I am always keen to shamelessly remind readers that I am a man who can ‘see around corners’, as they say. In 2018, as I handed in the last draft of ‘The Levelling’ I wrote the following regarding Russia, its broad strategy of ‘total war’ and more specifically its tactic of ‘maskirovka’…

‘Some countries, such as Russia, are already practicing war by “many means”—that is, where traditional military force is mixed with covert action, propaganda, and disinformation. The Russian doctrine of maskirovka, has roots that go back to the fourteenth-century Battle of Kulikovo and was further developed more recently, beginning with its use in the Second World War.

In a very basic sense, it involves the use of decoys and deception to distract and destabilize an enemy, though the doctrine of maskirovka has broad applications, stretching to disinformation, propaganda, and politically related tactics. A significant element of the thinking that reflects the new doctrine of warfare in Russia is that wars do not follow the same boundaries and time lines as they did historically.

This means that they are not officially declared—in the way cyberattacks happen—and that they can rely on many different types of force (e.g., information, humanitarian, and media) and can rely on the  subversion of states on a continual basis using mercenaries and special  operatives’.

At the time (2018) Russia had aggressively interfered with elections in the Netherlands, Germany, France and the UK, to name a few episodes. This was a mere sharpening of tools for what was to come, and while Russia has isolated and weakened itself by invading Ukraine, it has not given up the tricks that have been honed since 1380.

This much was on display in Tucker Carlson’s interview of Vladimir Putin, which took advantage of Carlson’s craven character, the prevalence of social media noise, the gullibility of many in the West and of course the rottenness of Donald Trump. In the minds of many, Putin has thrown sand in the face of those in Congress who support Ukraine, suggested that a ‘win-win’ deal is soon available, and that Donald Trump is a reasonable man worthy of Putin’s respect. In each case, the opposite is true.

Worryingly, this particular episode of ‘maskirovka’ has damaged the outlook for Ukraine, the security of NATO countries (and vulnerable ones on the flanks of NATO like Ireland). Arguably it ups the ante in the US presidential election and suggests that Russia (with the tacit support of China) is bent on further vandalising western democracies in this critical year for elections.

It should be said that Russian is aided and abetted by many politicians in those same western democracies. There are a few that grasp the magnitude of the challenge, and they are mostly in countries close to Russia, and that have battled to revive democracy and the rule of law in their countries, notably Poland’s Donald Tusk who this week castigated the Senate in Washington for its failure to support Ukraine.

I have not found much literature by way of how to do ‘counter-maskirovka’ operations, and I am likely not looking in the right places. We may need a ‘playbook’ soon as elections approach around the world.

What is happening in Poland is instructive in terms of the repair work being done on institutions – the media, courts, civil service and central bank to name a few have become degraded and politicised, and while some argue that they are now being politicised in a different way, the program of work that Tusk is pursuing highlights the importance of independent institutions as a buttress to outside interference.

The politicisation of the Supreme Court in the US, and the failure of social media giants to counter manipulation emanating directly from Moscow suggest that America is opening itself up to ‘maskirovka’.

Speaking of which, the other, better-known facet of Russian manipulation is kompromat – the use of economic, political and personal secrets to rein in enemies (though a Russian journalist Julia Latynina is quoted as saying to keep kompromat on enemies is a pleasure. To keep kompromat on friends is a must’).

I suspect that one of the candidates for (US) president has quite a bit to worry about in this regard (its not Biden), the question is, will we ever get to see the evidence?

Have a great week ahead

Mike 

I have seen and heard many things that have made me cynical about the investment industry, but nothing pricks my ears when I hear ‘valuation’ deployed as an entreaty for retail investors to buy  expensive assets (one of the best I heard is a former colleague who declared that a company was expensive on the basis of a price to earnings ratio (P/E) but cheap on the basis of the earnings yield (E/P)…they are the same thing!).

