War by Other Means – Positioning for 2023

War is a mere continuation of policy by other means’, General Carl von Clausewitz

As we end a turbulent 2022, I have been thinking about what firms, investors, and governments should be positioning for in 2023 (and beyond).  This year, together with David Skilling (long-time collaborator and LandFall Strategy Group CEO), we have prepared a paper on key dynamics that will shape the year ahead.

This shorter note sketches out our view on these dynamics.  Please get in touch (through LinkedIn or by email) if you would like to access the full report. 2023 is likely to be another volatile year.  This ongoing turbulence reflects not just idiosyncratic shocks, but also a regime change in the global economic and political system. 

After the end of the beginning

Our core thesis is that the global economy is moving onto a ‘war time’ footing, with increasing, broad-spectrum strategic rivalry between the big powers reshaping the global economic and political system.  The key domains for this strategic competition relate to economics, finance, and technology – extending well beyond military competition. 

Increasingly, government policy across multiple areas will be deeply shaped by this strategic competition, from macro policy to industrial policy and the net zero transition.  In turn, economic outcomes, the business environment, and markets, will also be affected.  2022 was the ‘end of the beginning’ for the new regime, and these realities will powerfully shape 2023.  The global economy has been relatively depoliticised – but politics is firmly back.

Note that we are not forecasting a ‘war’, but Clausewitz’ terminology is useful to describe an increasingly contested world.

Previous episodes of regime change have had big impacts on investment returns, profitability, and national outcomes.  New approaches are needed to prosper in this new context.  

We identify five major themes associated with this regime change and their implications for firms, investors, and policymakers: from a changing globalisation model to the return of the state and changed macro policy settings. 

Globalisation & strategic autonomy

Globalisation is changing in structural ways.  Economic factors are partly responsible, supporting reshoring and nearshoring.  But domestic politics and geopolitics are much more disruptive factors in reshaping global flows.

In domestic politics, there is a growing push for strategic autonomy and independence in key sectors.  Industrial policy has crossed into protectionism.  The Inflation Reduction Act and the CHIPS and Science Act in the US are two examples, with sweeping local content provisions.  The EU and numerous national governments are likely to respond with industrial support packages of their own through 2023.  And China will continue to strengthen its development of national champions. 

Relatedly, growing geopolitical rivalry between the US/West and China will powerfully shape global flows.  The US has imposed restrictions and sanctions on China, notably on semiconductors, and is looking to decouple parts of its economy.  Similarly, Europe and others will continue to reduce economic exposures to China, albeit in a more gradual manner.  China’s policies also push in the same direction – reinforced by observation of Western-led economic sanctions on Russia.

2023 will be a year in which we move into much more explicit political competition and tension in globalisation, with a more fragmented global economy emerging rapidly.  The recent G20 meetings put some guardrails around the US/China relationship, removing some of the tail risks, but the logic of strategic competition remains intact.  Firms and countries will need to make deliberate choices.

The return of the state

After a few decades of declining government spending, interrupted by the global financial crisis, the size and role of the state is expanding.  The pandemic and energy crisis support packages reflect changing expectations on the role of government and will be difficult to reverse, particularly into a slowing economy.

And beyond the pressures for transfer payments and the costs of an aging population, strategic competition will lead to increased government spending.  Many governments have committed to raise military spending to 2% of GDP (or more); significant investments are being made in the net zero transition; and there is increased spending on industrial policy initiatives. 

Beyond financial support, governments will also take a more expansive role in trade and regulatory policy to support key strategic sectors and building national champions. There will be pressure to increase tax revenues to fund this spending.  Wealth and asset taxes will become more prominent, together with windfall taxes and higher corporate taxes.  An increasingly progressive tax system is likely.  Efforts to reduce international tax competition, such as the OECD’s minimum corporate tax rate agreement, are consistent with this.

Given the magnitude of the likely increases in government spending and investment, the quality of those decisions will make a substantial difference.  State capability will become a core driver of national competitive advantage.

Democracy fights back – and the autocratic recession.

The strategic competition between big powers has sometimes been framed as democracy versus autocracy.  This is not an entirely accurate framing, but it does capture something.  As some Western political systems have stumbled over the past several years, they have often been compared to apparently high-performing autocracies like China.

Yet as we look into 2023, democracies are on the comeback after a period of ‘democratic recession’.   The centre is holding and populism is broadly on the retreat.  Across Europe, reasonably centrist parties are in dominant positions.  The US remains deeply divided, but the centre is also stronger. This dynamic is partly because democracies have been responsive to popular preferences through challenging times (Covid, energy crisis); and it may be that the increasingly evident strategic competition has led to greater seriousness.

There are of course challenges to democracies.  One of the biggest challenges in 2023 will be managing the redistributive implications of high inflation: real wage growth is negative, household budgets are squeezed and borrowing costs are increasing.  High inflation is weighing on public support for governments. 

In contrast, an ‘autocratic recession’ is more likely.  China will face major political issues through 2023, most notably getting out of the Covid corner it has painted itself into.  And the Chinese economy is slowing structurally, with increasing youth unemployment.  Iran is struggling with poor economic and social outcomes and political discontent.  And the Russian economy is likely to struggle to a much greater extent in 2023.

China, Russia, and other autocracies were on the offensive over the past decade, sensing democratic weakness.  But democracies now have more reason for confidence in their model. 

Macro unravelling

Strategic competition will also contribute to an unravelling of the macro policy order.  

We expect inflation to drop in 2023 but to remain stubbornly above target – including for structural reasons, such as frictions on globalisation and higher government spending.  As a result, interest rates will also remain at a high plateau.  This will create a range of macro risks, as pressure is placed on leveraged parts of the global economy. 

At the same time, the shift to a war-time economy will challenge the current macro policy regime: fiscal rules with a focus on fiscal sustainability, and independent central banks with a price stability target.  Higher government spending and investment will run into the constraints of fiscal rules and central bank inflation targets. 

