It is increasingly debated that the current generation of politicians, notably in the two Anglo-Saxon countries, are markedly inferior to those of prior generations – intellectually, morally and in their commitment to public service. Rory Stewart’s new book (Politics on the Edge) highlights a number of examples.

This is a view I have some sympathy for and a more compelling argument, supported by most politicians I have met, is that social media has debased politics and political debate, to the extent that the untrue and absurd garner greater attention from potential voters. Speeches at the Tory party conference last week (e.g. Penny Mordaunt) and the toppling of Kevin McCarthy by Matt Gaetz, are instances.

One of many litmus tests of this hypothesis is that the quality and quantity of pithy, quotable remarks by political leaders and policymakers appears to have diminished. Outside of set-piece speeches there seems to be far fewer impressively intelligent public utterances from those in public life. As a result, essay writers are left digging for lesser used quotes from Churchill with which to start their notes. This is a pity, not just for essay writers, but for the public at large.

Often, when those essay writers have exhausted the reservoir of Churchill quotes, they dip into Keynes. I recently happened upon a deep pool of quips from Keynes in Benn Steil’s ‘The Battle of Bretton Woods’, which is a superb account of the tussle between Britain and America to shape the new world financial order and with it, bodies like the IMF.

Tussle is too generous a word, the meeting effectively formalised the transfer of ‘world power’ from Britain to the US, or as Keynes wrote to his mother ‘ In another year’s time we shall have forfeited the claim we had staked out in the New World and in exchange this country will be mortgaged to America’.

Keynes’ prominent role at Bretton Woods was as foil to the American negotiator Harry Dexter White, and Keynes felt his place was to negotiate a deal for Britain that would rescue it from ‘losing face altogether and appearing to capitulate completely to dollar diplomacy.” For some, Keynes was living proof of Lord Halifax’ view that ‘they have all the money, and we have all the brains’.

From this point onwards, American financial dominance grew, manifested in the broad international use of its currency which has risen to a very particular place as the linchpin of the financial system. Indeed, one of the most important tenets of the twentieth-century  world order and the rise of globalization has been the position of the dollar as the international reserve currency.

This pre-eminence was christened in another memorable quote as ‘exorbitant privilege’ by Valery Giscard d’Estaing, then French finance minister and later President. When Giscard made this statement, the dollar was tied to gold, and the response from France and a number of other countries was to exchange their holdings of dollars for gold. This set the stage for the subsequent breaking of the dollar’s tie to gold by President Nixon. Since then, the dollar has been first among equals in the currency world, and many developing nations have pegged their currencies to it.

Recently, as we have noted before, this notion of ‘exorbitant privilege’ has come under scrutiny in the sense that there is a long line of commentators predicting the demise of the dollar.

A more interesting line of argument, thanks again to some French wizards (Pierre-Olivier Gourinchas and Hélène Rey) is the notion of ‘exorbitant duty’, which is the role that the dollar and US financial system play in times of crisis as the provider of a safe haven, even when those crises emanate from the US itself. As it stands, the next largest currency bloc to the dollar, the euro doesn’t have capital markets deep enough to become a fully fledged global safe haven. It might be that a group of smaller countries – Switzerland and Australia for instance could also draw in capital in a crisis.

So, the dollar may continue to do its duty, until perhaps it is undermined from within. While few in Washington will feel sorry for Kevin McCarthy, his removal represents another step towards the political unknown in America. Europeans and Asians are starting to worry about the prospect that Donald Trump could become president again and that the US might one day fail to do its ‘duty’.

Congress has got it wrong before. One of the comments in the Steil book recounts how after Bretton Woods ‘Congress was spontaneously more generous toward China than toward England, perhaps because no one envisaged China as a postwar rival for power or commerce.”

The Polish elections to be held on October 15^th are more important than many think. For Poles it may be the most important election since the fall of communism given the near existential struggle between liberal, pro-EU candidates (led by Donald Tusk) and ‘illiberals’ who increasingly resemble the Trump Republicans.

For reference, the incumbent ‘illiberal’ PiS (‘Law and Order’ led by Jaroslaw Kaczynski) has 35% support with Donald Tusk’s liberal Civic Coalition party on 28% and the three main smaller parties each with close to 9-10%. For Europe the election will be telling geopolitically, and notably for the way it reflects upon other EU countries like France and Germany (Slovakia which faces a similar contest goes to the polls this weekend).

