If you are still on holidays or about to pop off for a few days before the ‘back to school’ period, and are looking for a good book to read – perhaps one that titillates with stories of abbots cavorting with young ladies- then I can heartily recommend The Decameron, which does all that, and more.

Giovanni Boccaccio’s Decameron was one of the first literary masterpieces of the Renaissance. It is set in a villa outside Florence, at the height of the Bubonic Plague. Seven women and three men flee the Plague, ensconce themselves in a villa and spend ten days flirting, philosophising and debating. It originally came to my mind in May 2020, the third month of the COVID lockdown as I searched for templates for what the post-COVID world might look like.

The Black Death radically changed Europe, largely through the demographic effect that a 30% reduction in population had – in England nearly 40% of land changed hands, a shortage of labourers meant a rise in wages and innovation in farming methods and produce.

Rising wages for those who survived the Black Death altered the social mix (Walter Scheidel’s The Great Leveler is very good here) to the extent that the wealthy begun to dress more extravagantly in order to distinguish their social standing and in this were helped by regulation (i.e. England’s Sumptuory Laws 1363).

The Black Death also upset the geopolitical map of Europe (similar, much earlier plagues like the Athens Plague and Antonine Plague had profound geopolitical effects), led to trade and banking revolutions and spurred the rise of cities like Madrid and Genoa, and the demise of others like Winchester.

COVID has also changed many things. In May 2020 I thought that if there was to be a post COVID ‘Decameron’ thesis it might revolve around at least three elements – a return of pricing power to workers and corresponding uptick in consumer spending, a broad based improvement in human development and a renaissance in culture and technology.

To tackle the first one, COVID has most certainly disturbed developed world labour markets – where initially retention payments have distorted markets giving way to a very strong labour market, such that it is untypical for unemployment to be as low in face of aggressive interest rates hikes. One sign of this is the welcome reversal of the ‘she-cession’ where proportionately more women than men lost jobs during the COVID period, but female workforce participation in the US is now at a record high.

The overall impression is that workers, especially skilled workers, have more pricing power. The notion of working from home has certainly granted many more ‘liberty’ in how they work and has led to transformations in real estate markets, work practices and eventually I hope, better infrastructure for rural areas. In terms of wages, over the past three years nominal wages have risen handsomely, but parsing recent work by both the ECB and IMF, real wages have not risen much across the developed world. At this point however with inflation ebbing (but expectations of inflation remaining high) we may well be on the cusp of an upward wage spiral.

The second element of the Decameron thesis is the extent to which the COVID crisis will usher in a trend towards improving human development – in developed and developing countries. The components of human development – from life expectancy, to education and healthcare, to economic development – came to the fore during the coronavirus crisis and the value of good, accessible healthcare systems has become abundantly clear. I might even stretch the point to say that well educated leaders, who take science seriously, were better performers than those who did not (Bolsonaro, Trump, Boris).

Having attended a lecture at Trinity College on Monday by Angus Deaton and Anne Case, whose focus is (famously) on morbidity and mortality, it is hard to be convinced that human development is advancing in the US (for instance there is a stark difference in death rates and quality of life between well-educated and less well educated Americans). Life expectancy in the US has dropped precipitously, a development that I think is only matched by the fall in Russian life expectancy in ‘fall of communism’ aftermath.

What is concerning is that there is a broad picture of falling human development. In the two years after the COVID pandemic for which there is data, the UN’s HDI indicator fell for the first time in its history (since 1990), with 90% of countries recording a drop in their HDI score. This reverses the overall rise in human development over the past five years. What is also a concern, is that to my reading, the idea of human development as a policy pillar seems to be absent from political debates in the major economies.

The final aspect of the Decameron thesis I want to touch on is the extent to which there is a renaissance in ‘the way we live now’.

AI, quantum computing, the space economy and bio-engineering are now coming into the public domain, and the strategic competition between the US, China and Europe means that these and other sectors like green energy will receive a huge funding boost, though strategic competition between the regions means that these innovations will develop in a fractioned way.

What is also striking is the frivolity with which some actors invest capital. Last week India managed to land an unmanned spacecraft on the south pole of the moon, for a project cost of USD 75mn, USD 15 mn less than the price Saudi football club Al-Hillal spent on Neymar.

