Two of the key, recent headline stories have related to climate, and central banking. We cannot escape the dramatic evidence of climate damage across the world, and recurring high temperature records. In central banking, both the European Central Bank and the Federal Reserve raised rates last week in attempts to cool economies (inflation). If they succeed, they might even temper the heatwaves that grip many parts of the earth.

What is interesting about climate damage and central banking is that since the early 2000’s, both have embarked on trend changes. As the Hadley Centre database shows, excess world average temperatures have broken away from the levels of the past one hundred and fifty years, and now the average annual temperature of the earth’s land is about 1.5% higher than the long-term average. Similarly, in the aftermath of the global financial crisis, the balance sheets of the major central banks, notably the Federal Reserve, expanded dramatically as central banks enacted quantitative easing (QE) programs, even more so through the COVID crisis.

It is tempting to say that the liquidity provided by QE programs provided the fuel to drive climate damage. I am not sure that this is the case in a strict econometric sense, though QE has enabled a lot of poor or suboptimal investment (and possibly excess consumption). It is correct, I think, to say that both the existence of QE (as a sign that economies and financial systems were too fragile and required monetary morphine) and manifest climate damage, are warning signs that the world economy is reaching the limits of modus operandi, and possibly its very existence.

In particular, the contribution of QE was to buy ‘peace’. To paper over cracks or deficiencies in financial systems (the euro-zone), to create a wealth effect (for the wealthy) and to flatten the implications of tail-risk events – from the initial Russian invasion of Crimea to most notably COVID. As a form of ‘glue’ that kept the de-globalizing world together it was a success, but it created a deep dependency and dulled politicians and corporate leaders to rising risk factors.

What is new is that not only is QE in retreat (central bank balance sheets have again recently begun to edge backwards), but the policy framework behind QE is beginning to change. There were two new developments last week.

One was that the Bank of England, long the benchmark for other central banks, finds its credibility dented across various areas. Its forecasting ability is now subject to a post-mortem, led by Ben Bernanke, because according to comments from some members of the monetary policy committee, the banks forecasting models work well on the past, but are not suited to the future.

More alarmingly, in accounting terms, the Bank has made losses of over GBP 150 bn on its QE led market interventions. I am surprised that populists in the UK have not made more of this (they are perhaps more occupied with NatWest), though in Italian politics there are now frequent verbal assaults on the ECB.

Another notable move is the Bank of Japan’s (BoJ) attempt to loosen its control on the long end of the Japanese bond market (‘yield curve control’), which has so far not detonated any major volatility across bond markets. The BoJ is significant in at least two respects. First, it owns just over half of the entire Japanese bond market, and secondly it has been the last hold-out in the trend towards monetary policy normalization.

The upshot of all of this is that in a world where inflation has been curbed but not controlled, the consequences of higher rates will become increasingly obvious, at first in specific sections of the real estate market, and within some household segments. There has so far been a near miraculous absence of credit risk internationally, but I find it hard to see how this can continue, and there is plenty of scope for markets to reprice this.

Central banks, when they prosecuted QE, were the indispensable friends of the political classes – effectively removing the urgency to deal with pressing issues (reform of the euro-zone and national economic structures for instance). Now, the consequences of their (necessary) actions makes life more difficult for incumbent politicians (witness the UK housing market).

I expect that in the political economic landscape, central bankers will be less and less popular, at least until they have to ‘rescue’ the world when the next crisis arrives. A healthy development might be that they stop stretching their mandates to encompass policy topics like climate change (Lagarde) and unemployment (Yellen) that governments should and need to deal with, and that way we might get somewhere on climate damage control. 

Have a great week ahead,

Mike

Last Thursday the UK held three by-elections, notably one in Uxbridge to replace the disgraced former prime minister Boris Johnson. While the Tories held this seat (and lost two others to Labour and the Lib Dems), it was reassuring that the ‘ interplanetary space warrior’ candidate ‘Count Binface’ won more votes than UKIP and than Jeremy Corbyn’s older brother Piers. What was even more encouraging was the fact the new Labour MP for Selby is a 25 year old.

It is a welcome sign in a world where political systems, notably in the two main Anglo-Saxon countries, are becoming ossified – that is concentrated, perhaps mired, around a two-party system, and around age-old political dynasties and networks.

In other countries, ossification has taken hold in different ways. In France for example it will, in the light of recent events, surprise readers that nearly half of the members of the Assemblée Nationale are first time deputies (it was a remarkable 75% in 2017) and they are collectively younger than previous political generations (seven years younger than the 2007 batch). Yet, in France, the ossification occurs lower down in the political system (mayors) and in the running of the state.