Poland has the potential to become a driving force in Europe, or a thorn in its side. It has changed and developed rapidly in the last twenty years, but it is fair to say that its story is not as widely told and appreciated as other ‘miracles’. It interests me particularly because the way Poland has changed rhymes with what has happened in Ireland in the past thirty years.

Poland’s election is, even by the standards of other ages and countries, a very dirty, contested one, that was poisoned by the introduction of several referenda questions on divisive topics like immigration. In addition, the PiS have not shied away from anti-German sentiment and this will have long run consequences.

A bribery scandal where members of the PiS have been found to have offered visas to immigrants for cash has complicated matters further and provoked a deeper row with Germany which has threatened to closely police its border with Poland. Another strange incident has been the banning of Ukrainian grain by Poland, Hungary and Slovakia (ostensibly a sop to local farmers) and the brief ban on arms exports by Poland to Ukraine.

This is one of a range of issues where there is tension, to be polite, between Poland and the EU. I have a lot of sympathy with Poles who feel that they are condescended to by the ‘older’ European powers. That sympathy is in short supply however when I hear the arguments of the ‘traditional right’ in Poland. One such individual is Dominik Tarczynski, a Polish MEP and amateur exorcist.

He recently lectured fellow MEPs on the fact that Poland had suffered no terror attacks because it refused to allow in illegal migrants, the logic of which will have upset his colleagues. Tarczynski is guest on Fox news, where this kind of message goes down well, despite the reality that the deadliest form of terrorism in the US is from the far-right (the FBI has warned on this multiple times).

Another throwaway comment from Tarczynski – that unlike the larger ‘old’ countries, Poland is a high growth and low debt country, deserves a bit more attention. In 2030 Poland will likely be a richer than the UK and it has barely registered a dip in growth in the past thirty years. This is in stark contrast to Spain, Italy and France where last week the text of the 2024 budget was being finalised by Bruno Le Maire, France’s Finance Minister.

Whomever is in power in Poland in coming years will enjoy a strong economy (though with a compromised central bank) whilst the next (and current) occupant of the Elysée will have zero fiscal space. With government spending at 60% of GDP and debt to GDP easily above 100% France has little room to spend more. My hunch is that this will need to lead to greater innovation in its democracy and how the state is run, but not before further unrest perhaps.

This is why Poland becomes important. A victory for the ‘illiberals’ could have significant implications across European politics – it would deepen the divide between the Commission and countries like Hungary and Poland that do not adhere to the ‘European values’ framework, it could well complicate policy on Ukraine (though ultimately the main Polish parties are resolutely anti-Russian), and it might open up a new ‘Republican’ style debate on European politics and economics.

On the other hand, an EU friendly government led by the former European Council President Donald Tusk would be much less an irritant but rather a leader on foreign policy – notably in pushing countries like Germany to re-arm, in building a central European consensus and in pushing the growth narrative in Europe that is so lacking from Italy and France, and potentially becoming an industrial base with access to low energy (Poland is investing heavily in nuclear energy).

With the consensus that 2024 is the important election year, Poland might well be the political surprise.

Have a great week ahead,

Mike

The German Green party are a curious lot, one of the few large Green parties to attract a large share of the vote and to occupy the centre, and on foreign policy  (on Ukraine) to show themselves to be consistently hawkish. Annalena Baerbock, the German foreign minister is emblematic of this, and is one of Europe’s more original politicians.

An illustration of this is that last week she journeyed to Washington, via Texas. The trip will have been instructive in many ways, granting a sense of why Republican voters are so drawn to Donald Trump, witnessing Texas’ dual energy economy which blends fossil fuels and green technology, as well as the reasons that the Texan economy has managed to draw entrepreneurs and investment from the west coast.

In many ways Germany is the opposite of Texas. Its energy policy has been upended by the strange logic of the Merkel government and by the side-effects of the war in Ukraine such that it has neither fossil fuels, nuclear nor green energy in decent supply. In addition, its economy is experiencing a sharp cyclical downturn with many indicators dropping to levels that in the past coincided with a recession. It lags other European countries on the pace of digitization and key infrastructure projects such as Berlin airport and the Stuttgart rail terminal have lagged badly in terms of execution.

