What Will 2026 Bring, Part 2

Last week we released the first five of our themes for the year ahead, where much of the focus was on artificial intelligence –and its potential impact on asset allocation, society, geopolitics and industry.

This week we focus on macro and geopolitical themes, which in the light of the US National Security Strategy document, are becoming vital for Europe.

Have a great week ahead.

#6 Wall Street Retro

One of the curious foibles of Donald Trump is his dislike of economic competitors. If readers care to watch, there are multiple videos of him in the 1980’s and 1990’s castigating the role of Japan as an economic competitor of the US. That period was also marked by the rise of capital markets – as marked by the film ‘Wall Street’ and book ‘Barbarians at the Gate’.

With Trump back in the White House, capital markets activity is building – merger activity is picking up, not just between companies but also business sales by private investment firms to industry. Cross-industry data suggest that takeover activity is picking up significantly, and in private markets, private equity deal making is enjoying a recovery. Other parts of the capital markets chain should also pick up – most notably IPOs and one of the tests for 2026 will be whether a string of large European fintech firms can come to market.

In recent days, the battle between Netflix and Paramount for Warner Brothers is emblematic of some of the major takeover battles of capital markets history, and perhaps a harbinger of future activity.

The Future:

While OpenAI for example is using acquisitions to build out an AI industrial structure, we do not yet have a landmark M&A deal in the fashion of Vodafone-Mannesmann in 2000 or RBS’ acquisition spree in 2007. A sign of things to come are reports in the FT that AI giant Anthropic is preparing an IPO.

An uptick in capital markets activity will be a boon for private markets asset managers, as it helps to free up capital. In equities, it may make value investing easier in the sense that cheaper, struggling firms are acquired, but the net effect may be to push equity valuations even higher.

Reading William Cohen ‘The Last Tycoons’(2007), William Burroughs ‘Barbarians at the Gate’ (1989)

Watch: ‘Wall Street’ (1987)

#7 Age of Debt 

One of the most terrifying economic statistics is that the world has never been as indebted- most of the large economies (Japan, China, USA, UK, France and Italy) or about 60% of world GDP, have debt to GDP ratios over 100%. In previous decades 60% was considered excessive!

The good news is that households and corporates are not carrying excess debt loads, and that world household wealth is close to USD 500 trillion. Also, economists have been warning about the risks of indebtedness for some time, and we have not experienced a crash – and apart from an inflation scare, bond markets have been reasonably well behaved. Indeed, we are guilty of thinking of indebtedness as a risk event, rather than an economic process.

That said, as we head towards 2030, the consequences – economic, financial and political – of fiscal deficits and debt loads become all the clearer. At one level, public indebtedness will lead to shifts in economic power – private investors will take on the strategic investment projects that governments cannot afford to do (Canadian pension funds are doing so in the UK already).  

At the country level low debt countries like Germany, the Netherlands, Ireland and Norway will make up a small group of ‘safe’ countries that will accordingly enjoy greater economic power. At the same time, France, the UK and perhaps the US will spend the next fifteen years in the ‘Debtor’s Prison’ where policy and politics become dominated by debt. The US and China are more interesting. The obvious response of the White House to indebtedness (it spends more on interest payments than defence) is to pursue a set of unorthodox policies that push the fiscal burden to allies (tariffs on Canada and military spending on Germany).

The Future: In markets, investors are already beginning to price some corporate bonds at yields below their sovereigns, and when credit markets do start to price risk large cash rich companies will be in an advantageous position, and in some cases can control more strategic assets, and the wealthy will find that governments need to court them rather than tax them. Instead of wealth taxes, expect governments to issue ‘Patriot’ bonds to wealthy families.

The one country where this may not be the case is China, which is vastly indebted. Having studied the way some European economies become heavily indebted in the aftermath of the euro-zone crisis, the Communist party will throw entrepreneurs, the wealthy and corporates into the Debtors Prison, and let them pay their way out.

High yield spreads in the US, Japanese bond yields and Chinese bank share prices are some of the key variables to watch.