However, like Germany and a range of other European countries, there is a fluidity and even Darwinism in the party system, with old parties (French Socialists) being easily culled and new ones springing up. One to watch is the resurgent Vlaams Belang party in Belgium (they are fighting for Flemish independence and might just be the end of Belgium as we know it).

The idea of new parties springing up, and in some cases spanning borders is something I had devoted a few pages to in The Levelling, though arguably it is one trend that has not quite materialized in the way I expected.

For instance, I had expected to see a coordinated, cross-nation ‘Heimat Party’ (‘old values’, right wing) across northern countries, but instead these parties are currently emerging in southern European countries (watch Vox’s performance in Spain this weekend). Notably there is international coordination on the right – nefariously between Marion Marechal Le pen and Steve Bannon, and slightly less so between Giorgia Meloni and Mike Pompeo.

In the UK and US, there have been several attempts to set up new parties. Some years ago I sat in on a few meetings of United for Change, a new centrist party in the UK that was well funded, had an impressive list of potential candidates but never got off the ground, much like Chukka Umunna’s Change UK.

This month in the US, a new organization called ‘No Label’ has been launched, with great promises of policies and new presidential candidates to be announced in coming weeks, though what has so far been communicated is unsatisfying.

In the US, the prospect of another Biden vs Trump contest should energise new candidates. Some of these will simply come forward to plant the seeds of future national careers and others should be genuine contenders. In our November 5th 2022 note we stated ‘that the really interesting political figures are found at the mayoral and gubernational levels – Mike Duggan in Detroit and Francis Suarez in Miami’. True to form, Suarez has recently announced a presidential campaign and is one to watch for the future.

To those who desire to break the ossification of political systems in the UK and US, there may be hope ahead. In the US, there are rumours and hope that the CEO of JP Morgan Jamie Dimon might run for President. While I have no insight into whether this is possible, Dimon has enough name recognition, money and support from the business and media establishment to mount a credible ‘Unite America’ presidential campaign. One to watch.

Then in the UK, back to Shelby. It is very likely that a general election in the UK (summer 2024?) could elevate Labour to power, potentially in a coalition with the Lib Dems. This might in time lead to a change in the electoral system, away from the first past the post system and towards proportional representation. This could be Labour’s contribution to revolutionizing British politics, it would allow smaller parties to thrive, likely provoke a split in the Tory party, and usher in an age of consensus built, coalition governments.

Count Binface would approve.

Have a great week ahead

Mike 

Often a little stress can sharpen the mind. A recent journey, by train, from Paris to Oxford was disrupted by first a cancelled train and then predictably, a delayed one. This complicated an otherwise pleasant day because I was supposed to be sitting in front of my laptop participating in the aperture 4X4 discussion forum on AI (artificial intelligence). Instead, I found myself nearly hanging out of the window of the train trying to get good phone reception as I spoke at the forum.

In order to compensate for the poor connection I felt obliged to say something colourful and interesting, and thus put forward the view that the best comparison for understanding how humanity can use AI is the tv programme ‘One Man and his Dog’.

One Man and his Dog was a very popular, though quirky, BBC programme based on sheepdog trials across Great Britain and Ireland, which at its peak in the 1980’s had some 8 million viewers (still running on BBC Alba). In very simple terms it is a sheepdog trial, with farmers herding sheep with the help of their sheep dog, or in technical terms, humans performing a complex task, under pressure, with the aid of a trained, intelligent non-human.

While the comparison of AI with ‘One Man and his Dog’ was initially speculative, the more I think about it the more I consider it apt as a framework to understand how humans should use AI. I have not herded sheep, but imagine it can be as or more difficult as sorting data, as unlike data sheep have minds of their own. The combination of (wo)man and dog as a very productive team illustrates how the best uses of AI are beginning to emerge – by doctors, soldiers and scientists deploying AI to second guess and bolster their own decision making.

In addition, like AI, dogs can be trained to attack and defend, but while dogs make valuable companions I struggle to see how AI/robots can fulfil this function. There is a persuasive argument of how this could happen in book The LoveMakers, and in the behaviour of many people who find the metaverse an appealing place to ‘live’ (I am worried by the appearance of the LOVOT family robot in Japan and by the growing use of the AI relationship app Replika).

While dogs can sense our emotions and perhaps intuit what we are thinking, the increasingly alarming aspect of artificial intelligence is that it can determine what we are thinking. A recent edition of Nature journal described how AI can be used to analyse human brain activity, and translate this accurately into words and images.

If the analogy of sheepdogs and AI is less eccentric than readers might have initially thought, it does I hope highlight the need for society to have frameworks and rules of thumb to parse the use and impact of AI.

