Readers of the ‘Levelling’ might be looking for a destination to visit during the Christmas holidays, and if so, I want to recommend Caherdaniel in Co. Kerry (southwestern Ireland for those of you reading far away), with its gorgeous, long beach, woodlands and often – blue skies. It is also the home of one of Ireland’s best pubs – the Blind Piper.

Caherdaniel is most famous for Derrynane House, the home of Daniel O’Connell (born not too far away in Cahersiveen)– one of the grand figures of Irish history – a man that King George IV called the ‘uncrowned king of Ireland’ – also known as the Liberator or Emancipator (his main accomplishment was the emancipation of the Catholics in Ireland in the 19^th century). Derrynane is also famous as the place where President De Gaulle spent six weeks after his resignation in 1969 – and he may well have been inspired by a biography of O’Connell, written by his maternal grandmother Josephine, which he read as a child.

My linking of De Gaulle and O’Connell is motivated by the fact that this year is the 250^th anniversary of O’Connell’s birth, and last week I moderated a debate on democracy and European politics between a group of Irish and French experts in Paris as part of an ‘O’Connell’ conference.

In trying to explain O’Connell to a French audience today (not to mention the Irish audience – where he is somewhat forgotten), three defining traits stand out.

The first one I would highlight is that he was European in his outlook. I frequently visit Caherdaniel, and the recurring thought is of O’Connell setting off in his carriage to travel Ireland or to go to Westminster  or further to Rome – or back to France, where he was educated.

The second element that is interesting – was his internationalism – Marx, Dickens, Balzac, Bismarck, and John Quincy Adams in the US, all had something to say about O’Connell – and he was ardent in his support for other causes – against slavery in the US and, when he first took his seat in Westminster – he campaigned for the emancipation of the British Jews.

The third element we note about him is his political method – he spoke at enormous mass rallies – one at the Hill of Tara is said to have attracted 1 million people, he was an orator and a skilled political organiser, but also someone who believed in peaceful protest – perhaps because of what he witnessed in France during the Revolution.  In today’s terms, O’Connell was one of the first democrats, a defender of civil rights, and in some respects a beacon for liberal democracy in Europe and England – he was a founder of the Reform Club in London.

The point of raising his example today, beyond the simple fact of his anniversary, is to make the link with last week’s note on the changing of the political guard in the US (Change of Guard) and the grim backdrop that Western democracies face in terms of the rise of populism, vexatious impact of social media on public life and the vandalisation of Europe by countries like Russia. For example, in the past week a train line in Poland was sabotaged, and controversially the head of the French army warned people to be ‘ready to lose their children’ in a war.

Three strands came out of the debate on modern democracies, under the shadow of O’Connell, that are worthwhile flagging.

The first, is to find ways of breaking the polarization of political arguments, or the phenomenon where political debates quickly become corralled into opposing camps, leaving little room for considered debate. Arguably, politicians are part of this problem given the tendency of governments to constantly spin news developments.

Ironically, the second strand is a demand from politicians (in this case both French and Irish deputies) to curb abuse on social media, in particular its use as a channel to threaten public representatives. Every political figure I know has suffered abuse on social media, of a kind that if it were repeated in person, would most certainly result in a criminal conviction. The question then is whether and when politicians are ready to take a tougher stance with online abuse.

A final thought that relates directly to O’Connell is whether today’s mild-mannered political leaders – I am thinking of the likes of Friedrich Merz and Sir Keir Starmer – should be more enthusiastically populist in pushing their centrist causes. O’Connell was a complicated character and as stated a clever speaker and was a master in getting the ‘crowd’ on his side. The thought experiment is that democratic leaders ditch their anodyne, carefully crafted communications and let their oratorical skills off the leash. It would make a nice change and might well make the role of politician less frustrating. 

In the context of a political-economic climate in the US where good, regular economic data is hard to come by, commentary from industry leaders as they report earnings is providing some fascinating insights. Chipotle, the burrito chain, reported a surprise drop in revenues because two key consumer groups, households earning USD 100k or less, and younger customers (24-35 years old) are cutting back discretionary spending, even on fast food.

A range of firms with similar client bases underline this trend – car manufacturers report that sales of expensive, large vehicles are strong, but that lower income customers are preferring smaller, fuel-efficient models. McDonalds is revising its ‘extra value meal’ option, and credit card providers like Amex report very different types of activity from rising card balances and distress in the lower segments, to robust spending in its ‘Platinum’ category. In keeping with this last observation a headline in Thursday’s Wall Street Journal ran ‘big spenders keeping the party going’, while commentary from Federal Reserve board member Michael Barr referred to a two tier economy, where the wealthy are thriving.

Economists are blithely referring to this phenomenon as the ‘K-shaped’ economy, whistling past the graveyard of economic history that portends that revolutions are made of such obvious divergences in fortune. Indeed, it is a habit of economists that when they are unsure of the path of the business cycle, they reach for the alphabet. For example, in the aftermath of the global financial crisis, analysts pondered whether we might see a V, W or U-shaped recovery.

Now all of the talk is of a K shaped economy – which refers to multiple divergences between the price insensitive wealthy and those in economic precarity who are sensitive to inflation (this may help explain the election of Zohran Mamdani, but more on that next week), a services sector that is either shedding jobs and holding back from hiring compared to the upper echelons of the technology and finance industries where unprecedented levels of wealth are being created.

There are two other effects ongoing. The first is the economic effect of AI focused capital expenditure (across the energy, logistics and technology sectors). The second, more important trend is a mangling of business cycles, such that few of them are synchronized across geographies, or between the real and financial economies (German chemicals is in the doldrums but German finance is on an upswing).