Read: Charles Dickens’ ‘Little Dorrit’ (1857) and Honoré de Balzac’s ‘Lost Illusions’ (1837-1843) and ‘Pére Goriot’(1835)

Watch: A Christmas Carol (1984 version with George C Scott as Ebenezer Scrooge)

#8 From Multipolarity to the Fourth Pole

As the snippet on Sovereign AI suggests, strategic competition between the large economic blocs is the order of the day, and with globalization in the rear-view mirror the world order is evolving towards a multipolar form – one where the large zones do things increasingly differently.

While the notion of multipolarity is framed around the US, China and Europe, there may well be a fourth pole in the making in the shape of India, the Gulf States and other players across the ‘region’ (which we could define as those countries within a five hour flight from the UAE, which includes some 2.4 billion people across Asia, Africa, Southeast Europe and the Eastern Mediterranean).

There are two elements that will determine whether a ‘Fourth Pole’ emerges – that this coherent group of countries has mass or scale, and that it increasingly has a method – or distinctive way of doing things (I recently developed this theme in the UAE’s newspaper The National).

The notion of the ‘Fourth Pole’ is gathering pace around the very close relationship between the UAE and India (the very popular Hindu Temple in Abu Dhabi is just one sign), and the web of trade, finance and infrastructure deals they are engaging in across the region. This relationship may not ultimately become as deep as that of the EU countries, but it is beginning to look like a modern version of the ‘Coal and Steel’ community. The risk however, is that they overbuild capacity in the face of a forthcoming economic shock or recession.

The Future: The best indication that we had that the UAE is feeling both confident and more independent is that some well-connected government advisors have come up with an acronym for the west – W.E.N.A (Western Europe and North America).

Reading: UAE Future Vision , Peter Hopkirk’s ‘The Great Game’ (1990)

#9 Safe strategies in the Interregnum

The process by which globalization unravels and the multipolar world takes shape is going to be a long, noisy and uncertain one, which I term the ‘Interregnum’. It is an in-between phase, like the German idea of the ‘Zeitenwende’,      characterized by noise, uncertainty, and multiple contests between the ‘old’ and the ‘new’ (finance is a good example with the emergence of ‘DeFi’ or decentralized finance).

The Interregnum has at least three phrases. The first centres around the crises of the old, crumbling order notably in debt and democracy, the second phase around social, legal, and economic superstructures built around new technologies (AI, quantum) as well as the evolving contours of the multipolar world order, and then thirdly, the acceptance and coalescence of new world institutions, governments, and companies around this new world order.

The Interregnum will be a period of breaking (down the imbalances that have built up with globalisation such as climate damage and debt) and making (new world institutions and the integration of technology into economies and societies). It will be a noisy, chaotic process and its success is not yet a given.

The Future: From an investment point of view, the shifting geopolitical sands beg the question as to how exposed investors should be to US assets (last week’s theme ‘Expensives to Defensives’) and what safe havens are available (small, advanced economy debt and corporate bonds perhaps, above ‘Age of Debt’). There are other questions percolating up – previously specialized asset classes like agriculture, infrastructure and energy infrastructure will come more into the mainstream and become more ‘strategic’. Un-correlated assets or at least those that have much reduced correlation with equities will also be in demand.

Stablecoins is another area where many scratch their heads – is it a bona fide asset class or an electronic gambling chip? The bigger picture here is the ability of large financial institutions to evolve and adapt quickly to new technologies, whilst maintaining well managed balance sheets. The many ‘buy now pay later’ platforms will likely suffer here.

Read: The Fourth Turning by Neil Howe (1997)

#10 Europe – Right on the Brink

Britain, France and Germany have never been as united, in misery that is. Each country is struggling to get growth going, the UK and France are indebted to the gills, and centrist governments in those countries are highly unpopular. In the political wings, new right-wing parties – the Rassemblement, AfD and Reform. All three lead on the issue of immigration, are less than clear on their economic plans and in their own special way, have close ties to Moscow.

