Christmas has come early for readers of ‘The Levelling on Sunday’!

I want to give you a heads up that my programme ‘Waking up to World Debt’ will air on the BBC 4 on Monday evening (8pm UK time, and again at 11am on Wednesday – I will also circulate a link). It is my first and hopefully, not last radio project, and I can admit having had great fun making it (with thanks to the production team and my guests Prof Raghuram Rajan, Prof Barry Eichengreen, Ruchir Sharma and Joyce Chang).

The idea for the programme came from The Levelling where I mapped out the contours of the post-globalization age, the logic being that a new world order will be very slow to form until the imbalances created by globalization – such as climate damage, the democratic recession and indebtedness – are repaired.

One of the parallels with history we invoked was the 1924 Dawes conference where amidst a greater discussion on reparations and geopolitics there was a round of debt-forgiveness (to Germany by Britain and France, and in turn to them by the USA). I don’t want to spoil the surprise but ‘Waking up to World Debt’ starts in Horse Guards parade in London, not far from where the Dawes conference was held. The idea is that as the centenary of the Dawes conference approaches in 2024, that we may well need another world debt conference to reduce what are unsustainable levels of indebtedness across the major economies.

Indeed, since I wrote The Levelling, world debt levels have climbed rapidly. In the US and UK, stereotypes of financial strength and rectitude, debt to GDP levels are now above 100%. In the past, the two main Anglo-Saxon economies have only been as indebted in times of war (the Napoleonic Wars and the aftermath of the Second World War), and to an extent we are currently in a ‘war by other means’ in terms of the geopolitical competition between nations.

We are used to the EU being castigated for its high levels of debt and France and Italy remain burdened with debt, though the core countries and Ireland are in much better shape. China today looks like Ireland in 2006, government debt to GDP appears modest, but that could change very quickly if unemployment rises, and the government is forced to intervene in the heavily indebted private sector (wisely China has studied what happened in Ireland).

I am mindful that ‘predicting the next crisis’ is a low quality and very crowded perch and that is not the objective of the programme, but I increasingly worry that high interest rates and sticky inflation could ignite the vast pile of debt across regions. I am also mindful that the economist Rudiger Dornbusch observed that crises happen much more slowly than one might think, and then rapidly.

The fascinating aspect of world indebtedness today is how it has become complicated by geopolitics and national politics.

Over the past fifty years, all financial crises have been brought to a close by a ‘committee to save the world’ led by US policy makers. It was the case in Latin America in the 1980’s, Asia in the 1990’s and the US itself in the 2000’s (with help from Gordon Brown). This time is different, as they say. COVID showed that collaboration between the large regions is de minimis, with relations between the two largest economies especially frosty. Indeed, with all three of the regions that make up the multi-polar world (EU, China and the US) facing a substantial debt load, the competitive logic is that the one that unburdens itself first will have an advantage in the race to dominate the 21^st century. Hence the incentive to collaborate through a debt crisis is very limited.

The situation is ever more complicated when national politics are considered. Even when it is the author of a financial crisis, US assets (Treasuries and the dollar) play the role of safe havens. This time, as they, might be different, again. I

In the same way that a large section of the Americans is apparently ready to discard the strictures of the constitution, the guidance of the Federalist Papers and the norms of American politics, and vote for Donald Trump, it is possible that this sentiment is contagious to the bond market. If investors begin to fear deeper chaos in the US economy and an end to the rule of law (this is what Trump prescribes) the Treasury market and the dollar may no longer serve the role of safe havens. We may get an inkling of this in early March when Trump’s arraignment in Georgia coincides with the republican primary.

This is just one potential scare story. With credit markets pricing little risk of a debt event, and debt levels at multi-decade highs, the risk of an accident is high. You’ll have heard it first on BBC 4.

Enjoy the show,

Mike

An important contribution to the future of space engineering came on Wednesday when the US Fish and Wildlife Service gave their thumbs-up to the launch of SpaceX Starship IFT-2, which blasted off from Texas on Saturday. The IFT-2 is one of the largest, most powerful spaceships ever made, and completed its launch following a failed run this April (this time the ‘ship’ completed its initial launch phase though the booster rocket exploded and the ship was destroyed). Many readers will know that the Starship is ‘re-useable’ in that the ‘ship’ element can slow horizontally and then flip to perform a vertical landing.

Starship has all of the elements we now readily associate with Elon Musk – disruptive genius, oodles of capital and a tense relationship with government – Starship will ferry satellites to space (Starlink satellites will account for about 40% of Space X revenues) and is also intended to taxi astronauts to the moon, and eventually Mars, and in so doing it creates a dependency of NASA and to an extent, the US military on it.

The test flight is a reminder of the competitive interest that privateers and states are showing in the scramble for rare places, that is, the desire to unearth, control and harvest (pillage might be a better word) the deep seas, outer space and the Arctic, for example. Each of these rare places is a source of bounty, but also a potential theatre for warfare, and space is no exception.

Satellite warfare – whether satellites are either bumped out of place, smashed to smithereens in kinetic attacks or lasered – is something that militaries and their space wings (e.g. SpaceForce) prepare for. For instance, French has developed bodyguard satellites that can protect its own military and commercial satellites from attack.  Indeed, satellites are massively underestimated in terms of the reliance we place on them – to guide supply chains, telecommunications, military targeting and weather mapping to name a few uses, and any future conflict between large regions would very likely involve a ‘war on satellites’.

Each contested ‘rare place’ will soon be granted its own specific vocabulary, to the extent that we now speak of astropolitics and of the evolution of the rule of law of sorts of space (i.e. the Outer Space Treaty), a polity for space, I am waiting for someone to coin the term ‘the spolity’.