Economically, AI is already leading to a repricing of the role of people, like software engineers, whom it can replace, but also to a reappraisal to the training and role of those who can use it to be more productive. I suspect that such is the rate of deployment of AI that in time many of the products and solutions it creates will quickly become commoditised.

The practical aspects of this phenomenon are gathering speed – in the last week alone KPMG has announced a partnership with Microsoft to drive the use of AI in its businesses and the role of Palantir on the side of the Ukrainian military is becoming more clear. Also, actors and screenwriters in Hollywood are striking at the prospect that some of their work could be replaced by AI.

In addition in China, measures have been announced to control the use of generative AI by requiring firms producing these tools to be licensed by the government where these tools are targeted at ‘the general public’.

This move is consistent with my broad thesis that the US, EU and China will increasingly tackle new trends (notably technologies) in very different ways. America has the AI stock bubble (see Nvidia), the EU has its recent AI Act and now China is controlling the production points of generative AI.

In the US, regulators are beginning to catch up with international counterparts. The Federal Trade Commission is investigating whether OpenAI’s ChatGPT produces false information. More broadly, the OECD has warned of the negative effects of AI on labour markets.

My view is that if they want to see how humans and robots should work together, One Man and his Dog is a good place to start.

It is always good for the ego and the learning process to revisit bold statements written in the past. This time last year, I wrote in Democratic Twilight that ‘French democracy is in a much better place than its two Atlantic neighbours’

How do you say ‘humble pie’ in French? Humble tarte?

The eruption of two waves of violence in France in the past couple of months – one in reaction to the government (On est lá Macron! ) and the other against the state, has shattered the idea that France is calm politically, though depressingly the US and UK are still not far off the French benchmark.

Having witnessed many of the defining events in Paris in the last ten years (terror attacks, the fire at Notre Dame and many protests to name a few) the latest episode of violence is deeply frustrating. It has implicated many of the facets of French society – its mayors, police, social structure of its cities, its firefighters (tragically) and others. In particular, my frustration is directed at the extreme left to extreme right in French politics and the foreign press.

It is very tempting to spend time assessing who is at fault for this bout of violence, and to wonder how a socio-economic system that is very redistributive and that registers low levels of income inequality, and a city that is seeing massive investment in its suburbs, could prove so fragile at the edges. Many experts and policy officials are busy on this question, so I would rather pose two different ones – why do the French appear to protest so much (and indeed why do other nations not protest), and what are the longer term implications of the rioting for France and its neighbours.

One clue as to why the French appear to protest so much is that the French state is so overwhelmingly present in their lives – it does nearly everything for them. The state provides education, healthcare and pensions and cheap transport, and in most cases does a good job of. It also regulates the lives of its citizens with a fair bit of ‘fait pas ci, fait pas ça’. This relationship leaves little room for flexibility and in general is not one that is built on trust.  It is a distant but dependent relationship that provokes friction.

In this context, it is worth noting that France is running out of fiscal space. With government debt rising and state spending (%GDP) close to 60% there is little room to quell discontent with spending. France’s fiscal constraints may soon start to tell, and one way out of this might be political innovation, but perhaps not before more riots. Another alternative would be to emphatically embrace a pro-growth, reindustrialisation economic philosophy, but I don’t see this happening given it is alien to the average French policymaker’s mindset.

Changing policy mindsets is difficult in France, and Emmanuel Macron deserves credit for trying. The debate on pension reform was an attempt to ease the burden on the state, and in that sense is an attempt to ‘modernise’ France fiscally. What is distinctive about France from an international point of view is that the French right do not have strong views on the economy (there are few proponents of low taxes for instance), but tend to get excited on questions of liberty and identity.

For that reason, the recent riots play to the politic of the right (Jean-Luc Melanchon’s left-wing NUPES group has generally lost credibility in the past two weeks)

For the right at very least, the 2027 race for the Elysée has been kick-started by the riots and notably the divide between left and right will grow, with the right becoming a more crowded space.  

Having written about the rise of the far-right in last week’s note (Spode), one element I am watching of is the extent to which the main runners on the right (Ciotti, Wauquiez, Philippe) will succumb to the temptation to become more nasty on issues like identity and immigration. Michel Barnier, a normally mild-mannered politician could not resist doing so in 2022, and in the US, Ron DeSanctis has recently recorded a disgraceful anti-gay promotional video.

On the right in France, Edouard Philippe is the front runner, and during his career has shown himself to be dignified, and his patience will be tested by overly simplistic proposals from the far-right. It might be said that the great challenge for politicians for the centre-right is to try to address the multi-faceted aspects of issues like immigration in a thoughtful way, amidst a barrage of bile from the extremes of the political spectrum. 