On that basis my credulity was recently stretched when I heard an analyst at Morgan Stanley, the large investment bank, declare that technology stocks are ‘attractively valued’ based on the ‘price to innovation’ ratio. Price to innovation is the ratio of the price of a company to its earnings plus what it spends on research and development – as such it is designed to make companies with scant earnings and large, risky investment budgets, look attractive.

As a rule of thumb, when the financial community start to invent new valuation measures, it is time to worry. In the early 2000’s analysts introduced valuation ratios such as ‘price to clicks’ for internet stocks, so as to try to give a veneer of respectability to bubble level valuations. Of course, it all ended badly.

The introduction of the idea of a ‘price to innovation’ ratio to the market narrative should spark fears of a stock market bubble, notably in artificial intelligence (AI) driven stocks. Bubbles are hard to define, but to follow a famous legal opinion on pornography, ‘you know it when you see it’.

The ingredients of a bubble are usually based on an innovation (railways, the internet) doused with cheap money, and together they produce significant outperformance of a select group of assets that results in historically extreme valuation levels.

There is most likely the nucleus of a bubble in a group of mega-sized technology stocks, known increasingly as the Magnificent Seven, chief of which is the chip design firm Nvidia. To use a very simple valuation metric – the ratio of price to revenue, the European equity market trades on a price to revenue multiple of 1.3 times, the American market is 2.5 times (the large tech stocks drive this higher), Microsoft trades at a ratio of 13 times revenue and Nvidia at 33 times (for comparison UBS is on a ratio of 1.7 times and Siemens 1.3).

There is a similar valuation bubble in private markets where venture investors pay very high multiples for AI focused start-ups. The underlying rationale is that the potential sales growth of these large tech firms is so promising, that they desire a higher valuation multiple.

The past week has seen many of them report earnings, and whilst most of these tech firms have delivered healthy earnings, revenue growth is not impressive, suggesting an abundance of optimism regarding the future impact of AI.

In that context, if AI is going to be the organizing logic of the next bubble (in the past fifty years we have seen asset bubbles in gold, Japan, Asia, the internet, housing, China…to name the main ones) it will need the boost, or the ‘petit coup de whiskey’ (as New York Fed chair Benjamin Strong put it in 1927…guess what happened next).

In general, since the global financial crisis monetary conditions have been very easy, provoking inflation in assets as opposed to consumer inflation. That trend has changed recently as a burst of inflation begot a sharp rise in rates. Despite this, credit markets have been very well behaved (another bubble?). With inflation falling, expectations are growing that central banks might prune interest rates back, which might add further fuel to the AI bubble hypothesis.

In the days before quantitative easing there was a decent debate as to whether central banks aided and abetted the creation of asset bubbles. At the time, the orthodoxy was that bubbles were hard to identify and even if they could be identified, it was difficult for central banks to deflate them. The difference today is that few if any central bankers worry about this risk, and instead speak of the ‘wealth effect’ from asset prices.

The reasons for them to be more vigilant here are that asset bubbles usually destroy wealth, invariably transfer it from poorer to richer investors (the rich buy early and the poorer investors buy late it goes), they distort investment across economies and when they collapse, their aftermath can be costly (witness Japan’s lost decade(s)). Bubbles do often leave behind useful infrastructure – railways in the late 19^th century, and the internet/telecoms infrastructure of the 2000’s, but at a high price.

In my view we are not yet in an AI bubble proper. So far, it is located in a small number of companies, who very unusually make up a huge proportion of the stock market. Calculations by BCA Research show that the top ten largest companies in the USA make up 75% of the stock market, something that has occurred only in 2000 and 1929.

For the AI bubble to grow and become a mania (Charles Kindleberger’s Manias, Panics and Crashes is still the best analysis of bubbles) companies in sectors that will be impacted positively by AI (such as healthcare and life sciences, financial data centric firms) will need to be captured by the AI narrative and see their share prices rise accordingly. In the same sense, AI mania will need to spill out to countries in Europe, Japan and maybe China.

Watch out for other indicators. When taxi drivers start to speak of error correction in quantum computing then we will most surely be in an AI bubble.