Reflecting this is the drop in the competitiveness of German industry. The authoritative IMD Competitiveness Report of 2023 shows that Germany, which has habitually ranked around fifteenth place in the global competitiveness standings, but has dropped seven places to 22, just behind China and ahead of the UK. Germany’s travails in energy, industry and politics are now characterized (in a Scholz speech) by Zeitenwende, or turning point, which I think is akin to my own idea of the Interregnum.

Germany may now find itself at the centre of an economic security storm. With Chinese electric vehicles (from companies like BYD) arriving on Europe’s shores, some countries (Italy and France) with large car markets in Europe have pressured the European Commission to investigate China for commercial dumping and state aid. Given the exposure of German auto manufacturers to China (Volkswagen has about 14% market share) my expectation was that the EC would wait to curb China’s export of cars.

In that context Ursula von der Leyen’s announcement of an investigation into Chinese electric auto exports was an aggressive move (please note that it was made in a ‘campaign’ speech as she positions for re-election). In addition, the French ministry for the ‘Green Transition’ will recalibrate government grants for the purchase of electric vehicles so that these will no longer apply to the majority of EV’s from Asia. Also, the German Bundesbank, oddly, has warned German industry of the need to ‘de-risk’ from China.

If that is not enough, Baerbock referred to Xi Jinping as a dictator during her trip across the US. None of this has pleased the Chinese, who unleashed now characteristically overstated rebuttals in the international media, and who might just find subtle ways of undermining German car sales and EV production (Europe depends a lot on Chinese battery materials and technologies).

One element of the German response to falling competitiveness is to use state aid to attract foreign investment (e.g. Intel). A much better response is that of von der Leyen who has asked Mario Draghi to undertake a study of the competitiveness of European countries.

He could do worse than start with the IMD data, which shows that the top eight countries are small economies, most of them small, advanced economies (Denmark, Switzerland and Ireland are the top three).

Regular readers will know that David Skilling and I have ploughed a deep furrow on the success of policy making across small, advanced economies and we will be scribbling notes to Mr Draghi. Germany has traditionally done many of the things that small, advanced economies do well – training, research and education. It has fallen down on capital markets, clarity of policy, corporate governance, coordination with other economies (from France to Poland) and it does not have a method to help German businesses work with those from other countries to become European champions.

Notably in the context of Zeitenwende, our sense is that the larger economies of the world are much less alert to changes in the structure of the world economy than smaller ones are, and equally the larger countries are slower to change. Perhaps Joe Biden’s industrial policy is the exception here in terms of how quickly it is re-shaping the American economy. We can only hope that Foreign Minister took good notes.

Have a great week ahead,

Mike

Regular readers will now be well aware of the thesis of the Levelling – that globalization judders to a halt and is replaced by the unsteady formation of a multipolar world.

In 2018 we wrote that ‘Geopolitics will be dominated by three significant players: China-centric Asia, the Americas, and Europe. India may constitute a fourth pole, but its time has not yet arrived. These will be the players in the Great Game of the twenty-first century. (Peter Hopkirk’s book The Great Game: On Secret Service in High Asia, on the strategic battle between Britain and Russia in the nineteenth century, is a must-read as background.) For example, China’s One Belt, One Road infrastructure and trade project is a definitive Great Game–like manoeuver.

Reflecting on this, the Belt and Road is now fading into the past (Italy is leaving soon) and I would still strongly recommend Hopkirk’s book. The new development is the ‘seeding’ of a potential ‘Fourth Pole’ of the world order around India and the Gulf states and Saudi Arabia.

One of the key developments of an otherwise disappointing G20 meeting in India was the announcement form the US, India, Saudi Arabia, the United Arab Emirates, France, Germany, Italy and the European Union of a project to create a new India-Middle East-Europe Economic Corridor (railways to ports) as a pillar of the G20’s Global Infrastructure initiative. Amidst the rally of India as a geopolitical player and economy, and the rapid and historic remaking of alliances across the Middle East, the key question is whether the combination of India and the Gulf/Arabian states could become a bona fide Fourth Pole on the geopolitical landscape.

This notion is still in its ‘venture’ stage and there is much that could derail it – from climate change to Narendra Modi’s antagonization of his muslim population to a collapse in the price of oil.