Internationally, the images of the riots (overegged by the foreign press in my view) are damaging for France, and take the allure off its prestige and foreign policy projection. Emmanuel Macron admitted as much, saying such a spectacle would likely not have taken place in Germany.

Yet, while some countries may enjoy the cooling of France’s panache, they must also recognise that the factors that drive the protests – inflation, immigration and integration to name a few, are bubbling up in many other countries, and this weekend have scuppered the government of Mark Rutte in the Netherlands. These factors pose yet another trial in the great democratic recession.

Have a great week ahead,

Mike 

In 1940 PG Wodehouse was (as he might be) spending the summer in Le Touquet, when he found himself surrounded by German troops and interned. Naively, he agreed to be interviewed by a Nazi propaganda team about his internment, and the subsequent diffusion of this led some in England to denounce Wodehouse as a traitor. He was stoutly backed by the likes of George Orwell (who wrote an essay ‘In defence of PG Wodehouse), but Wodehouse’s denigrators left him disenchanted by England and he spent much of the rest of his life in the US.

There should have been little doubt as to where Wodehouse stood on fascism. His 1938 book ‘The Code of the Woosters’ is famous for his comic undermining of the character Spode, a black shorted fascist, most likely modelled on Oswald Mosley.

There are a few other examples of the deployment of comedy to bring fascists to earth, the best of which is Charlie Chaplin’s ‘Great Dictator’, which I strongly recommend. Then, there is the recent Putin/Lukashenko production of ‘Wagner’, which has (by their own admission) confused the best spies in the West, and drained the credibility of Russia’s dictator.

Unfortunately, that is not the end of fascists, electoral systems around the world are spewing them out. Take a few examples. While the main outcome of last week’s Greek general election in Greece was the majority that New Democracy has garnered, 12% of the seats in parliament are held by far-right parties including the badly disguised neo-nazi Golden Dawn party.

In the forthcoming Spanish election, the far-right Vox party may be crucial to the formation of a government and in German the ugly AfD is on the rise. I distinguish these groups from ‘right wing’ parties by the fact that they shamelessly cultivate links to fascists.

In this context we have to ask what is prompting the significant rise in support for the far-right, how ill it will shape national and international politics, and in the context of Wodehouse, we should not be naïve in the face of this new trend.

In Europe, the first wave of far right political support is generally understood to have come in reaction to the global financial crisis, and a group of German researchers have detailed this. Now it appears to be a reaction to immigration, inflation, identity politics and in some cases a sense of overbearing government. Many of the far right parties in Europe are generally mute on the issue of economic policy and most, while lauding family values, appear to want to make their countries unfriendly to families.

There are few if any far right parties who have entered government and left with their country improved, and in this respect the rise of the right is a concern. In recent years, their track record is Brexit and the ransacking of American democracy.

In the greater scheme of things, the rise of the right is part of the battle against liberal democracy and a marker of this is that in some countries – gay rights and women are coming under attack by the far-right.

In the near term, the political implication of the rise of the far right is that right wing and centrist parties will be tempted to move further towards the right – and this debate is accelerating in France this weekend.

Centre-right parties should however bear in mind that an important lesson from Brexit and indeed the career of Donald Trump is that the rise of the far right is often supported by their co-option by the right (i.e. the Tories enabled Nigel Farage and then became a bastion for the likes of Suella Braverman). In that respect the outcome of the forthcoming Spanish election will be interesting (in so far as the PP are willing to go into power with Vox.

Whilst the far right have typically copied the Spode approach when it comes to political theatre, a new element is that they are increasingly linked across countries. Steve Bannon has worked with Marion Marechal on a ‘school for the far-right’ and Giorgia Meloni and Mike Pompeo are close. Operationally, many far right parties use the same rhetoric, ideas, social media tactics and often have the same backers. At a far murkier level there are ties between the far right in Hungary and Greece and the underworld, and in many countries, these parties have tendrils to Russia. 

In the end, the far-right usually defeats itself, the question is whether the damage they inflict on society and the democratic process is too much, and if so how to curb them. Preventing far right parties entering the democratic process would itself be undemocratic, but they (together with mainstream politicians – I am thinking of Boris) should be subject to stricter campaign finance laws, oversight of their use of social media and full disclosure of their links to foreign states.

In a week where Jair Bolsonaro has been banned from politics for eight years, voters and parties of the centre need to react to the rise of the far right and adapt to it in the knowledge that as a movement it has created rather than solved problems.

Have a great week ahead

Mike