Have a great week ahead,

Mike

I had thought that early March could be crucial from a political economic point of view. On March 4^th Donald Trump goes on trial for trying to overturn the results of the 2020 presidential election, and on the 5^th the republican party holds its primary elections for the 2024 presidency. The scene would be set for Trump the martyr to march to power.

It seems that the sense of drama is now largely redundant, Trump is well ahead of his nearest rival Nikki Haley, and he has started to control the policy agenda on the republican side. His very obvious weak point is that beyond the most steadfast ‘right wing’ republicans, he seems to have few votes to garner. This may ensure that some donors help Haley to stay in the race longer than many think.

Yet, a second Trump presidency is now a high probability, and in the US, activists, lawyers and the policy community are preparing for this scenario and the likely cleaving of public life in the US (it can get worse than it is). Beyond the US, the knee-jerk assumption is that Europe is unprepared for a second Trump presidency, and that Europe will ‘fold’ in a world where the leader of the ‘free’ world is an aspiring dictator. I am not sure that this assumption is a good one.

Much of the debate around the impact of a second Trump presidency on Europe, centres around defence, the assumption being that the US would pull out of NATO, leaving Europe at the mercy of Russia. Indeed, in recent days a chorus of European policy makers have sounded off on this.

For example, last week the defence ministers of the UK and Germany, Norwegian and Swedish generals, as well as the head of NATO’s military committee, have made pointed warnings of a war between NATO and Russia. There have also been calls for an EU army (‘European pillar of defence’) and for the EU to have its own nuclear deterrent (the only independent European nuclear capability is that of France), and a public musing by a British general on the virtues of conscription.

If Europe is serious about preparing the political and security ground for a Trump II world in which Russia becomes more belligerent (I am not sure), then it can do a number of things, which in themselves become tests of intent.

First, to repeat a point I have made in this note many times, it needs to make member states like Slovakia and especially Hungary (as well as prospective member Serbia) choose sides. Trump is the only political figure in the western world who lauds Viktor Orban (Putin simply controls him), and Orban in return pushes the case for Trump’s re-election. Orban’s corruption and Russo-philia are becoming institutionalised in Hungary.

Matters might come to a head at an EU leaders summit late next week, where the aim is to sign-off a funding package for Ukraine. Hungary has obstructed this and there is now a sizable group in the European parliament and a smaller group amongst European leaders in favour of using Article 7 to deprive Hungary of its voting rights. Beyond Hungary, there is much the EU can do to prepare for a more hostile approach from Russia – aggressively bolster support for Belarus’ opposition, credible trade and financial sanctions against Russia, aggressive sanctions against banks in and on the old periphery of the EU (i.e. UK and Switzerland) who hold the assets of Russian individuals, and very severe controls on the movement of Russians into and in the EU.

Before I get too carried away with preparations for war, let’s return to the impact of a second Trump presidency for Europe. My view is that beyond the grotesqueness of Trump as a character, the real concern is that his second term in office would be marked by the abandonment of the rule of law and the ethos of democracy by a majority of Americans, to a degree never seen in America’s long history as a democracy and not even fully anticipated in the Federalist Papers.

If this is the view that Americans and the rest of the world draw, then it will have significant implications for the role of American companies in the world economy, the perceived safety of US assets and the role America as both a superpower and a benign ‘godfather’ to world institutions. In this scenario, where there is less respect, confidence in and fear of America, Europe has an obligation and an opportunity to bolster the international order.

Indeed, one could imagine that the role of Europe in the world (as the liberal, democratic and cultural pole) could become clearer – should Europe’s leaders rise to the challenge in framing this, and in investing in it. Here, one opportunity that has gone begging is capital markets union – perhaps there are no votes in such a project for European politicians – but Europe has failed to follow through on one of the implications of the euro-zone crisis. As a financial system it needs more ‘safe assets’ and risk capital. If Europe had deeper, more joined up capital markets it would be in a much stronger place geopolitically, and in terms of funding its ‘strategic autonomy’.

