of step on issues like the treatment of women, minorities and the respect for the rule of law.

The third factor to watch is how the deeper involvement of the Green party in German politics transforms German industry, so that for instance it makes Germany the world leader in energy cells and battery technology and vaults the German car industry into a position of dominance in electronic vehicles, not to mention its energy dependence on gas imports from Russia.

If all that can happen, in years to come we will speak of ‘Grün und Eisen’.

Have a great week ahead,