The abiding lesson from Europe’s unpopular centrist governments is that if they do not confront difficult social and political issues, the public will tire of their mildness. In this sense, Europe’s liberals are being mugged by reality, and in the next year (at least in Germany and the UK) we are likely to see more dramatic attempts to combat illegal immigration, and to get economic growth going, with de-regulation emerging as the avenue through which this is achieved.

The Future: The popular narrative is that the US innovates, China copies and Europe regulates. This may no longer be true, especially given the advances China is making in numerous technologies, and Europe may surprise in that a bonfire of regulations may mark 2026. European growth momentum is already better than that of the US, and a positive surprise could be in the offing.

Read: Giuliano da Empoli ‘The Wizard of the Kremlin’(2022), ‘’L’Heure des Prédateurs’(2024).

Watch: The Great Beauty (2013), House of Cards (UK version) (1990), A Very British Coup (1988), and ‘La Conquête’(2011).

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

When George W Bush became president of the United States in 2000, following the relative calm and prosperity of the Clinton years, he was surrounded by a group of advisers called the ‘neo-cons’, who significance grew in the aftermath of the September 11 attack on America.

The term ‘neo-con’ stemmed from Irving Kristol, one of the intellectual forces behind the right in American politics, who famously defined neo-conservatives as ‘liberals mugged by reality’.

In particular, the neo-cons’ policy approach was associated with an aggressively militaristic foreign policy, as exemplified in the invasion of Iraq. Though the neo-cons pre-figured Donald Trump, they now likely feel a diminished ideological attachment to him.

Now, as last week’s EU Summit in Copenhagen heralds the need for shift towards a tougher European policy stance on Russia, the time has come for Europe to have its neo-con moment, as centrist governments wake up to a geopolitical mugging by Russia, China and increasingly, the USA.

The extent of the Chinese pilferage of British state secrets is becoming clearer, the German intelligence services warn of subversion, manipulation and infiltration of German institutions by Russia and the fact that the Dutch intelligence agency has announced that it will curb intelligence sharing with Washington, lest its secrets are passed to the Kremlin, are all alarming. As evidence of these and other incursions grow, multiple European countries – Denmark and Sweden for example – have placed themselves on a war footing.

At one level, the response of European countries (UK included) has been impressive. Germany has swept aside its debt brake and will spend up to Eur 1 trillion on defence in coming years, the UK has been an unwavering backer of Ukraine in its defence against Russian aggression, and there is now a defence start-up mania across Europe.

However, there are plenty of signs to suggest that Europe’s centrists have not come to terms with the vandalization of its democracies and institutions by outside actors. For example, tens of thousands of Chinese students populate UK universities, the south of France, Vienna and parts of Italy are host to wealthy Russians, and the EC is far too forgiving of the obstructionism of Viktor Orban. At the country level, there are notable laggards, Spain and Ireland stand out as nations that are ripe for a ‘mugging’.

Following Captain Bligh’s dictum that ‘the beatings will continue until morale improves’, Europe will have to become more absolutist in its dealings with the world beyond, and in terms of the measures it will need to protect its democracy.

The question then, is whether Europe is on the verge of a neo-con moment and what that might look like.

One response might be to list a series of necessary actions – a mechanism that might allow the EU to exclude recalcitrant members like Hungary, a more unforgiving policy on immigration, or a more full ‘shadow’ war against Russia, or even an aggressive acceleration of the savings and investment union (unlikely I fear).

A better signal would be a change in mentality. The EU and the UK currently march to the beat of every incursion and slight from the likes of Russia, or to the tone of every tweet from the US president. Europe will have to play at its own tempo, and more frequently up the ante in areas where it is capable of doing so. It must also change the international narrative around Europe, where it is cast as an ineffectual geopolitical actor and economic weakling.