As a final point (I suspect I will be returning to this topic) Europe’s politicians, and I would argue its voters, need to examine the reasons behind Trump’s persistent popularity and ensure that Europe does not make the same mistake (particularly bearing in mind the current controversy over the AfD in Germany, where senior party members hosted an offsite led by a small, Austrian fascist that touched on topics such as mass deportation). In particular, the sense that politics is disconnected from people and run by an ‘elite’, the high cost of living, the poisoning of political systems by social media and the need for greater education specifically around democracy, are just some of the things that spring to mind.  

Have a great week ahead,

Mike

There are several interesting rankings of British prime ministers, notably from the BBC and the University of Leeds. They mostly relate to prime ministers of the modern era. Several other rankings (by the BBC and journalists in the politics field – notably Matthew Parris, Iain Dale and Peter Riddell) go back further in time to Robert Walpole, effectively prime minister in 1721. These rankings suggest that one of the greatest prime ministers was William Pitt the Younger (his father William Pitt the Elder was also prime minister).

As a character, Pitt was considered aloof, unsociable, and allegedly, didn’t like girls. Of the main issues to cross his desk (he served as prime minister for nearly nineteen years) were the reaping of commercial fruits of the post-Independence relationship with America, the rebuilding of Britain’s financial strength and the sapping of India’s economy through the East India Company. Today, India is on the rise, the US might have peaked, and Britain’s finances again need remaking.

The reason that Pitt the Younger should be of interest to us today is that he is acclaimed for the way he navigated Britain through a series of geopolitical events emanating from France (the Revolution and the Napoleonic Wars), and that he first became prime minister at the tender age of 24 (for those readers who wish to learn more William Hague has written a good book on Pitt).

It was one of a number of sources I leapt to on hearing that Emmanuel Macron had appointed 34-year-old Gabriel Attal as prime minister. Attal, like several other appointees to the new cabinet, has effectively no experience of government, or indeed of much else. Macron himself had relatively little experience of government when he made the daring decision to run for President, as did Sanna Marin, elevated to prime minister of Finland at the age of 34 also.

However, France usually likes its politicians to be (too) clever, experienced and capable, and in this sense the new government is a break with the past, and not necessarily one for the better. Whether, like Pitt the Younger, Attal has a long distinguished career and vanquishes France’s adversaries I do not know, but his appointment highlights several trends.

The first is that Macron is a risk taker. I don’t feel that this aspect of his behaviour receives enough commentary, but he is one of very few political leaders (populists don’t count here because they don’t care about the consequences of their actions) to take big risks. Pension reform is one, which didn’t quite pay off, and the result is that he has decided that a more political, activist and showy government is the answer.

Attal will be more the impresario of the government, and less the ‘driver of the bus’ in the sense of Jean Castex, or the near-presidential term in office of Edouard Philippe. His cabinet will be a difficult one to manage. Several of the political heavyweights (Le Maire, Darmanin) were against Attal’s appointment, as were other influential figures (Francois Bayrou, Philippe and Alexis Kohler the top civil servant at the Elysée). Some ministers have little experience in government, and the joker in the pack – the appointment of Rachida Dati as culture minister, will likely prove an ongoing distraction (she is hard to describe).

I am lucky to know many of the different corners of France well, and if I was to judge the reshuffle from the point of view of people in for example Charente-Maritime, it all looks like the Parisien elite (of which Attal is the archetype) carving up political roles for themselves, with little radical change in terms of what this means for the lives of French people. Indeed, the reality of France’s perilous fiscal situation makes it very difficult to do so.

My suspicion is that the Attal government will look and sound less like previous French administrations, and more like the recent Tory cabinets (and that is not a good thing). What I mean here is that the personality, private life and ‘showbiz’ allure of the Attal and ministers like Dati could take precedence over policy. French politics will also become more combative, like Westminster. The team that Macron is sending out is crafted to take on the far-right, to be more vocal and aggressive in parliament.

The great error here is that (I believe) French people do not want politics to become like day-time tv, but rather want politicians to trust and understand them better, and to reshape the political machine so that people (regions, departments for example) have more access to power. That is the message of ‘L’Accord du Peuple’, which will be published next week. It might be the only beneficiary of this new government. 