If the choice is between strategic priorities and existing macro policy institutions, it is likely the institutions that will give.  There will be a shift from policy rules to policy discretion: a relaxation of fiscal rules and softer inflation targets, perhaps with diminished central bank independence.  QE will be difficult to end.  Higher trend inflation is likely as macro policy remains accommodating. 

By way of analogy, the US decision to unilaterally exit the gold peg in 1971 was due to the tension between its strategic policy objectives (domestic spending, the Vietnam and Cold Wars) and macro policy rules.  Similar pressures will become more evident in 2023.

The USD will remain dominant, but there may be some changes in the global financial system.  As one example, it seems unlikely to us that the HKD peg can be sustained given the rivalry between the US and China.

The commanding heights: the technology & energy revolution

Technology is commonly thought to dominate the commanding heights of the global economy, and national economic policy is often focused on developing an edge in technology.  China, the EU, the US, and others, are increasingly investing in strengthening strategic autonomy in leading technology sectors.  Through 2023, we will see increased government capital flow into strategic areas of technology. 

Economic sanctions and restrictions are being placed on technology flows and investments between the competing blocs – and this will strengthen through 2023, drawing in a broader range of countries.   Choices will need to be made.  There are costs to global economic fragmentation due to the push for strategic autonomy.  But as in other domains, competition between countries can be a good thing – creating sharper incentives for investment and innovation (as during the Cold War).

In addition, energy remains a core element of competitive advantage.  The US is advantaged with its high measure of energy independence relative to Europe – which is currently facing competitive pressures, particularly in energy intensive sectors.

Energy investments, particularly renewables, will be accelerated in 2023 for several reasons: in response to the current high prices and supply concerns; as a matter of industrial policy; to comply with net zero targets; and as a matter of strategic autonomy.  Economies that can rapidly move to renewables (electricity, green hydrogen) will be advantaged. 

Those countries and firms that can combine technology leadership as well as security of supply of critical flows of commodities and energy will out-perform.  As technology and energy are increasingly framed in strategic terms, the pace of change will increase markedly, generating significant investment opportunities. 

For a full copy of the paper – including implications, our views on wild cards for 2023, as well as things not to worry about – please get in touch by reply email or at thelevelling@gmail.com for the full report.

The Autocratic Recession

I am in the middle of writing a book on French democracy, and not for the first time I wonder if I have the wrong country. Often in recent months I have felt I should have been scribbling about America or the UK, but now unrest is bravely picking up in Iran, and then, surprisingly we have the most political, widespread and angry outbreak of protests across China. It might well be too bold a view to say that the democratic recession is coming to an end or has troughed, but a ‘Spring’ in autocratic countries would be a welcome development, provided it ends well (please note that 15 of the 16 countries in the last ‘16’ round of the World Cup are democracies’).  

China is crucial and fascinating here. Having crowned himself as leader for ‘a very long time’ and triggered a transition from one party to one man, Xi Jinping’s hubris could not have been greater (see an earlier note ‘The Red Curtain’), and this has now been punctured by public calls for his resignation.

Having enjoyed an easy two years whilst the rest of the world suffered greatly, China is now mired in COVID, direly so in the context of the government’s autocratic and heavy-handed crackdown. In some ways it has had little choice. Chinese vaccines are not as effective as Western ones and a very large number of older Chinese people have not had a booster jab.

Neither does China have the public health infrastructure of the West. It has, on a per capita basis, one seventh of the nurses that Germany has, and one tenth of the ‘emergency’ hospital beds of Germany (though, life expectancy in China surpassed that of the US this year, still well behind the EU). It could not cope with a public health emergency – by the standards of how America dealt with COVID, China could suffer 4 million deaths, or 2.3 million using Taiwan as a benchmark. In that respect, a harsh lockdown makes some sense.

What is new, is that the lockdown has given the bulk of China’s population a bitter taste of

autocracy. In some cases, factory workers have been treated in a way that makes Oliver Twist’s trials look like a luxury holiday. Granted that the lockdown cannot end immediately and must endure till the spring in some form or other, there are two very important, long-term questions to answer.

The first is whether the manifestation of Xi Jinping’s autocratic strategy breaks the patience of the Chinese people, and the contract between the people and the state (CCP). Second and relatedly, is whether autocracy is bad for productivity, and if so China hits the productivity wall and regresses. In my view, in the grand scheme of strategic competition between China

and the US, this is far more an important issue that a potential invasion of Taiwan.

Chinese growth is slowing and like many other countries it may be in a recession. More tellingly, its trend rate of growth has come down significantly (3%) and given worsening demographics, stronger productivity is really the only recourse to higher growth. This is why autocracy is a problem.

To parse the academic work in this field, autocracy and rising productivity can go hand in hand in early developmental economies, but as the very different paths of North and South Korea show, the development of strong institutions and potentially a democracy, pays a sizeable economic dividend.

There is a good deal of evidence to show that political instability or sharp, negative changes in institutional quality can damage productivity. Turkey is another good example of a thriving economy shrunk by deepening autocracy and corruption.

At the other end of the spectrum, the consistently most productive and innovative economies are those countries (Nordics, Ireland, Switzerland for instance) with the best institutional and democratic ‘quality’. They exemplify open economies and open societies.

Cracks are now starting to show in the Chinese model. That Jack Ma only feels secure in Tokyo suggest that there are limits to entrepreneurial leadership in China. The property and shadow banking system are under stress and the disconnection of China from the rest of the world (diplomatically, flow of people) are just some of the factors that will curb innovation, risk taking and productivity in China.

Any talk of a ‘rising’ in China is misplaced, and equally the place of Taiwan is not fundamental to China’s progress. However, if it is to become a dominant power its economy must develop structurally, and this is where autocracy may become the biggest obstacle that China faces.