However, if the progenitors of the ‘Fourth Pole’ are reading, there are two broad criteria to watch – the first is a coherent mass and the second is a coherent method or way of doing things.

In terms of the first, Europe, the US and China have ‘mass’ economically and financially (single markets, currencies), diplomatically (Europe is increasingly coordinated, and we know what China is thinking even if its foreign minister disappears for weeks on end), industrially (Bidenomics, Strategic Autonomy and state driven Chinese entrepreneurship) and militarily (all three are nuclear powers with sizeable armies). By comparison, Russia for instance is not a ‘pole’ as it is not significant economically, industrially and has a toxic foreign policy.

India and Saudi Arabia, to take two of the Fourth Pole players, are meaningful economically though much less so as financial players (though Saudi Arabia’s reserves given it clout), and apart from India’s nuclear arsenal are not in the top division of battle-ready militaries (India has a large airforce but it would likely not perform well against say the Finnish airforce). Building ‘mass’ would take time and investment and would demand a coherence in strategy between very disparate countries, and currently there are few policy areas where there is policy collaboration at a detailed and well-coordinated level between India and say the UAE.

The second and essential element of multipolarity is that each pole has a defined ‘method’ or way of doing things – Europe is a liberal social democracy with increasingly coordinated policies, China has the ‘China Dream’ social contract between the Chinese people and the communist party while the US is making itself great, again. Each one has a distinctly different approach to technology, the internet and lately to regulating AI.

The India to Saudi Arabia corridor is yet very different in terms of its cultures and development models and is very far from have a common method. This is something that can arrive after at least forty years of close trade and cooperation, and in my view will be highly influenced by the Indian diaspora in countries as diverse as Kenya to Dubai.

In the context of this new project, there is a great deal of talk about the global south – effectively the fast growing, populous countries of Asia, Africa and Latin America. It does their individual cultures little justice to group them together, and the idea of the ‘global south’ vastly overestimates the ability of these countries to act as a single entity. The primary challenge for the ‘global south’ countries is to find ways to increase the level of trade between themselves. In the long run it may be that the India-KSA-UAE corridor becomes the organizing locus for the global south.

These countries can take heart from the early days of the United States (for example the ways in which Alexander Hamilton bound individual states together during the Whiskey Rebellion) and the fact that the EU itself started off as a trade and infrastructure project (Coal and Steel community). For the moment, they need to be patient, not over-reach and concentrate on trading more together.

I spent the start of the week at the imposing Stormont building in Belfast. It has been the centre of power in Northern Ireland for nearly one hundred years, and hosts Northern Ireland’s Assembly, which notoriously now has not sat for over a year, something the vast majority of people in Northern Ireland would like to see rectified Notwithstanding this the local economy is strong (unemployment is 2.7%) and this weekend there will be a US led investment conference in the city, which amongst many other things, demonstrates the economic dividend of falling geopolitical risk.

Unfortunately, Northern Ireland is very much the outlier here, as geopolitical risk is on the rise across the international spectrum. One of the sharpest reminders that we are in a ‘war by other means’ environment is the ongoing ‘Chip Wars’, the latest salvo of which involved the Chinese government banning the use of iPhones by government employees (presumably as a form of leverage over the USA at the same time as Huawei is launching a new flagship phone).

Despite this I have found the lack of interest by  European firms (large and medium sized) in geopolitics to be striking.

In markets, geopolitical risk has rarely been a major factor over the past forty years, owing to the tailwind of globalisation (no wars amongst democracies and emerging markets have been on a path to growth). The events that signalled the cracks in globalisation – Brexit and the Trump trade war – were risks that investors needed to measure. In addition, as inflation has risen, the absence of quantitative easing has made markets more sensitive to geopolitical risk.

In today’s multipolar world where strategic competition is increasingly the norm, geopolitical risks loom large– from the risk that Donald Trump comes close to re-election, to the drive of Chinese technology into Europe (BYD cars have arrived) to the re-alignment of the European defense, aerospace and greentech industries owing to the war in Ukraine. Many of these risks are events that require a response and readjustment, others are more existential.

One important source of risk is the way governments react to landmark technologies such as Artificial Intelligence (AI). The ways in which the use (and abuse of these technologies) is framed and watched over can determine the shape of the industries of the future.

