Balance sheet of Jenga

William Miller, a former Fed chairman in the 1970s was known to have joked that 23% of the US population thought the Federal Reserve was an Indian Reservation, 26% thought it was a wildlife preserve, and 51% thought it was a brand of whiskey. On that basis the ECB might be confused with the England Cricket Board and the BoJ as Balance sheet of Jenga.

Miller shouldn’t really have been one to joke – his tenure at the Fed lasted only seventeen months after he flagrantly lost control of inflation, to be ‘promoted’ to the role of Treasury Secretary and replaced at the Fed by Paul Volker – the rest as they say, was history.

We are back at a Volker moment of sorts. Only ‘sorts’ because to Miller’s intuition, it seems to me that the vast majority of people have no idea of the chaos that central banks are sowing in their lives – having pumped excessively cheap money into the economy, trapping new home buyers and then as inflation took off, taking a hawkish turn and raising rates aggressively in an attempt to undo their prior mistake (see our earlier note Pantomime to Farce).

In this context, it strikes me that there is very little public sense of what central banks are doing, and of the accountability of the actions, views and forecasts of the major central banks. Strangely though appropriately, this period of monetary tightening is also accompanied by some introspection as to what the role of central banks is.

For example, in a recent speech at Sweden’s Riksbank, Fed Chairman Jerome Powell stated that the Fed’s mandate did not encompass the role of a climate policymaker. His comments likely reflect a debate in the US, predominantly amongst Republicans as to the extent to which ESG (Environment, Social and Governance) driven policies should be pursued by institutions and investors.

Powell is in my view, correct in the view that the role of central banks needs to be tightly defined, though incorrect if he assumes there is no link between the policies of central banks and climate damage (curiously excess temperature readings and world debt to GDP have risen in tandem since the time QE (quantitative easing) begun). Relatedly few central bankers return to the perspective that a significant opportunity to ‘reset’ finance was missed in the heat of the global financial crisis.

Powell’s attempt to frame the Fed’s role comes at a time when the role of central banks in the political economy is enormous. As they have come to the rescue of various crises – that of low growth in the US, the structural deficiencies of the euro-zone and the economic side-effects of COVID, their role has burgeoned.

Central bank mission creep appears contagious – Janet Yellen positioning the Fed as the ‘cure’ for long-term unemployment, Christine Lagarde as the solution to climate change, and the outgoing Bank of Japan Governor Kuroda positioning the BoJ to swallow the entire Japanese financial system.

What is increasingly absent is a sense that fiscal policymakers are willing to both channel and offset the power of central banks.

First, for crucial policy issues like climate change and wealth inequality, monetary policy is a powerful motivating force but too broad based to have real policy relevance. Here fiscal policy makers need to channel the impact of monetary policy through instruments (such as the issue of green bonds) so that capital is directed to viable green technology projects and similarly to curb its effects on wealth inequality through taxation. Europe is much better than the US in these regards. Where Europe falls down (apart from capital markets and banking union), is in the way individual governments set fiscal policy with respect to the common monetary policy.

The omnipotence of central banks also means that they are an important benchmark for the quality of institutions, and for public policy leadership. For instance, that the ECB’s view on inflation and the outlook for the economy have very little credibility is not a great thing.

Far, far worse, in September 2021 it came to light that very senior Fed officials had been actively trading securities – something that would be unimaginable to most investment bank compliance officers. Interestingly, the moment that the Fed introduced new policies to oversee and effectively stop trading by Fed officials (December 2021 /January 2022) marked the top for equity markets and the onset of a hawkish turn in US monetary policy.

Ideally, this should never have occurred, especially at a time when so many other American institutions – from Congress to the Supreme Court – have been under attack, and it is my sense that most of the previous holders of the Fed Chair would have resigned in such circumstances.

So, if central banks need to do better on the ‘G’ part of ESG they will soon be confronted with the lure of geopolitics. To continue the thread that David Skilling and I opened up at the start of the year in ‘War by Other Means’, and if readers don’t mind, returning to page 267 of The Levelling …

One dimension that may complicate the need for less central bank intervention and diminish their independence is the quest by the large poles for financial dominance over each other. Central banks could become a vital instrument in such pursuits. Echoing Carl von Clausewitz’s view that “war is the continuation of politics by other means,” in a multipolar world central banks could become the monetary battleships of the large regions, with currency wars shadowing trade wars.