Have a great week ahead,


From Pantomime to Farce

This time last year we wrote an article entitled ‘Pantomime Monetary Policy’ where we mocked the denial and inaction of central bankers in the face of rising inflation, especially high asset price inflation. For much of 2022 central bankers bleated that inflation was ‘transitory’, but with consumer price inflation now tagging 8-10% across the Atlantic, they  are now of the view that ‘there are few signs that inflation pressures are easing’ to quote the latest Federal Reserve meeting minutes. Now they may get it badly wrong again.

As the central banking chorus grows, an array of macroeconomic indicators are dropping sharply like fizzing meteorites to earth – components of the Conference Board lead indicators, Philly Fed Survey and Empire State Manufacturing indicator – have all fallen to levels only seen during the 2008 recession. Financial liquidity is contracting rapidly (this has proven a good indicator of where inflation goes, with a lag). Note that if inflation doesn’t fall, then liquidity must contract even more.  

Economic sleuths will have noticed the recent drop in the price of oil, welcome from an inflation watching point of view, but a move that also tells the story of weaker growth ahead. Together with the drop in some of the above-mentioned releases, this suggests that a recession is not far away, if not upon us (curiously the Fed economic forecasts and those of the White House exclude such a scenario). More compelling evidence comes from the bond market where there is an epidemic of steeping if different calibrations of yield curve.

Yield curve steepening occurs, in very simple terms when longer maturity bond yields (10 year for example) fall well below shorter term ones (2 year), essentially forecasting weaker growth in the future. Unlike equity markets, which have predicted nine of the past five recessions, the yield curve has a better record, predicting six of the past five recessions. Another important indicator is the health of housing markets. In the rate sensitive and generally over valued and over leveraged markets (Canada, Sweden, Australia and New Zealand for instance) aggregate prices are dropping

Many economists are now sounding the alarm, and readers should brace for a media debate on whether we get a W, V or U-shaped recession. As it stands, unlike government bond markets, corporate bond and equity markets are not pricing in a recession and may well be vulnerable.

But, the outlook is however more complex than that.

Notably, different elements of the business cycle are behaving in odd ways. While lead indicators and more speculative indicators of inflation (lumber, used car prices for example) are dropping, labour markets are very strong and in general business activity seems to be healthy. Many of these elements may disimprove with time, or a lag as economists say, but these strands of strength make for several dilemmas for central bankers.

Do they for example bludgeon the cash rich consumer and healthy labour market in order to force inflation down or permit a higher level of inflation to stay in place with many unforeseen consequences for companies and asset prices. As it stands, there is a risk that interest rates run high for too long – thus discovering hitherto hidden pockets of risk and leverage. This will be a key story for 2023 and we will come back to it. An additional strand of this story will be the acute social and wealth inequality related aspects of this.

There are two more things worth saying about the business cycle.

The first is that it has been distorted and vandalized by a range of factors – lengthened and prolonged by both globalization and low interest rates (the three business cycle expansion phases during the period of globalization were the longest on record) and then the effects of COVID on labour markets, consumer preferences and fiscal policy. The commercial rupture between the US and China will also skew it and most likely the large outstanding debt load across many countries and companies will produce shorter, staccato’d business cycles.

Second, and finally there are not enough policy makers with a vision for the structural improvement of their economies. Liz Truss managed to identify a low trend rate of growth as a problem, but her response to it was hopeless. Since the global financial crisis, policy making across different countries, notably Europe, has been about crisis management. As such there are few large economies that are targeting gains in productivity and build infrastructure in new economic areas. When that happens we will be free of unconventional business cycles.

 Until then, we are in the hands of the central bankers.

The Kennedy Tapes

In a June note ‘Summer Surprises’ we spoke of tail risks to the war in Ukraine, noting the risk of a missile strike on Poland. In that respect we were not surprised by Wednesday’s missile hit on Poland, though relieved that it was not graver, and perhaps, more deliberate.

Oddly, the incident in Poland made me think of the evening of June 30, 1998 when Argentina beat England on penalties in the World Cup. I had rushed back from London to watch the match, having been to a more interesting event – the European launch of a book called ‘The Kennedy Tapes’. Memorably the book was launched by Caspar Weinberg, one of the longest serving secretaries of defense (his efforts to become secretary of state were stymied by the likes of Jimmy Baker and George H Bush). His introduction to the book that evening was passionate and telling, even for a Republican.

To give you more detail, ‘The Kennedy Tapes – Inside the White house during the Cuban Missile Crisis’ edited by Ernest May and Philip Zelikow, is a compilation of the conversations that John Kennedy, his brother Bobby and advisers held during the Cuban Missile Crisis – JFK had had recording devices fitted in the Oval Office to record his meetings and deliberations. Apparently, JFK was incensed that some advisers had backed the Bay of Pigs invasion privately but later publicly gave opposing views (there is more detail at the JFK Library).

When I read the book, I recall being struck by how thoughtful and strategic JFK and Bobby were (by the way there is a very good book about his murder ‘Who Killed Bobby?’ by Shane O’Sullivan, not to mention the film ‘RFK Must Die’). The book does not dwell on what produced the Cuban crisis but gives a superb and dramatic insight into the reaction of the Kennedy administration to it. JFK and his brother are generally calmer and more considered than their public reputations allow, and it is largely owing to this ‘calm’, and the advice of capable advisers, that an escalation did not occur.

Historians, politicians and public policy practitioners should read the ‘Kennedy Tapes’, even today, where the dilemma that the Kennedys faced is now ever present. Consider that the US/Japan/South Korea ponder the ever more powerful missile tests of North Korea, the now near public shadow war between Iran and Israel over the former’s nuclear program, the potential threat to China’s southern flank of a Japanese nuclear missile program or even the acquisition by Taiwan of long range missile technologies, the many risks from Russia’s arsenal to Ukraine and Europe, and to depress readers even more, the risks that terror groups acquire high level missile technology and deploy it into Latin America or Europe.