Yet, granted that we have just witnessed the highest number of job cuts in an October since 2003 in the US, set against the fact that the stock market hit all-time highs (and valuation highs) in October, a better diagnosis might be the ‘Marxist’ economy – one where the owners of capital and the source of labour are at odds.

In the US, the top 10% of the population own 87% of stocks and 84% of private businesses, according to data from the Federal Reserve. On the other hand, we have previously written about the rise of economic precarity in The Road to Serfdom. So, whilst it is a new observation amongst the commentariat, the diverging fortunes of capital and labour should start to trouble policymakers.

To start with, central bankers are in a difficult position as cutting rates will ultimately make wealth inequality greater, and many monetary economists would argue that inequality is not an objective in the Fed’s mandate. This is a fiscal/political problem, and one that Donald Trump had vowed to fix. However, the kinds of necessary fiscal remedies would have a strong ‘Robinhood’ flavour to them (fewer asset or capital exemptions, higher capital gains tax, and potentially higher corporate taxes) in truth are unlikely to be implemented.

The White House might argue that at least the US isn’t Europe – where everyone is poor, as all the wealthy have fled. Listening to debates in the UK House of Commons or France’s parliamentary fiscal committees last week, I have some sympathy for this view. Europe’s economies look ‘pear-shaped’ as the English might say.

Still, the idea of the K-shaped, or Marxist economy is worth studying, not so much for its economic consequences, but for the political, and ultimately financial, change it may bring.

Have a great week ahead,

Mike 

France, Germany and the UK, the industrial and intellectual powers of the early 20^th century, are struggling to achieve economic momentum, against a threatening political backdrop where largely new parties from the right (Reform, AfD and Rassemblement) are hovering over these democracies. A common thread between the three countries is a lack of political and policy coherence.

This is not a problem for China, which whilst becoming even more autocratic, and has a policy mechanism that has served it well called the Plenum, which is held seven times during the five yearly policy making cycle that aims to set the long-term direction of the development of China by the Communist Party. Unlike the theatrical Labour and Tory party conferences in the UK, the Plenum is a sober affair.

Amidst the generalised chaos of Western politics in recent weeks, China held its most recent Plenum a week ago, of which there has been relatively little Western coverage. The object of the Plenum, a closed-door meeting between 370 Communist Party Central Committee members, is to agree and set out the broad (economic) policy objective for the next five years, to which further detail will be added in the new year.

The backdrop to the Plenum is a more sluggish economy than the Chinese leadership would wish for. In particular, the Q3 GDP print was 4.8% Y-o-Y, which comes in just below the government’s 5% target. House prices fell again in September, this time at their fastest pace in 12 months. In addition, retail sales growth slowed and the contraction in property investment was disappointing. The need to boost demand is also an objective that has emerged from the Plenum.

The headline takeaway from the Plenum is that China ‘should achieve greater self-reliance and strength in science and technology’, which in many respects mirrors the path that the US and Europe are taking in developing their technology ecosystems in a strategic, autonomous way.

In more detail, the main thread from the Plenum is the stated objective to build a modern industrial system, which is now given top priority by the Party. This comes against the backdrop of the ‘involution’ policy of paring back excess capacity in existing industrial sectors, such as chemicals.

The new policy will focus on building industries in leading technological segments – from clean energy to AI to semiconductors. Watchwords like intelligence, digitalization, and green transformation—will take policy priority over services (which was a priority in the previous Plenum gathering).

What is interesting is that the strategic competitive nature of the new policy is very much clear, as is the role of the US as the primary competitor. In this respect the Plenum outcome is a clear signal to the US regarding the trade war and restrictions on technology exports to China, and it puts last week’s trade ‘truce’ between the American and Chinese leaders in perspective, suggesting that China is simply buying time until it achieves technological independence from the US and Europe.

The aim then (extending from the previous Plenum) is to make China more like Silicon Valley. My interpretation of all of this is that Xi is shaping China in the form of a more closed state (which makes for a less open world), that curbs the will of those inside, adopts a singularly selfish approach to those outside, and relies on several great strides in technological industrialisation for the prolongation of the ‘China Dream’.

The contradiction here, and specifically between the strands to emerge from the Plenum, lies in an increasingly restrictive social infrastructure on one side and the ambition of a high quality economy. China needs innovation but is creating a socio-political system that smothers it (a number of people have mentioned to me how some of China’s most creative people now live in Japan). This is the fallacy of authoritarian systems. Indeed, one of the facets of the Plenum was the replacement of 11 officials in the Central Committee – the highest number since 2017, most of whom held military roles.

In this respect, Dan Wang’s recent book ‘Breakneck’ is interesting, rather it is much better in its commentary on China than other parts of the world and doesn’t fully do justice to the theory that an engineering led leadership is one of the key sources of China’s economic success. In the book Wang flags the focus on the high-tech sectors of the economy that has surfaced at the Plenum, but also notes China’s appalling failures in social areas – its handling of COVID and of the one-baby policy.

Wang’s view is that China will have little difficulty in finding scientists and researchers to pioneer discovery in fields like quantum computing, and here is the correct. The emerging issue may be finding the entrepreneurs to take and commercialise these technologies, and even more so, to do so on an international scale.

That might be a problem for the next Plenum. For the moment China is focusing on frontier technologies, so much so that the foreign minister of Germany, Johann Wadephul, had to cancel a trip to Beijing, because no-one would meet him.

Have a great week ahead,

Mike