Have a great week ahead,

Mike

A couple of weeks ago I found myself strolling through Soho in London, at a respectable hour, behaving in an entirely respectable way.

I popped into the Coach and Horses on Greek St to pay homage to Peter O’Toole and Jeffrey Barnard, and on my way out passed through Dean St. Unusually maybe, my thoughts turned to Karl Marx and Charles Dickens. Marx lived at 28 Dean St (at the time the area was populated by doctors, architects, publishers and lawyers) and Dickens had worked in a theatre nearby (73 Dean St).

I wondered if they had ever met – there is no record of them having ever done so, though both had the same pre-occupation, the social and economic side-effects of the industrial revolution in Britain, especially the plight of those cast aside by the locomotive of what was then the world’s most powerful economy.

For example, Dickens’ book ‘A Christmas Carol’ published in 1843 was followed a few years later by Marx/Engels’ Communist Manifesto. There is evidence that in his own writing, Marx referred to some of Dickens’s work (and characters like Mr Pecksniff in Dickens’ 1842 book Martin Chuzzlewit, with Dickens later coining the term ‘pecksniffian’ to denote someone of high moral principles). Yet, even though their attention was grabbed by the same problems, Marx was an advocate of revolutionary solutions, and Dickens a fan of a more measured, benevolent approach.

If they were to meet today, I wonder what their collective passions might be fired by?

At the beginning of the ‘Manifesto’ Marx wrote ‘a spectre is haunting Europe—the spectre of Communism. All the powers of old Europe have entered into a holy alliance to exorcise this spectre’. What for example might that spectre be?

They might discuss how the two large communist countries have become authoritarian states and the ways in which they are weigh on and actively impinging on European democracy. Dickens would surely hold Marx to task for ‘how it all went so wrong’.

Marx might try to correct the error of communist ways by writing ‘A Democratic Manifesto’, abolishing the concentration of power in small groups, tight ownership of media and social media and much greater use of collective decision making. Dickens might plot the trials of naïve leaders (there are still a few judging by the courting of Viktor Orban) as they struggle to negotiate the obstacles put in their way by the former communists.

If poverty was the greatest obstacle of the mid 19th century, perhaps the biggest challenge in developed countries is from the ways in which, for the first time ever, technology is permitting enormous changes and variability in the ways we socialise, we think, are educated and the ways we look. Two of the stock market trends of 2023  – AI and obesity drugs – betray this.

For his part Marx, who greatly valued the social aspect of human life, and who feared that capitalism might destroy society (not yet), might well take against the power of social media and soon AI firms. He might build up an impressive book of evidence – the ways in which social media leads to deteriorating sociability (apparently most couples now meet online, and there is a loneliness epidemic), societies appear more divided than ever, especially on questions of identity and values. It is also now possible to control and manipulate humans through technology than ever before.

For his part, Dickens might have difficulty writing about an atomised world, where people are so easy to take offense and where, despite material wealth, human development is regressing (Oliver Twist might choose an entirely different path – perhaps continuing life in a gang of scammers and David Copperfield would vault from poverty through the prism of TikTok).

If we needed proof of the prowess and relevance of either man, they are still part of public life. Marx remains prominent in the discourse in international political economy (David Skilling and I have coined the current business cycle as ‘Marx’s revenge’ because of the countervailing forces of capital and inflation) and this Christmas, various works of Dickens will appear on tv channels.

As a final recommendation, one of my favourite Dickens themed books ‘is ‘Drinking with Dickens’ , a set of yuletide drink recipes from the time of Dickens, authored by his great-grandson Cedric Dickens.

Mike 

I have mentioned previously that I spent a good deal of time this year writing a book on how to reinvigorate French democracy (co-authored with Pierre-Charles Pradier, L’Accord du Peuple’ will be published in mid-January by Calmann Levy).