With respect to the immediate risk of a Russian strike into Poland and the threat of an attack on a NATO or western country, leaders will do well to follow the deliberate strategy evident in the Kennedy Tapes.

Whilst I have read a few books on war, I am not a military strategist, though I have enough experience with econometrics to know that tail risks are rising. This can encapsulate the possibility of some form of truce or settlement (perhaps Turkey or India or even China will be the initial matchmaker) but also of more sinister action by Russia given Ukraine’s progress in the south-east of the country. I suspect that the more Ukraine forces the Russian army back and the closer they approach Crimea, the heavier that attacks on Ukrainian infrastructure will grow, and as some hold, the prospect of an aggressive attack on the Ukrainian president will also rise. The recent meeting in Ankara of Bill Burns (CIA Director) with his Russian counterpart is a demonstration of the very serious undertones to the tail risks present.

There is a common thread in the ‘Kennedy Tapes’ and Bill Burns own recent book ‘The Back Channel’, that of the value of diplomacy. Worryingly in the cases of Iran and North Korea, the limits of diplomacy appear to be exhausted – by North Korea’s increasingly belligerent and attention seeking missile tests, and by Iran’s decision to supply weapons to Russia. In 2023 we may well see ‘Cuban crisis’ style deliberations around these two countries, both of which present dilemmas for Western policymakers.

In the case of Iran, any outside aggression or perceived interference could derail what is a surprisingly robust (though bloody) protest movement. In North Korea, the calculation is one of geography (namely the proximity of Seoul to North Korea) and of the viability of Kim Jong Il’s regime. And that’s before we have even considered Taiwan.

Have a great week ahead


Odd Couples

Spats between Europe and the US tend to be tempestuous, short-lived affairs – thankfully. In the Suez Crisis, Britain and France stormed towards Egypt only to be reined in by a raise of the American eyebrow. Dominique de Villepin’s speech against the invasion of Iraq was a glorious affair (please read the bande dessinée ‘Quai D’Orsay’ or watch the film of the same name with Thierry Lhermitte and Julie Gayet), but the tanks still rolled in. Then there was ‘The Donald’, lecturing the Germans on their energy and security policies, to guffaws of laughter and much derision, though he was quite right in the end.

Now, there is another, largely avoidable, though consequential tangle coming between the US and Europe. America’s increasingly concerted efforts to nobble the Chinese economy, and Europe’s slow awakening that it finds itself in strategic competition with China and to an extent the US and must boost its ‘strategic autonomy’, are two geopolitical threads that risk crossing each other in a disorderly way.

The complications of this intersection of interests were on display last week as Olaf Scholz visited China- a man standing nervously on cracking geopolitical ice flottes – he managed to disappoint everybody. His coalition partners were vexed, France’s proposal for a joint EU visit was spurned and America wondered whose side Scholz is on (that of German industry is the answer).

This tender diplomatic environment is just one outcome of a world where globalization as we know it has crumbled and we are now in the interregnum phase before the contours of a new world order are established. The problem being that two or maybe three parties want to establish the rules, standards and institutions of that world order.

There are several problems. America wants to have its diplomatic cake and eat it – it expects Europe and other nations to disengage from China – recall the diplomatic error over the creation of AUKUS. Further its domestic fiscal policy is reinforcing the negative side-effects of its foreign policy. For instance, European car manufacturers will suffer the consequences of the Inflation Reduction Act (David Skilling elaborates on these points in his recent ‘Peak West’ note).

Europe by comparison wants to bake its own cake but doesn’t quite know how. The idea of strategic autonomy has yet to fully take flight – and to be cruel this has yet to evolve beyond ‘strategic yogurt policy’ (in 2005 the French government shielded Danone from a takeover bid by Pepsi).

In a world where the three large regions are fast developing distinct expressions of their values, Europe and America have a common cultural and historical thread and share an interest in promoting democracy. On both sides of the Atlantic, democracy is under threat – from within by populists, and from without by anti-democratic countries like Russia and China.

In that respect, we ask what can be done to ensure that Europe and the US do not trip over each other as they keep an eye on the bigger picture.

The first is that American companies and policy makers need to take into account that the narrative in Brussels and major European capitals has changed towards ‘strategic autonomy’ across a range of fields (defence, telecoms etc) and anyone wanting to do business across Europe needs to fit their pitch into this framing.

The second, related element is that Europe needs to do at least two things – give itself a chance to establish strategic autonomy by putting in place the capital markets, tax frameworks and incentives that will allow innovation to thrive. We are far from this point and there are too few pan-European consumer and fintech platforms – Sumup is one, Doctolib becoming another. The second is to help partners like the US to understand the mapping of ‘strategic autonomy’ and where they can be involved commercially.  

The US and Europe ideally need to work more closely on stemming external interference in their electoral processes in particular, and economies in general. For instance, this time last year Europe announced its democracy package – aimed at safeguarding interference on political funding, media and voting rights – but it is effectively porous given the ability of foreign actors to penetrate individual countries without proper surveillance and sanction.

Then, there is talk that the G7 could become the organising body for the democratic Western world – though in effect this boils down to the US-EU axis. There was a time when the UK acted as a bridge for the US into Europe, but Brexit and the degradation of the UK’s soft and institutional power by Boris Johnson have broken this bridge – it may now be up to smaller states like Ireland to better interpret and marshal an open, diplomatic exchange between the US and Europe.

Such a move might help the US-EU axis but then the bigger question remains as to what the EU and US do together- would they try to destabilise public life in China or adopt permanent sanctions and restrictions on Russia. This might well be a false avenue – the best they can do together is convince the likes of Indonesia, Bangladesh and India to move closer to them and thus tilt the balance away from autocracy.

Have a great week ahead



There is a scene at the end of the film ‘The Firm’ where the character played by Tom Cruise is chased along the Mississippi bank in Memphis. As we might expect, our hero escapes. I was in Memphis recently, and ‘re-created’ the run along the mud bank, and then across the Harahan bridge into Arkansas – which looks very much like Tennessee, and no sign at all of Bill Clinton.