Indeed, the epidemic of countries sanctioning each other in 2018 (Saudi Arabia sanctioning Canada, the United States sanctioning Turkey, Russia, and China, for instance) suggests that finance is a key part of the geopolitical arsenal. Against this backdrop, governments may be tempted to allow central banks to take on a more strategic or geostrategic role than the “mere” economic function they play today. For the United States and Europe, this compulsion may well grow. Financial globalization is the only area of globalization where the United States is truly dominant, and using financial architecture to entrench its dominance is a compelling strategy.

In this context, I think that once this rate hiking cycle is over, the major central banks, as well as the minor ones like the PBOC, will spend more time thinking how they can expand the circulation of their currencies (the US in the Middle East,  Latam and with swap lines to Asia, China in Africa, and the euro-zone in Eastern Europe and North Africa) and how they can use their monetary tools against other economies.

Before that, the central banks (note there is an important Fed meeting next week) may have to negotiate a financial crisis – every US rate cycle since 1970 ended with a financial/market crisis. The outcome of such a crisis will have a bearing on the strategic competition facing the world.

Have a great week ahead


Mugged by Reality

History is catching up with me. In my last two notes I wrote variously about the tendency for some authors to use the opening line from Dickens’ Tale of Two Cities…’it was the best of times the worst of times’ and, the ability of ChatGPT to write essays and speeches.

On Monday, I dug out an old speech from Xi Jinping – and to my horror found it contained the sentence ‘it as the best of times the worst of times’, and it was written in such a balanced, anodyne way, with an obvious appeal to the Western reader, that it must have been written by a ChatGPT engine- the Chinese are apparently years ahead of thus here.

The speech in question is worth dwelling on. It was given at Davos in 2017, only a few days before Donald trump was inaugurated. As America struggled with the reality of Trump’s election victory, Xi Jinping came to Davos to claim globalization for China and to place China in the vanguard of the world order.

After the speech I saw American CEO’s wander out of the Assembly, partly in shock and mostly in recognition that China’s time had come. It should have been the beginning of an era for China, but instead it was the beginning of the end for globalization. Xi’s autocracy, China’s hunger for productivity boosting technologies, and Trump’s telling, though infantile, castigation of China, all opened a sharp divide between the two biggest economies in the world.

The Davos crowd is still debating whether globalization has simply changed its spots or stripes, but I think the wider consensus view is that it is being replaced by a multipolar world order (of large regions that ‘do things’ increasingly differently).

What is much less a consensus view is the intensity of the strategic competition between the USA and China, and increasingly Europe. For the moment, Europe’s stance reminds me of the description that Iriving Kristol gave for a neoliberal as a ‘a liberal who got mugged by reality but has not pressed charges’. Europe is being mugged by the reality of strategic competition but has not quite yet decided how to proceed.

Armed with this insight I took my soapbox up the ‘magic mountain’ last week. As ever Davos is a mixture of James Bond and ‘The Pink Panther’ (á la Peter Sellers), with sleek security combining with the rich and famous slipping around on the snow.

On Wednesday we had a very good discussion (thanks to Creative Dock and Roland Berger) around the implications of ‘strategic competition’ for European companies. The audience was mostly made up of German and Swiss business people so I, diplomatically as ever, wasted no time wading into the topic of German politics (I was heavily outnumbered by experts on the topic).

Today, more than any other European country, Germany embodies the dilemma that many nations face of being ‘forced to choose sides’. Having spent decades managing and cultivating relationships with European neighbours and countries like Turkey and Russia, Germany now has to choose.

It must choose between being economically and politically close to the US, and commercially bound to China, more so than it realises. In different ways, it is coming under pressure from the US, and at the same time being subject to a charm offensive from China.

Within German politics, there are also multiple contortions – the Greens acquiescing to coal mining and the sale of weapons is an example, and traditional relationships with the likes of France are fracturing. Perhaps German politicians thought that its economic power would render it influential diplomatically, which was certainly the case – but it has now become a liability.

The debate over the provision of Leopard tanks to Ukraine is sapping Germany’s credibility, and especially that of its leader Olaf Scholz. He appears to be the outlier in a long line of generally impressive German leaders since the 1960’s. If he believes that his indecision will create an environment where negotiations become likely, then he is badly wrong – morally and strategically.

Appropriately, the indecision in Berlin is a reminder of the lack of decisive policy making during the euro-zone crisis. Neither I expect, and again I am not an expert here, does the German public realise the extent to which the political mood has shifted in the West and what other nations now expect of Germany.  