The wealthy should be careful how they spend their money. The idea of wealthy people secluding themselves in a villa to avoid a highly contagious disease is as unpopular today as it was in the 14^th century. Again, as Walter Scheidel has pointed out, the Bubonic Plague was eventually a leveller of inequality in the 14^th century though plenty of periods of unrest (La Jacquerie in France in 1358 and the Peasants Revolt in 1381 in England).Social and political volatility may well be a feature of our future.

 Have a great week ahead,

Mike

Forecasting, as they say, is difficult, especially about the future. Two recent examples spring to mind. First, the DGSE (Direction Générale de la Sécurité Extérieure) or the French secret service was lauding itself that it had spotted and followed the Wagner rebellion in Russia, but it seems it badly missed the other Wagner rebellion (against French interests) in Niger.

Second, tacking away from the DGSE to DSGE (Dynamic Stochastic General Equilibrium) models, which are the basis of how policy makers try to frame and forecast economic progression, the Bank of England has slapped itself on the wrist and called upon Ben Bernanke to lead a study into the poor forecasting ability of the Bank, which missed the 11% rise in inflation over the course of the past eighteen months (19% rise in food prices) and has scrambled to raise interest rates in order to compensate.

There is an element of irony here as some ten years ago Mervyn King the former governor led a similar inquiry into the monetary policy framework of Sweden’s Riksbank. To be quite fair to the Bank, which has long been regarded as a standard bearer in the monetary policy community, its governance framework encourages such a review and it would be a very good idea if the European Central Bank would carry out a similar, necessary post-mortem. Instead, I suspect it will carry on, in the hope that the European public have not noticed its blundering.

With those brave words, I acknowledge that I also get things wrong, from time to time. For the moment, I am happy to stand by the prognostics in the year ahead outlook ‘War by Other Means’ I penned with David Skilling last December. The central tenet of the note is the way in which the strategic rivalry between the US and China will shape military, industrial and commercial interests.

Surprisingly, the big moves in this domain have come from the EU, with its AI Act and EU Economic Security Policy. The other theme is inflation and the way in which governments are dealing with it. Bond markets are decidedly unimpressed with the view that inflation is dead and yields (US ten year) are rising to levels where they have previously provoked stress in the economy.

In this respect, one prediction for the second half of this year is that we will hear more about debt sustainability – which I define as the ability of companies, households or governments to meet their debt payment obligations without help (through assistance, default or forbearance).

That the US government now spends more on debt repayments than defence, shows the toll of indebtedness, and its geopolitical implications. I have written about the rise in indebtedness for some time and have a theory that upon the centenary of the word debt conference of 1924, we may need another ‘conference’ in 2024 (my forecasting might be a little off). I am going to spend a good deal more time talking about debt in the coming months.

Another deepening of an existing theme to watch for the remainder of 2023 is the tension between democracy and populism, which in many countries is a close-run thing. As a general trend Europe (except the UK which looks ready to move centre-left) is moving to the right, and in those countries where this move is sticking, politicians are carefully navigating the issues upon which to sound ‘populist’ (identity) and those where it is less advisable (economy). The risk is that their guile induces the public to sleepwalk into a state of mind that permits the enfeebling of laws and institutions.

In the US, the alarming element is that, according to opinion polls, a large group of people are prepared to support Donald Trump (who willingly denigrates democracy) and Ron DeSanctis (who witlessly does so), in apparent disregard for the withering consequences for America’s institutions and reputation (this may have been one factor that prompted the Fitch downgrade of US debt). By the end of the year the 2024 presidential campaign will be in full swing, and the commentariat will devote endless pages to the prospect of Trump II.

As a final word, a recurring theme this year has been the ways in which artificial intelligence will disrupt our economies and lives (i.e. One Man and His Dog). As the year develops, I expect to see at least two sub-trends materialize. The first will be the race to set the rules, regulations. and possibly the institutional architecture around how AI is used, and here I think the UK is in an interesting position, if only its government knew how to ‘play’ this.

The other is that as the weight of high interest rates on economies builds, and activity levels falters, there will likely be more chatter as to how AI can replace humans and make companies more efficient. My One Man and His Dog theory is that AI can help rather than replace skilled humans, and that there is plenty of room for humans to work with skilled, intelligent non-humans (dogs or robots). The fear that AI could displace workers may actually be a positive force in pushing a debate on how to frame its use, notably in China where unemployment and diminishing productivity are another issue to watch.

For the time being, granted the holiday period, the ‘Levelling on Sunday’ will pause for two weeks, returning on Sunday the 27^th August.

Have a great week ahead,

Mike