In my visit to Tennessee one private objective was to pick up a sense of the fractured political climate in the US ahead of the midterm elections – though disappointingly all the people I met were pleasant, intelligent and well informed. On then to New York, where at a breakfast meeting, I spotted Bill Barr at the next table no doubt conspiring on the election with a Republican Senate candidate.

Then, a quick, regular homage to the tomb of Alexander Hamilton (see chapter ten of the Levelling) before a meeting in the new World Trade Centre. The last time I was there, I shared a podium (one the very impressive top floor) with JD Vance, author of HillBilly Elegy, and now a Senate candidate in Ohio.

At the time – I had greatly enjoyed his book – my impression was of someone who was authentic, somewhat unpolished and with strong views. I recall him being very critical of Donald Trump. Since then, Vance has been swallowed up in the bitter morass of American politics, and viewed from Europe, been radicalized. This is a pity given his life story and achievements, but emblematic of the intensity and complexity of public life in the US.

It was always a testing environment – an examination of the period Hamilton lived through (and the fact that he died in a duel), highlights the vitriol of the press and political debate back then (Ron Chernow’s book is a good reference point). There is also a school of thought that holds that the quality of politicians has been on a downward tack since the Founding Fathers, Andy Borowitz’ new book is an example (‘Profiles in Ignorance’).

Against the backdrop of the ebb and flow of the fortunes of strongmen leaders (Bibi is back, Bolsonaro is out, Boris is on tour) and the context of a worldwide democratic depression, the mid-terms are interesting for what they tell us about the theatrical aspect of American politics (notably the Pennsylvania race between Dr Oz and John Fetterman), the pulling power of Donald Trump and the health of American democracy.

In that respect, the barometers to watch are the relative success of ‘non-Trump’ Republicans (for example Doug Ducey in Arizona or Joe O’Dea in Arizona), the extent to which candidates at the extremes of both parties do well (worryingly both Kevin McCarthy and a group of left wing Democrats including Alexandra Ocasio-Castro have tried to suggest that America’s support for Ukraine be limited).

Listening to the debate, it seems that the notion of ‘truth’ is very much up for grabs, both in the sense to which candidates and their supporters have flexible views on the rules of the political process, and to the extent to which they feel their own lives need to correspond to their policies – Herschel Walker the former Dallas Cowboys running back and now Republican candidate in Georgia is a case in point in terms of his stance on abortion.

The race will also give a steer as to the runners and riders in the 2024 Presidential election – I suspect that on balance the Republicans will do relatively well in the mid-terms (a barometer of the extent to which Americans care about the economy versus abortion for instance), and Donald Trump could claim credit for this and declare his candidacy for the Presidency (he is, statistically, the most ‘losingist’ President since Herbert Hoover having lost the Presidential election and the Senate and Congress).

It is not clear who the Democratic candidate might be – officially Joe Biden is a contender and problematically for the Democratic race there are few other obvious contenders (maybe Mayor Pete?). My own view is that the really interesting political figures are found at the mayoral and gubernational levels – Mike Duggan in Detroit and Francis Suarez in Miami.

In previous decades, a relatively good mid-term for the Republicans would have fostered talk of bi-partisan cooperation with a Democratic President – something that Joe Biden excelled at during his career. This time is different. The battle for American democracy may just heat up.

At War

During the week I participated in a discussion with a group of insurance sector executives as to what defines ‘at war’ – in the context of various claims on the sector with respect to the invasion of Ukraine (i.e. ships stranded in the Black Sea, aircraft impounded in Russia). The question is an increasingly relevant one, notably for the evolution of security policy in Europe.

In recent days, at least two developments have underlined this. One is the elevation of Xi Jinping to a third term as Chinese leader, in a choreographed display of singular ‘thoughtcrime’. In my view the transition from a ‘one party’ to a ‘one man’ state may not necessarily make the invasion of Taiwan more likely, but it does increase the risk of policy mistakes by China (as an aside, capital is trying to flee China and, the Chinese stock market has delivered a 30 year return of precisely 0%).

The other was the repeated warnings from Russia that Ukraine is developing a dirty bomb – such crooked veiled threats can be unlocked by turning them upside down – Russia is signaling its intention to escalate the war in an even more ghastly way (interestingly this week’s Der Spiegel has an interesting article on veiled threats by Russia to attack Berlin with nuclear weapons). 

And, the Russians have been busy. Consistent with some of our earlier missives (From Great War to Total War) Russia has adopted a policy of aggravating and irritating Europe around its borders. They have now stepped this up to menace critical infrastructure – cyber attacks on banks, transport companies in large European countries, the (alleged) blowing up of gas pipelines around the Nordic states, the threat to vandalize telecommunication cables linking the US to Ireland (and thus Europe). It is a ruthless, near medieval siege type attack where Europe’s vital connections are targeted.

Not to mind that, but attacks are coming in other domains. In a recent note (The Man on Horseback) we noted the epidemic of coups d’états in African states, many of which coincided with the arrival of the Russian mercenary firm Wagner in those countries. There has yet to be a push back from the colonial power in many of those countries (France) but it could come once the outcome of the war in Ukraine is more clear.

In sum, Europe is under attack, if not at war. Insurers would argue that the technical conditions for war are not met, but the reality on the ground is that this is the case in a practical sense. This attack or aggravation by Russia may also mark the first time that Europe as an entity or more importantly, as a system of values, is under attack. How then might it respond?

First, in some European countries, where a coherent security policy has been willfully neglected because of historical factors, there is a rude awakening.

Germany is a good example and it has a long way to go in replenishing its military hardware and personnel. Indeed, one of the reasons for the relatively difficult relations between the German and French governments has been the German reluctance to buy French weaponry. If that’s not enough, Germany is also caught in a difficult position with regard to Russia’s ‘unlimited friend’ China, with a proposed Chinese acquisition of Hamburg’s port and a visit to China by Olaf Scholz stirring controversy.  