As we started the book in 2022, France was calm and I wondered if I had the wrong subject but two bouts of violence in early 2023 have convinced me that French democracy needs mending. One way we proposed to doing this is to follow some of the innovations in Irish democracy (i.e. deliberative democracy). No sooner than we had sent the book to our editors, violent riots erupted in Dublin.

All of this suggest two things. First, I am not good at forecasting and in fact curse whatever subject I write about. Secondly and more seriously, the world is still in a democratic recession, and in particular Europe, as the epicentre of the democratic world is challenged and under attack from multiple angles.

Against this backdrop, next year will be a crucial one for democracy as it is a year of consequential elections (as David Skilling and I note in our recent 2024 ‘Scramble for Supremacy’ note), with voters in countries representing over 50% of the global population going to the polls.

Last year we expected to see a stabilisation in the ‘democratic recession’ and increased stresses on autocrats. This has largely played out.  In Europe, where we have EU level elections in June, the centre has largely held, but shifted to the right somewhat.  Indeed, in several countries the far right has surrendered power to the centre (Spain, Poland).  

Immigration and the shadow of Russia’s war on Ukraine are the two motivating forces on European politics and in general we have seen the centre adopt a tougher stance on immigration and values.  Robert Habeck’s speech in the aftermath of the attack on Israel and the collaboration amongst the Nordic countries on deportations are two signs of this.

The likely accession to power by Donald Tusk in Poland is a significant positive, though we do not expect the Sanchez government in Spain to endure.  German politics is in flux and in both Germany and the Netherlands new parties are emerging that mix left wing socio-economic policies with stringent policies on immigration.   

As Europe shifts to the right, we expect the UK to move to the left.  The next UK general election is now Labour’s to lose and despite the recent cabinet reshuffle, the credibility of the Tories is so badly damaged that we consider the outstanding issue to be the magnitude of a Labour victory.

If European democracy is more stable, a series of elections in Asia and the US have the potential to reset the democratic and geopolitical debate for the next decade.

Chronologically, we highlight Taiwan’s presidential election in January, Indonesia in February, Russia in March, and India in April. A general election in South Africa will then likely follow and on November 5^th the US votes for its next president.

The US Presidential election is obviously the key event.  The risk is that not just that Donald Trump is re-elected but that American voters demonstrate disregard for the constitution, the rule of law and the reputation and role of the US abroad.  This event would create a constitutional and political crisis (not least as Trump’s retribution committee becomes active) in the US, and would likely upset economic and investment activity, and alter the balance between the democratic and ‘non-democratic’ world.  

In other key elections, Vladimir Putin will almost certainly win the Russian vote – though turnout and the protest vote will be interesting to watch.  In India, Narendra Modi is likely to stay in power next year – India’s economy and notably its geopolitical position are in the ascendant, and with a fragmented opposition (we are watching five state elections in December) he stands a high chance of being re-elected.

Finally, Taiwan’s election in January bears watching for its global implications – from the risk of war to global semiconductor supply chains.  As we write, the two opposition parties have failed to cement a coalition, and it is likely that the DPP’s Lai Ching-te will be the victor, something that would displease China.  This election could influence the geopolitical tone for the year.

These elections in 2024 will have implications for markets and for economies.  Expect more government spending as governments seek to strengthen economic activity – and the prospects of re-election.  And there is the potential for ructions in markets if there are unexpected political results – and there are particular market risks around the US Presidential campaign and elections.

Specifically, and with a financial markets hat on, ‘Losing America’ would have enormous implications for bond markets.  In times of crisis, Treasuries and the USD rally, but a ‘rule of law’ crisis of confidence in the US could lead to prolonged weakness. Corporate investment (with less room for tax cuts this time) would be curbed, and ‘American division’ could spoil the economy.

In such a scenario, geopolitical risks – emanating from Russia and China – would rise, vulnerable and contested sectors from semiconductors to vehicles would be volatile, and we expect that a ‘supply chain’ wobble might well reoccur.  In response, we expect the EU to focus more on defense and security, and that ‘strategic autonomy’ would be deepened.

Let’s hope the voters do the right thing!

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