As an early mover on regulation, Europe’s response to AI is the EU AI Act, whose main contribution is to divide the application of AI into four pillars from harmless to very harmful (akin to China’s use of AI for social credit scoring). The fact that Europe has moved first sets the bar for other regulatory initiatives on AI, notably that being pursued by Chuck Schumer in the US and Japan’s G7 level ‘Hiroshima’ paper on AI.

One area of vibrant debate, and some confusion, that has opened up is that way in which companies – software, media, data firms – who do not necessarily ‘generate’ AI content formally but are at the centre of many of its processes, are treated. The extent to which they will be policed by the AI Act is not clear and we have not yet had detail forthcoming from the EU. Indeed, it may well be up to individual companies to try to take the lead within their own industries for setting out the ways in which they will treat and use AI (telecoms, retailers with large datasets for example).

An additional source of confusion lies in the use of AI by start-up firms, especially out of France (ironically), which is striving to become an AI innovation centre (it has a rich labour market here and the backing of key entrepreneurs). Their argument is that the Act might constrain innovation by new firms. One response to this may well be a ‘sandbox’ system where young companies are allowed to innovate in a regulatory sandbox, to a certain level of commercialisation. A related issue that is bubbling up is access to models (and data) for researchers, and whether we might begin to see more EU coordination on this.

We also need more detail on governance. It may well be that there is a top-level AI Office at the EU level, with then individual state AI Offices, or to make matters more complicated some countries may argue to have an AI office for sub-sectors (AI in telecoms, AI in banking for instance). This is not yet resolved.

A sure sign that AI is becoming the terrain of competition between the large nations is that the UK is trying to become the ‘locus’ of AI regulation, in the sense that it is signalling that it wants to be the coordinator of international regulatory activity, and in the same way as Geneva hosts the WHO, WTO, it wants to be the locus of AI standards.

The AI Summit at Bletchley (Nov. 1^st and 2nd) will be an important milestone here. If the UK was to physically host an international regulatory body, why not have it in Northern Ireland?

Have a great week ahead,

Mike

The worry is not so much that Trump is declared guilty, or innocent, but that in the Republican primaries that follow the court case and in the court of public opinion, a large number of Americans declare him to be their champion.

It is not impossible that Trump is sent to prison and wins the 2024 presidency from there (to my knowledge, the US constitution does not prohibit anyone who has been convicted, indicted or in jail, from running and becoming president, though constitutional lawyers and potentially Congress might try to use the 14^th amendment to bar him from holding office’.

As always, the only winners will be the lawyers, and perhaps the media (Twitter, or X, will soon allow paid political ads).

My interest is what the reaction of the world beyond America could be to its potential descent towards a deep civil schism and, if opinion polls are to be believed, a presidential candidate who has vandalized all of the sacred, historical tents of American democracy. A victory for Trump is one thing, but an American public that detonates the foundations of the US is quite something else. We would lose America as we know it.

I could write reams on how bad this could all be, and others surely will. The relevant point is that with March 4th set as the date for the Trump trial, other countries, notably the autocracies, are already preparing for a difficult period for American democracy (as are many in Washington), and the possibility of a highly controversial year in American politics.

Some European leaders like Emmanuel Macron, who has plenty of experience with Trump, have already flagged the risks of the above scenario, but other European states like Ireland are so deeply tied to America (last weekend Notre Dame played the Navy in an American football game in Dublin) that the shock would be enormous.

European leaders have already contended with Trump and indeed, with a range of policy surprises from the Biden White House (IRA Act, AUKUS) but in general working relations between Washington and Paris/Brussels/Berlin are good now.

In general, Europe has risen (slowly) to meet the challenge of autocrats (European foreign, security, enlargement and industrial policy have changed dramatically in response to Russia), though it could be all the more decisive with Viktor Orban. ‘Losing America’ as we know it would be chilling, but some governments and policy experts in Europe are beginning to brainstorm this possibility and there is a long list of ‘to dos’.

Autocratic economies are faring much worse than democratic ones, a trend that highlights the first risk of a popular wave of support for Trump, that its consequences could lead to a loss of faith in US financial assets. Imagine if Trump declared that the US had no obligations to the overseas holders of its debt, and or ordered the Navy to occupy Greenland.