Ireland is another example, where complacency regarding its geographic location and a half-baked policy of neutrality have been conceived in a way that it is effectively defenceless – so much so that when a Russian plane flies close to Irish airspace, we need to call the RAF. Irish politicians may think that its location and neutrality render it safe, but viewed through Russian eyes Ireland is a tributary of the larger Anglo-Saxon countries (notably the US) and an easy candidate for a provocative act.

Second, at some point, Europe’s leaders will feel the need to respond to aggression, and in the pattern of the EU being forced to evolve by crises, it may for the first time undertake an offensive action in the name of the EU. This would take the EU into a highly ambiguous area, and such an act may take the shape of a coalition of the willing – perhaps a large scale cyber attack led by the Netherlands, France and Sweden. 

The awakening that Europe is under attack should really sharpen the view that cannot suffer attacks from within – I have written many times on the need to credibly sanction Viktor Orban’s Hungary. Additionally, the progress of countries like Serbia towards EU membership should be halted. Moreover, Belarus a weak point in Russia’s constellation should be more actively targeted in terms of sanctions and support for its pro-democracy movement.

This has not been an optimistic post, but to finish on a high, though stay on topic, I can recommend an excellent, amusing collection of the writings (between 1940-45) of Flann O’Brien, entitled ‘At War’.  

Katherine the Great

It is hard not to write about the end of the short political career of Liz Truss, harder still to say something funnier than the array of jokes already printed, and impossible to write about the dangerous political asteroid that is Brexit.

Truss’ exit is the logical outcome of the Tory party’s hatred of Europe on one hand and inability and unwillingness to arrest their country’s relative decline, that has consumed British politics, troubled the EU, permanently damaged the UK and likely destroyed the Union. This bonfire may only end when the Tory party itself is consumed by Brexit, and this day may not be far off. Even with a new prime minister, in the context of severe economic stress in the UK we cannot be far away from a general election, which based on opinion polls, would effectively wipe out the Tories.

Truss’ premiership will go down as the worst and shortest in British history, competing with the likes of George Canning who died after 121 days in the role, and Andrew Bonar Law who stepped down with illness after 211 days. Even, Edgar Æthling who ruled England from October 1066 till William the Conqueror stepped in in December 1066, lasted longer.

Equally, Truss will make Lord North (who lost the American ‘colonies’) and Anthony Eden (Suez) look like strategic geniuses.

That the current cabinet is now made up largely of ‘Remainers’ and the political-economic landscape in the UK is in ruins, support the sense that Brexit was a bad idea. That some Tory MP’s and party members still want Boris Johnson as prime minister suggest that pockets of denial remain, and that more ‘pain’ is necessary.

Brexit allowed the most ambitious, least able politicians to come to the fore, and it is time to now reverse this. One recent example of the clash of ability with politics comes in Kate Bingham’s recent book ‘The Long Shot’ where she details the race to find and distribute a COVID vaccine in the UK, and the political machinations involved in the process.

The implosion of the Brexiteers allows many people to say ‘I told you so!’, and I am going to clamber shamelessly onto this bandwagon. It could have been very different.

Some four years ago when I wrote ‘The Levelling’ I created a character called Katherine Chidley. She was based on a very impressive 17th century activist and businesswoman of that name. Born in 1616, Katherine Chidley was one of the most eloquent and prominent women in public life in mid-seventeenth-century England. She wrote widely, ran a business (selling socks to the army) and was the mother of seven children.

In the book (chapter six – much of what follows is directly from this) I imagined a modern politician in her image, newly elected, and thrown into the position of finance minister. As such her aim is to find a formula for sustainable economic growth that will also lead to a balanced society (Liz Truss could have taken this path but didn’t).

Chidley is determined, especially to avoid creating imbalances in debt levels, asset prices, and trade. Minister Chidley has many obstacles ahead; the first is coming to grips with her department and with the nuances of economics and finance.

‘As the new finance minister she might, if not careful, find herself being quickly carried along in the jargon of economics, speaking in terms of deficits and the code of GDP forecasts. Like most professions, finance and economics have their own codes, rituals, and language. To the outsider, most of this is dull and hard to comprehend (even Kwasi got it wrong).

In her first weeks in the job Chidley will see economics and policy making from the inside and will make a journey of discovery, learning to distinguish cosmetic drivers of growth from longer-term, more meaningful factors —such as a focus on investment in human development. They take time to show dividends but are ultimately the ingredients that make countries strong and resilient.

In her first few days in the job, she asks her chief civil servant or “Sir Humphrey” to give

her an honest view of the lay of the land: What is the outlook for economic growth, where does economic growth come from, and, optimistically, how can she improve her country’s level of growth?

An honest mandarin might point out that economic growth, as we have come to know it, is getting scarcer and more constrained. In order to soften that blow the mandarin might heave a great pile of research and policy papers from institutions like the IMF, the World Bank, and OECD onto the desk of Minister Chidley.

Already, Minister Chidley will see that a troubling pattern is emerging. At one level, we see the slowing and transformation of globalization. At another, the end of a very long economic cycle is in sight. There is also a sense of exhaustion, not merely on the part of households and businesses but also on the part of policy makers, especially central banks, who have gone to extraordinary lengths to sustain growth and prevent a deep recession (and who are now confronted by high inflation). This exhaustion may be attributable to the fact that at no point since the late 1990s has there been a full-scale reckoning or  clearing out of the imbalances in the world economic system.

Having listened to this long tale of lower growth, the economic handbrakes of demographics, and lower productivity, Minister Chidley is thoroughly depressed and wishes she had been made a minister of defense instead. Tackling low growth and its consequences will be demanding.