The great pity, and a sign of a world that is being degraded, is that after a long period of globalisation when international democracy flourished, Europe could well end up as the last pocket of liberal democracy in the world. Whilst this is viewed as a vulnerability from Beijing and Moscow, and with disdain by others, for the vast majority of people around the world – education, healthcare and civil, open societies, all key characteristics of the European model, are what they crave. In years to come, Europe may be the only large region where the rule of law matters, and where institutions are stable.

A Europe that is ‘mugged by reality’ will in time act in a more ruthless and perhaps riskier way towards non-democracies, while concurrently being more confident in its socio-political model.

This EU Summit – which dodged a number of geopolitical issues (such as the use of Russian capital) – was not yet a ‘neo-con’ moment, the issue is how bad the mugging needs to be in order to change minds.

Have a great week ahead,

Mike

Last week saw the annual meetings of the IMF and World Bank take place in Washington, which typically offer a chance for economists and policy types to debate the state of the world. Several friends who attended reported back that the mood was less nervous than similar sessions earlier this summer, if only because the notion that we are in a normal, ordered world has been shattered.

In general, the IMF view is that in the next twelve months, the world economy will experience a low, positive rate of growth, with momentum in Europe picking up, just, and an otherwise troubled US economy flattered by the powerful effects of AI driven investment spending.

In the early years of globalization, the confabs at the IMF/World Bank meetings produced a narrative that became known as the ‘Washington Consensus’ – effectively an approach to world economic development and globalisation, that was denounced by critics on the left as a neo-liberal policy recipe book.

Professor Joe Stiglitz, formerly the chief economist at the IMF, and thus one of its ‘high priests’, became very critical of the running of the IMF as an institution. In 2002 he wrote a book entitled ‘Globalization and its Discontents’ in which he mentioned globalization only 64 times but the IMF some 340 times. Despite that, and two case studies in errant leadership – at least two recent managing directors, Rodrigo de Rato and Dominique Strauss Kahn, were embroiled in scandals, the IMF maintained its place in the global macro discourse.

With the benefit of hindsight today, the Washington Consensus was valuable in the sense that it was a consensus– though perhaps not agreed – it encapsulated an approach that many countries were content to go along with as part of their first foray into real economic development. That consensus is now disturbed.

I have long suspected that Donald Trump would shut down the IMF, but either he seems not to know it exits, or his treasury Secretary is a such a devotee of the IMF meetings and regards it as a useful forum to criticise China (notably, Bessent’s former chief of staff Dan Katz is now the Deputy Managing Director at the IMF). Now, it is not so much that the IMF will change, but the world around it has.

The ‘Fund’ used to be a financial ambulance (social scientist David Graeber had a harsher view calling it the ‘the high-finance equivalent of the guys who come to break your legs’), and in this sense it has rightly faced criticism in recent years – notably for its dealings with Greece (it was too harsh) and Argentina (it was too soft).

Today, it is a beacon of the orthodox, in an economic world where there seems to be a premium to unorthodox policy making. There are plenty of examples.

The IMF has stated that global public debt will hit 100% by 2029 (the highest since 1948) and singled out the US as a reckless player here. However, standard, or ‘orthodox’ remedies such as raising taxes and cutting spending are spurned by the White House in favour of antique policy choices (tariffs) and investment drive by immoral suasion.

Equally, now that Javier Milei’s chainsaw school of economic policy has run out of steam, the now traditional IMF visit to Buenos Aires might be expected, but it instead enjoys a financial support package from the US that will do little to help the underlying issues facing the Argentine economy.

Policy orthodoxy is being jettisoned in other ways. The Nobel (Riksbank) Prize in Economics went to three economists (Philippe Aghion, Joel Mokyr and Peter Howitt) for their work on how economies grow through innovation, as driven by higher education and research – two facets of the American model that are now being undercut.

If the IMF and its meetings are a beacon of the orthodox, governments like the USA are sailing past, on their way to a fiscal adventure, or simply speeding towards the financial rocks. If they hit those rocks, the warnings of the IMF economists that deficits are too high and debt to heavy will ring true, and there will be no money for a rescue.