The euro and European government debt might likely become more of a safe haven asset, some wealthy Americans might move to Europe and the UK, and the difficulty of running economic and foreign policy in the US may well mean a period of heightened uncertainty is ahead.

Geopolitically, Europe may want to pre-empt some of the risks associated with this scenario by eradicating as best as it can Russian influence within European countries like Germany and Austria, and in my view should take a much more severe stance on Hungary’s government. Poland, which holds elections in October will be a vital cog in this setup, as will the Baltic states. A more aggressive stance would be to surge military support for Ukraine, across different domains (cyber, financial, hard weapons).

Operationally, Europe also needs to accelerate and deepen the implementation of its Economic Security Act and to bolster it with much greater, and more ruthless resourcing of banking and payments oversight. The coming US election will make the risk focused EU AI Act look sensible, especially as the use of AI in social media and politics is concerned (though the Act won’t be in force by then).

In this respect, even the threat of another Trump presidency could be the forcing element that defines the multipolar era, when Europe finally realizes that it must rely on its own resources – as it is increasingly doing. There would likely be little change in Europe’s relationship with China, which is based on ‘de-risking’ rather than ‘de-coupling’.

If this scenario comes to pass, we will badly miss America as we know it, but there is no excuse for this outcome being a surprise.

Have a great week ahead

Mike

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 Have a great week ahead,

Mike

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

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

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

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

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

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

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

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

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

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

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

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

Have a great week ahead,

Mike 

Two of the key, recent headline stories have related to climate, and central banking. We cannot escape the dramatic evidence of climate damage across the world, and recurring high temperature records. In central banking, both the European Central Bank and the Federal Reserve raised rates last week in attempts to cool economies (inflation). If they succeed, they might even temper the heatwaves that grip many parts of the earth.

What is interesting about climate damage and central banking is that since the early 2000’s, both have embarked on trend changes. As the Hadley Centre database shows, excess world average temperatures have broken away from the levels of the past one hundred and fifty years, and now the average annual temperature of the earth’s land is about 1.5% higher than the long-term average. Similarly, in the aftermath of the global financial crisis, the balance sheets of the major central banks, notably the Federal Reserve, expanded dramatically as central banks enacted quantitative easing (QE) programs, even more so through the COVID crisis.

It is tempting to say that the liquidity provided by QE programs provided the fuel to drive climate damage. I am not sure that this is the case in a strict econometric sense, though QE has enabled a lot of poor or suboptimal investment (and possibly excess consumption). It is correct, I think, to say that both the existence of QE (as a sign that economies and financial systems were too fragile and required monetary morphine) and manifest climate damage, are warning signs that the world economy is reaching the limits of modus operandi, and possibly its very existence.

In particular, the contribution of QE was to buy ‘peace’. To paper over cracks or deficiencies in financial systems (the euro-zone), to create a wealth effect (for the wealthy) and to flatten the implications of tail-risk events – from the initial Russian invasion of Crimea to most notably COVID. As a form of ‘glue’ that kept the de-globalizing world together it was a success, but it created a deep dependency and dulled politicians and corporate leaders to rising risk factors.

What is new is that not only is QE in retreat (central bank balance sheets have again recently begun to edge backwards), but the policy framework behind QE is beginning to change. There were two new developments last week.

One was that the Bank of England, long the benchmark for other central banks, finds its credibility dented across various areas. Its forecasting ability is now subject to a post-mortem, led by Ben Bernanke, because according to comments from some members of the monetary policy committee, the banks forecasting models work well on the past, but are not suited to the future.

More alarmingly, in accounting terms, the Bank has made losses of over GBP 150 bn on its QE led market interventions. I am surprised that populists in the UK have not made more of this (they are perhaps more occupied with NatWest), though in Italian politics there are now frequent verbal assaults on the ECB.

Another notable move is the Bank of Japan’s (BoJ) attempt to loosen its control on the long end of the Japanese bond market (‘yield curve control’), which has so far not detonated any major volatility across bond markets. The BoJ is significant in at least two respects. First, it owns just over half of the entire Japanese bond market, and secondly it has been the last hold-out in the trend towards monetary policy normalization.