Before I hector Germany too much, I also acknowledge that Ireland may also be on the cusp of a similar geopolitical dilemma. On a per capita basis, it has one of the best and most effective diplomatic services in the world, and a very large stock of soft power. However, it has ignored the creation of a proper defence and security policy and compared to other small nations (Denmark for instance), it effectively has no hard defence capability. It is the opposite of Israel – lots of soft power and little hard power.

The cases of Germany and Ireland demonstrate how crises occur – broad strands of policy are left neglected for years (often for good reasons), and then a shift in the world order makes demands upon them that cannot be met.

We are now living the great geopolitical ‘mugging’.

Have a great week ahead,


Two Cities

Writers or presenters in need of a catchy headline often deploy the line from Charles Dickens’ ‘A Tale of Two Cities’ that ‘it was the best of times, it was the worst of times’. The phrase in question compares London and Paris, around time of the French Revolution.

Having spent Thursday giving a talk on ‘La Guerre par d’autre moyens’ to a group of French economists and then Friday in London attending the estimable Pi Capital’s lunch meeting (Ian Bremmer presented his ‘risks for the year ahead’), I couldn’t help thinking of the ‘Two Cities’ and everything their history has to tell us about the development of economies, power and the state of the world today.

They are the two most extraordinary cities on earth, and no modern city, nor I expect Beijing (for a very long time the most populous city on earth – Rome has the record here) will match their colour.

I have lived in London and Paris for nearly half my life, so a full and worthy attempt to compare and contrast them could take a very long time. O’Sullivan’s Guide to the Pubs of The City and Paris Centre (sponsored by Eurostar) will have to wait.

What is interesting today is how each city confirms the stereotype of the other – London rather than Paris is beset by strikes and labour disputes, alternatively I find Paris more elitist than London and provocatively, I find Parisien(ne)s more polite than Londoners. There are certain elements of British culture I miss – notably the artistry of newspaper headlines. ‘Sex at No. 10 Covid Party’ is one such banner that greeted my arrival in London,

There are a number of serious points in comparing the two cities – not least in the context of the rest of Dickens’ quote that ‘it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair’ which underlined the dangers of the post-Revolution period.

The uncertainty that the French Revolution caused, and that Dickens wrote about, might well map onto Brexit. We are at a point in history where, as the old globalization led order dissipates, the rise and fall of countries will accelerate. For example, Russia, Estonia and Poland have all made strong choices this year, and will reap the consequences – in a positive way geopolitically for Poland Estonia, and quite possibly in a catastrophic way for Russia that could see the disintegration of its geopolitical hinterland and potentially the country become a renegade actor internationally.

Brexit is not quite as bad, but its folly is laid bare every day. Investment, especially in social infrastructure and public goods has collapsed over the past ten years, while productivity is anaemic. In France productivity is healthy, but France is reaching the limits of its budgetary and financial power. So, not entirely unlike the aftermath of the Napoleonic Wars, which drove economic innovation (in England), both the UK and France need to rethink everything they have done in the past forty years.

The UK needs to follow the French model – greater, better spending on education, health (and a less politicised approach to operating healthcare and policing), and possibly also on the military. The UK’s tax base needs to widen and arguably corporate tax needs to rise.

France on the other hand needs to look at what its neighbours are doing well. The heavy burden of administration needs to be cut away – to help businesses and to shorten the gap between the state and ‘the people’. Granted that France is at the limit of its budgetary potential, it has two (non-mutually exclusive) choices – political crisis or innovation. Mass privatisation is a non-starter but the digital economy in France offers the means to use private capital and expertise to improve public services.

As a final, crucial point, the ‘real’ tale of the two cities is how politically they have become estranged during the Johnson years. Brexit and the post Merkel era in Germany have left France the indispensable country in Europe, but with American singularity and Russian savagery on the rise, it needs to be politically closer to the UK (notwithstanding AUKUS) on topics of defense and security.

If this is the case it will suit Rishi Sunak, who I suspect will follow a foreign policy akin to the old Turkish one of ‘no trouble with neighbours’. There are already welcome signs of a change in tack in discussions around the post Brexit trade relationship of Northern Ireland. There is growing urgency to solve this before the 25th anniversary of the Good Friday Agreement in April.

Fittingly then, it has just been announced that Emmanuel Macron and Rishi Sunak will hold the first UK-France summit in five years on March 10, and King Charles III is expected to cross the Channel in late March.

At long last, harmony may reign between the two greatest cities on earth.

Have a great week ahead,




Let me pick up where I left off ahead of Christmas by reiterating the fives themes for 2023 (‘War by Other Means’) that I had put together with David Skilling. The note details the trends we expect to materialise through the year as intense strategic competition between regions takes hold.