One aspect, where I am on more solid ground in terms of my grasp of the laws of gravity of markets and economies, as opposed to space technology, is the space economy, which covers many aspects – from space tourism, to mining and resource harvesting to the very promising rents to be garnered from satellites.

For the US the space economy is already rooted in the military, aerospace and telecoms industries and has a ‘blue sky’ element in the sense that Washington has bought into the strategic value of the space and this view is shared by entrepreneurs and enough investors to make a difference.

If we had to map the share of the space economy on to share of gdp back on Earth, the US, China and Japan would, have chunks of the space economy that might be commensurate with their ‘Earth’ gdps, and Russia would have a chunk of the space economy that is well above the role its flailing economy plays, while India might play an important role. The EU, which accounts for over a quarter of world GDP, likely has a smaller share of space GDP (the Space Foundation puts the size of the space economy at close to Eur 500 bn). Europe’s space industry has a smaller footprint than Fiat (roughly 200,000 people are employed in the space industry according to the European Space Agency, with roughly Eur 60bn in direct and indirect revenues).

It is not without key assets though – the Ariane and Vega rocket ships, Galileo navigation system and the Govsatcom secure communication system. Across Europe there is a rising number of growth companies forming a commercial eco-system, in the production of food and water in space like environments, in mineral mining and notably in satellites, which is where the money is in space commerce.

Europe’s problem in space commerce is not unlike its banking industry, still nation centric and the common capital market is not deep enough. To make things more complex, the speculative nature of many space-oriented projects makes them difficult to finance, even for risk taking venture capitalists (space tech venture activity is back down to 2018 levels). In time I suspect that Europe may need to adopt new forms of financing for select space tech projects, that bring entrepreneurs together in pan-national projects and that combine public and private money. It might be too early for a Bank for Space, but the EU needs to realise that succeeding in space is as much about the right kind of capital, as it is about technology.

For their part, Europeans may just prefer to sit and wait it out, glad not to have funded Space X.

In his book, the Origins of Political Order, the political scientist Francis Fukuyama grapples with the issue of building quality institutions, which he coins as ‘getting to Denmark’ in the sense that ‘For people in developing countries, ’Denmark’ is a mythical place that is known to have good political and economic institutions: it is stable, democratic, peaceful, prosperous, inclusive, and has extremely low levels of political corruption’.

Fukuyama traces the quality of Denmark’s socio-economic pillars to the Protestant Reformation. I am not sure he is right here, but that is a debate for another day. In general though, the model of the small, advanced economies (not just Denmark but also the other Nordics and smaller leading nations from Singapore to Ireland to the Netherlands) is the exemplar for policy making internationally, as David Skilling and I continue to stress.

Now however, there is trouble in the ‘Denmarks’.

Whilst the Nordic economies are famous for their socio-economic balance they are increasingly known for their struggles in integrating immigrants. Against a background of violence and gang led crime, Sweden’s prime minister has referred to a period of ‘political naivety and cluelessness’ and has even sought to involve the military in curbing violent crime.

In this context the five Nordic countries (Finland, Denmark, Norway, Iceland and Sweden) have signed an agreement to collaborate more closely in deporting illegal immigrants (for example in pooling deportation flights). In the background, individual Nordic countries have been tightening their policies on immigration – towards the relatively tougher Danish approach.

Though this is a specific measure, it highlights a turning point in the Nordic countries’ tolerance and approach to illegal immigration, and potentially migration on a larger scale. As harbingers of socio-political change, this is potentially an important development on the European stage in that it signals progressive European countries have reached a limit in terms of the scale and nature of migration they are willing to permit.

If this is the case it may have several implications.

One is that in the context of very tight labour markets, European countries will try to be more selective in the immigrants they welcome. In Ireland for example, central bank data shows that Indian women are one of the best paid migrant cohorts in the labour market (they work in the IT sector), while even Hungary whose illiberal government rails against immigrants, needs to take in half a million migrants over the next two years. Broadly, it is worth emphasising the point that employment is considered the best means to integrate new arrivals in societies.

We may also see some European countries make labour markets more flexible, notably finding ways to involve older people in labour markets (in Denmark the retirement age is 67 and from 2030 will increase by one year every five years, depending on life expectancy), and it is also possible we see the EC study how Japan manages its economy with few immigrants.

Politically, the notion that we are at ‘peak Denmark’ may have at least three interesting effects.

In many European countries, immigration is the leading, and most contested political issue, with the tone set by ugly rhetoric from the far-right. Suella Bravermann’s offensive courting of controversy – from promising to send illegal immigrants to Rwanda to describing homelessness as a life-style choice – is an example. The fact that governments are reacting more forcibly to illegal immigration may well move the debate back towards the political centre and arguably, make it more policy focused.

At the same time, I expect that we will see many European politicians focus on the notion of European values, and what this means in terms of the responsibilities they place on both Europeans and immigrants. Robert Habeck’s impressive speech on this theme is such an example, and I believe that we will hear more voices from the political centre echo his words.

 The other interesting trend, that is consistent with progressives reaching the limit of their patience with immigration is the rise of new ‘mongrel’ political parties. I say mongrel in the sense that they (Sahra Wagenknecht’s Alliance for Justice and Reason in Germany and Pieter Omtzigt’s New Social Contract party in the Netherlands) mix left wing economic policies with tough stances on migration and ‘values’.

It points to a major turning point in policy and politics in Europe, with serious implications for the developing world.

Have a great week ahead,

Mike