There is a crisis viewing in the US banking sector as markets question whether lending standards have been compromised. The index of US regional banks has fallen 10% since the start of October and could skid lower. It might give the IMF something to do.

Have a great week ahead, Mike

The Anglophone press has recently become very excited by the contribution of economist Gabriel Zucman to the debate in France on the dire fiscal outlook, and the notion that a tax on the super-rich might solve France’s intimidatingly high deficit and debt load. The idea is superficially attractive in France, where wealth is a dirty word, though there is lots of it (France has 5% of the world’s millionaires, according to recent UBS/CS Wealth Reports).

For his part, Zucman – a clever economist and winner of the Clark Medal – is guilty only of not having spent enough time with billionaires, and learning how mobile, and unpatriotic capital has become. Notably, fiscally weak states risk capital flight. Zucman may also have missed the signal that a stiff wealth tax (as a fiscal response) sends to the broad investment community. The UK is an example, where the recent policies of the Tories and Labour have allegedly scared all the billionaires off to either Milan or Dubai.

In France specifically, the debate on the Zucman tax obscures the reality that, in the effective-post Macron era, there is no appetite across the political spectrum to tackle the large deficit and debt load. However a new left-leaning government in France will put the notion of a wealth tax even more so in the limelight.

More broadly, the focus on wealth raises two important questions as we move into the ‘Age of Debt’, where the consequences of indebtedness pervade and dominate politics, financial markets, geopolitics and society. They are how will the capital of the wealthy behave in a debt laden world and how will governments marshall the wealthy?

At first sight, in a world where the burden of mostly government debt, is weighing on economies, owners of capital face opportunities and constraints, both of which will increasingly be driven by the notion of patriotism.

High levels of government debt mean that governments cannot be as active in building new infrastructure, be it in AI, energy or in defence. That much is very clear in the UK, and despite the easing of the German debt brake, is also true in Europe. In the US, much of the new AI infrastructure will be funded by the cash rich technology giants and the private credit sector.

To that end private asset investors, and seasoned family businesses in the US as well as Europe, may have a larger strategic imprint, and the upshot of this is that tax focused economists like Gabriel Zucman should spend more time thinking of how to better incentivize private investment in Europe, which is yet missing in large economies like Germany.

The other, newer aspect of ‘patriotic capital’ relates to bond markets. We may not be far away from a point where institutional investors begin to lose faith in the bond markets of the major economies – China, Japan, UK, France, Italy and the US – near 60% of the world’s economy. In many of these countries bond yields may rise to multi-decade highs. The US, where inflation looks ready to push higher again is a particular concern, and this might well betray President Trump’s desire to take control of the Federal Reserve’s balance sheet.

Given that the White House has little appetite for orthodox fiscal policy it may, in the context of very high bond yields target the very wealthy, not so much as sources of tax revenue, but as patriotic buyers of debt. There are close to 130,000 ultra high net worth individuals in the US (wealth over USD 50mn and beyond) and together they represent a pool of capital of tens of trillions.

As is now the case in Indonesia, in the near future it may be that, consistent with the idea of financial repression, the US government issues sources a ‘patriotic’ loan financed by American family offices, with the rider that those that have the correct asset allocation do not get a visit from the IRS. It might even be that more nuanced assets – defence innovation venture funding, is farmed out to wealthy Americans (it is largely the case already).

The reality of the indebtedness of the large economies means, somewhat contrary to the Zucman framework, that the wealthy and their governments become more symbiotic, and that there is a ‘contract’ between the wealthy and government. None of this solves the fact that some very wealthy pay miniscule taxes, nor that in countries like the USA, where wealth inequality is at historic extremes, and in particular that the super wealthy exert an undue influence on public life.

What is ahead, given weak government finances and record private wealth, is an era where patriotic ‘barons’ invest in government debt for the sake of fiscal peace and stability, and where they play an outsized role in the private economy. In time, this may sow the seeds of even greater upheaval.

Have a great week ahead, Mike