She has two, perhaps three, options. First, worried that there seems to be very little public acceptance that the future could be less rosy than  the past, she asks her mandarin for a quick fix, an economic magic pill.  An infrastructure program like Boston’s Big Dig might fit the bill. A second option is economic nationalism. With the level of growth likely to be lower than it has in the past twenty years, she might take to megaphone politics, point to growing competing economies and tell her voters that she will take back the growth that is theirs.

Third, and the difficult solution practically and politically, she might ask what drives national development and stability in the long term and set about creating a framework to implement those drivers. She is drawn to the idea of country strength, which relies on nations’ developing a policy mind-set that cultivates economic resilience and that invests in intangible infrastructure (education, an inclusive society, research/development, institutional excellence).

Katherine Chidley, and the economic vision that she developed, which I set our four years ago is the anti-thesis of Liz Truss. The only remaining question is how much chaos the Tories must visit upon themselves and their country, until a Chidley character takes the political stage.

In with the New!

I am being a little lazy this week in that I am serving up ‘one I made earlier’. Following a week where economic policymakers gathered for the annual meeting of the IMF and World Bank, Christos Cabolis (chief economist at the IMD.. in Lausanne) and myself have an article in the excellent Prospect magazine, where we look forward to the kinds of institutions that are needed to marshall the world order of the 21st century. 

It says much about the defunct nature of the IMF that they have little relevance in a world where markets appear untamed (equities had one of the largest turnarounds ever last week, whilst the volatility in gilts is mind boggling). It would be easy to spend time castigating the likes of the IMF and WTO (World Trade Organisation), but I have done that many times before (and also at last week’s Global Goals conference). 

Instead, its is better, we feel to try to start a debate on the kinds of institutions that will be required to police cyber warfare, give institutional structure to new forms of money and even, produce meaningful climate change. 

Hope you enjoy the article – I attach a link here and the text below. 

The Queen’s death reminds us that an era of stability has come decisively to an end. We are currently facing a number of global shocks—a sharp breakout in inflation and a corresponding rise in interest rates, a bloody war in Europe and rising tensions between China and the US, the two largest economies in the world. Longer-term issues such as climate change, declining productivity, rising indebtedness and extreme income and wealth inequalities in the wake of the financial crisis leave us in no doubt that the world has changed.

We now must focus attention on the institutional infrastructure required to marshal the world order of the 21st century. Many of the institutions that were established to mediate the post-World War Two order are now defunct. Even those that fulfilled the roles that were intended for them may now have nothing more to offer.

The World Bank is such an example, especially in the context of economic growth across Asia and the rise of rival sources of funding (e.g. the Asian Development Bank.)

[Also should draw attention to the fact that the “stability” of the 20th and 21st centuries was not necessarily relevant in most parts of the world – Yugoslavia, Eritrea, Congo, Syria, Iraq, Afghanistan etc – not quite relevant here in my view

Another Bretton Woods institution, the International Monetary Fund, is experiencing a decline in its credibility and influence. Notably, two of its major, recent funding programmes—for Argentina and Greece—have been severely criticised. The World Trade Organisation has been powerless and largely ignored in the face of trade wars. All three institutions have had multiple crises of leadership. The same is true of the World Health Organisation, which has allowed itself to be compromised by geopolitics during the most severe international health crisis of recent times.

These institutions are now largely obsolete, and any debate that seeks to resurrect them is a waste of time. More effort should be spent on identifying the policy challenges of the 21st century and mapping out the institutions that can address them.

We must consider which powers, actors and countries are likely to shape the new world order. During the most recent wave of globalisation, power was rooted in the role of the USA as the dominant player, and indeed many of the world institutions were themselves rooted there—the UN, World Bank, IMF, with others based in European cities (WTO and WHO in Geneva and the OECD in Paris).

The new, multipolar world will be one dominated by at least three large regions—the US, the EU, China (the India-Dubai region is a potential fourth pole)—who do things increasingly distinctively, from their socio-economic models to internet regulation. These will be composed of groups of small advanced nations (the Nordics, Ireland, Singapore, Switzerland, Netherlands, New Zealand, Belgium and Switzerland) that top a range of league tables from democracy to innovation to human development, then a group of disparate non-superpower powerful countries (the UK, Russia, Japan, Australia, and possibly India), [I don’t follow the order of these groups here – is there a reason the small nations would be followed by larger ones? – I think the super powers and the small states are the most coherent, focused ones that’s why I have prioritiesd followed up by a group of emerging economies with large, fast-growing populations (e.g. Ethiopia, Indonesia, Kenya, Nigeria, Vietnam).

The needs and aims of these groups and nations, together with the ways in which they respond to new threats to security, will determine what the next set of institutions will look like and where they will be based. The new challenges of the future—climate change, potential energy shortages, and economic volatility, coupled with new technologies—will necessitate collaboration between them and other stakeholders, such as corporations. This will in turn demand global governance, new standards and regulation, and coordination through new institutional bodies. New world institutions or collaborative arrangements will need to be hammered out. What should they focus on and what might they look like?


We now have the highest debt-to-GDP ratio in centuries. As inflation forces interest rates higher, it may be too late for an international institution (like the IMF) to gently persuade countries to reduce debt levels. But it is crucial that there is an institution that can oversee the chaos that may result from a new debt crisis. This body—a debt conference—would have at least two objectives: coordinating debt reduction and forgiveness across the major economies, and then putting in place a new set of “rules of the road” that will set in place new tenets of economic governance.

Meanwhile, questions over the “future of money” have gathered pace—turbocharged with the rise of crypto currencies and the steady advance of central bank plans for digital currencies. This new trend will necessitate the laying out of standards for payments and the technologies that drive them. It will require bodies that can oversee the intersection of centralised and decentralised money systems, and that help to order the spread of competing payment and money services across emerging countries.