The upshot of all of this is that in a world where inflation has been curbed but not controlled, the consequences of higher rates will become increasingly obvious, at first in specific sections of the real estate market, and within some household segments. There has so far been a near miraculous absence of credit risk internationally, but I find it hard to see how this can continue, and there is plenty of scope for markets to reprice this.

Central banks, when they prosecuted QE, were the indispensable friends of the political classes – effectively removing the urgency to deal with pressing issues (reform of the euro-zone and national economic structures for instance). Now, the consequences of their (necessary) actions makes life more difficult for incumbent politicians (witness the UK housing market).

I expect that in the political economic landscape, central bankers will be less and less popular, at least until they have to ‘rescue’ the world when the next crisis arrives. A healthy development might be that they stop stretching their mandates to encompass policy topics like climate change (Lagarde) and unemployment (Yellen) that governments should and need to deal with, and that way we might get somewhere on climate damage control. 

Have a great week ahead,

Mike

Last Thursday the UK held three by-elections, notably one in Uxbridge to replace the disgraced former prime minister Boris Johnson. While the Tories held this seat (and lost two others to Labour and the Lib Dems), it was reassuring that the ‘ interplanetary space warrior’ candidate ‘Count Binface’ won more votes than UKIP and than Jeremy Corbyn’s older brother Piers. What was even more encouraging was the fact the new Labour MP for Selby is a 25 year old.

It is a welcome sign in a world where political systems, notably in the two main Anglo-Saxon countries, are becoming ossified – that is concentrated, perhaps mired, around a two-party system, and around age-old political dynasties and networks.

In other countries, ossification has taken hold in different ways. In France for example it will, in the light of recent events, surprise readers that nearly half of the members of the Assemblée Nationale are first time deputies (it was a remarkable 75% in 2017) and they are collectively younger than previous political generations (seven years younger than the 2007 batch). Yet, in France, the ossification occurs lower down in the political system (mayors) and in the running of the state.

However, like Germany and a range of other European countries, there is a fluidity and even Darwinism in the party system, with old parties (French Socialists) being easily culled and new ones springing up. One to watch is the resurgent Vlaams Belang party in Belgium (they are fighting for Flemish independence and might just be the end of Belgium as we know it).

The idea of new parties springing up, and in some cases spanning borders is something I had devoted a few pages to in The Levelling, though arguably it is one trend that has not quite materialized in the way I expected.

For instance, I had expected to see a coordinated, cross-nation ‘Heimat Party’ (‘old values’, right wing) across northern countries, but instead these parties are currently emerging in southern European countries (watch Vox’s performance in Spain this weekend). Notably there is international coordination on the right – nefariously between Marion Marechal Le pen and Steve Bannon, and slightly less so between Giorgia Meloni and Mike Pompeo.

In the UK and US, there have been several attempts to set up new parties. Some years ago I sat in on a few meetings of United for Change, a new centrist party in the UK that was well funded, had an impressive list of potential candidates but never got off the ground, much like Chukka Umunna’s Change UK.

This month in the US, a new organization called ‘No Label’ has been launched, with great promises of policies and new presidential candidates to be announced in coming weeks, though what has so far been communicated is unsatisfying.

In the US, the prospect of another Biden vs Trump contest should energise new candidates. Some of these will simply come forward to plant the seeds of future national careers and others should be genuine contenders. In our November 5th 2022 note we stated ‘that the really interesting political figures are found at the mayoral and gubernational levels – Mike Duggan in Detroit and Francis Suarez in Miami’. True to form, Suarez has recently announced a presidential campaign and is one to watch for the future.

To those who desire to break the ossification of political systems in the UK and US, there may be hope ahead. In the US, there are rumours and hope that the CEO of JP Morgan Jamie Dimon might run for President. While I have no insight into whether this is possible, Dimon has enough name recognition, money and support from the business and media establishment to mount a credible ‘Unite America’ presidential campaign. One to watch.

Then in the UK, back to Shelby. It is very likely that a general election in the UK (summer 2024?) could elevate Labour to power, potentially in a coalition with the Lib Dems. This might in time lead to a change in the electoral system, away from the first past the post system and towards proportional representation. This could be Labour’s contribution to revolutionizing British politics, it would allow smaller parties to thrive, likely provoke a split in the Tory party, and usher in an age of consensus built, coalition governments.

Count Binface would approve.

Have a great week ahead

Mike