What has also become apparent to me over the holiday period – perhaps because I have simply had time to read more and reflect better, is that some of the contours of the post-globalization landscape are taking shape – the geopolitical realignment of the countries of the Middle East for instance, and the forming of currency based geo-strategic relationships, notably in the use of the yuan and rouble to settle commodity trades.

Another profound change that has been taking place is the relationship between humans and technology, in the sense that in many domains now humans are becoming far more effective in their work where they use technology cleverly and with humility. Additionally, still strong labour markets in the context of collapsing technology stock valuations suggest that humans have not been economically eviscerated by technology.

The trade-offs between technology and humans are not a new issue. As with many of the topics we grapple with today – military strategy, democracy and philosophy – the ancient Greeks established the benchmarks that most of us have struggled to keep up with since. With respect to technology, Greek philosophers spoke of automations (robots), engineers like Daedalus were said to have invented moving statues and models of animals, and Greek mythology conjured ‘Talos’ a giant, moving, bronze statue that guarded the island of Crete.

In modern times, the new frontier is where human professionals can use technology to help rather than replace them. For example, within the US military the use of various drones, intelligence centric tools and some weaponised machines by small units of soldiers is an area of keen study and practise, and it is now more than evident that the Ukrainian army has been given a leg up in deploying satellite and AI technologies in prosecuting its defence with increasingly impressive results.

The military use of robots and AI has potentially terrifying outcomes, which is why it is important that both the law and philosophy keep track with the use of technology and set boundaries to its use – to that end some universities are tackling this head on, such as the Centre for Ethics in AI at Oxford. In this respect, an interesting book that I have flagged before, is Aifric Campbell’s ‘The Love Makers’ (see AI – The Final Problem) which provocatively details a world where humans and robots are enmeshed, romantically and in other ways.

In this context, a really interesting recent paper by Cass Sunstein (‘The Use of Algorithms in Society’) highlights the role of AI in multiple domains such as dating, where he quotes the conclusion of a paper by the University of Utah’s Samantha Joel entitled ‘Is Romantic Desire Predictable? Machine Learning Applied to Initial Romantic Attraction’ which holds that the process of romantic attraction may be more “like an earthquake such that the dynamic and chaos-like processes that cause its occurrence require considerable additional scientific inquiry before prediction is realistic.”, a conclusion so clunky it must have been written by a robot.

The Sunstein paper is useful in illustrating how surgeons or judges can use AI and its related datasets in the support of their own roles, rather than competition with them, so that they are wiser, challenged in a data centric way, and hopefully society is better off.

Lurking behind the use of technology and specifically AI by professionals is the fear that it will disintermediate them. A recent development here is the arrival of ChatGPT an interactive ‘intelligent’ bot that has been developed by OpenAI (set up seven years ago to build socially constructive AI, and recently valued at USD 30bn). ChatGPT is catching on quickly, not least because students have found that it can write half decent essays.

I recently tested it out, asking for a response to the question ‘Is globalization over?’- the result is below, and in my humble opinion is a good rendition of the kind of response that a ‘two handed economist’ might give (‘on one hand…on the other’). I think I can just about do better, and if there is any lesson to draw it is for human writers to be more opinionated, quirky or style driven in how they write. I am not out of a job just yet.

Have a great week ahead,

It is difficult to say whether globalization is “over,” as the term can be interpreted in different ways. Some people use the term to refer to the increased interconnectedness of the world’s economies, while others use it to refer to the spread of Western culture around the world.

In terms of economic interconnectedness, it is true that globalization has slowed down in recent years. Trade growth has slowed, and there has been an increase in protectionist policies such as tariffs and trade barriers. However, it is also important to note that globalization has brought many benefits, such as increased economic growth and the spread of technology and ideas.

It is also worth noting that globalization is not a new phenomenon. Throughout history, people and goods have been moving around the world, and different cultures have influenced one another. While the pace of globalization may have slowed in recent years, it is unlikely to come to a complete halt.

In terms of the spread of Western culture, it is also difficult to say whether this process is over. While it is true that other cultures and ways of life have been influenced by Western culture, it is also important to recognize that there is a growing appreciation for cultural diversity and the value of preserving cultural traditions.

In conclusion, it is hard to say whether globalization is “over.” While there have been some changes in the level of economic interconnectedness in recent years, it is unlikely that the world will become completely isolated from one another. Similarly, while Western culture has had an influence on other parts of the world, there is also a growing recognition of the value of cultural diversity.