Health and science:

Advances in medical research, in particular gene-editing technology, raise important ethical questions about the ways in which scientists can alter our genetic makeup. This could exacerbate health inequality, enabling the wealthy to live longer, at a higher health quality. In extremis, this may even raise the prospect of genetically edited athletes and soldiers. Where technological advances outstrip debates in law and philosophy, there is a need for global standards and laws to marshal this development.

The coronavirus pandemic has been remarkable for the innovations it has spurred in medicine and medical practice, and for the attention it has focused around mental health issues. This shift in emphasis is also percolating through national policy agendas, though mostly in smaller progressive countries— Iceland, Scotland and New Zealand have joined together to form a “Wellbeing Alliance”. With global poverty now significantly reduced from decades past, mental health is the next great frontier in health policy. It requires a global approach to co-ordinate best practice, diffuse this to the many countries that do not place mental health at the centre of their health services, and in particular to work with actors like corporations to improve the mental well-being of workers.


An increasingly common phenomenon is the disabling of healthcare systems, energy infrastructure and public services by cyberattacks. Many such attacks originate from Eastern Europe and especially Russia. The Baltic states, Ukraine, Syria, Turkey and Taiwan have all been targets for cyberattacks in recent years, not to mention the prominent cyberattacks by Iran as part of its “soft war” military strategy. Cyber-crime and cyber war occur in a grey zone in international law where there are no formal rules on how to punish cyber attackers who operate within a particular country. It is not clear whether a cyber-attack on a French hospital that originates in Lithuania that indirectly results in avoidable deaths, for instance, can be considered an act of war that permits a direct physical military response. Some corporations have already opened a debate on the need for legal infrastructure to deter cyberattacks, be they by state or private actors.


That the world is enduring severe climate change is now incontrovertible. The 2015 Paris Accord is a formal acknowledgement of what must be done to combat it. In our view, nation states have not yet solved the game theoretic problem of producing a framework that aligns the cost and responsibility for climate damage. An international institution with carbon and levying powers, or even a framework agreement between large international cities, may offer potential solutions.  

Rare places:

One trend that become more apparent in recent years is the contest over distant locations that are difficult to reach, such as outer space or the Arctic. The US, Europe, Qatar and China have all sent probes to Mars. Space commerce, space defence and space tourism are set to grow. The invasion of geopolitics into largely inaccessible places raises the risk that these areas become contested, and that subsequent competitive behaviour become disorderly. While bodies like the Arctic Council already marshal the various interests acting in the Arctic, we envisage that a constitution will be necessary to oversee space exploration, space combat and space tourism.

We speculate that these areas, and the potential new institutions that will shape and shepherd them, will form the contours of the “new world order” that many talk about. Unlike the 20th century, the engineering of these institutions cannot be left to governments alone but must involve corporations, cities, citizen assembly bodies and universities. At a time when the old world order is crumbling, these institutions offer an exciting opportunity to build something new.


One of the more remarkable places I have visited is the ancient fortress of Bam, in south eastern Iran – hidden behind high walls, there is initially little sense of the magnitude of this citadel, which in its full vista looks almost like a film set. I was lucky enough to see it just before it was destroyed in an earthquake, though it has now been largely reconstructed.

At the time, in the post 9/11 world, Iran had been castigated by George W Bush as part of the ‘axis of evil’, though it managed to use the war in Iraq and the eruption of the Arab Spring across Syria to deepen its tentacles across the Middle East.

My sense of Iran then was that for many of the things we believed about Iran from a Western point of view, the opposite was true, and I suspect that this is still the case, especially with respect to Iranians themselves. Iran has a very deep and rich heritage, matched by an enduring modern middle class and broad level of education across its population.

It is however, tightly controlled by a small, inward looking and harsh theocracy, aided and abetted by the Revolutionary Guard who exert de facto control over the Iranian economy as well as other sectors.

Iran has for many reasons been the centre of geopolitical intrigue – which is one reason why the Iranian state is structurally distrustful of Britain and America – and today, it is the locus of an increasingly open ‘secret’ war with Israel.

Against this complicated backdrop the protests across Iran by men and women, that were triggered by the death of Mahsa Amini, are important. In essence the protests were triggered by the new president Raisi’s desire to enforce strict Islamic decorum by increasing the number and vigour of the morality police.

In a country with a very large young population that has a hunger for a more progressive society and where there is a growing gender consciousness (the film the Stoning of Soraya M. is not only a good film but also a reminder of how the odds were stacked against Iranian women), such a repressive measure was a bad idea.

Over 100 people have now died in Iran since the murder of Mahsa Amini. While protests are widespread and frequent across Iran this one may have an enduring effect. One is that Iran’s supreme leader Ayatollah Khamenei is in poor health, and while a changing of the guard may not yield a reformist minded leader, he might be more pragmatic. Second, the ‘headscarf’ protests could feed broad public civil disobedience (women might stop wearing head scarfs altogether) that might then set in train broader social changes.

It is unlikely however, to produce what some call ‘regime change’ – the Iranian state is far too repressive to permit this, and there is sufficient paranoia and nationalism in Iran that any attempt at regime change would be perceived as an outside intervention in Iranian affairs.

The prospect of a slightly more modern Iranian state throws up an intriguing dilemma for those negotiating the Iran nuclear deal (JCPOA), which is now on its last legs. Do they do everything possible to ‘break’ the Iranian regime, or risk allowing a deal and the easing of sanctions that might open up Iran’s economy and society?

Whilst Israel will have a very powerful voice in these deliberations behind the scenes, recent events in Saudi Arabia may also become a factor.

Saudi Arabia’s very public cutting of oil production in tandem with Russia is effectively a ‘rogue’ turn by them, given the military and geopolitical support they have enjoyed from America over the years. Not only is Iran the polar opposite of Saudi Arabia socially, but it has hitherto been on the opposite side geopolitically. It is too much to say that Saudi Arabia’s alignment with Russia (Iran is a close partner) heralds a decisive shift in the geopolitics of the region, but this week there is a sense that long standing relationships are beginning to break down.  

Have a great week ahead,