Although I devoted last week’s note to book recommendations, I want to start this week’s missive by also highlighting a few classic works, notably Charles Dickens’ ‘Little Dorrit’ and Honoré de Balzac’s ‘Lost Illusions’ and ‘Pére Goriot’. All three books, published in the middle of the 19^th century, in the shadow of the debt burdens that resulted from the Napoleonic Wars, speak to the pernicious aspects of debt – debtors prisons, debt collection and the surrender of properties caused by over-indebtedness.

They have come to mind because markets are beginning to price in a potentially very dramatic change in fortunes – which, if it occurs, will be historic and far reaching. There are at least three noteworthy elements to this.

The first is that the difference between interest rates for companies, relative to ‘safe’ government bonds, have fallen to historic lows. In more technical terms, corporate bond spreads (corporate yields less the US 10 year bond yield for example) and spreads for riskier high yield bonds in the US, are now well below long-term average levels. While this is a function of strong risk appetite and demand for fixed income, it is also a recognition by markets that debt levels for corporations (on average) are at very manageable levels, while those for governments are not.

Second, the spread between emerging market debt (countries and companies) and Treasuries has also compressed, to multi-decade lows. Again, this is an indication of appetite for yield from investors, but also a re-evaluation of the riskiness of emerging market debt (compared to countries like the US). Emerging markets collectively (China skews the data) have a debt to GDP ratio of 75% according to the April edition of the IMF Fiscal Monitor, which is the highest it has ever been.

The only saving grace is that emerging economies have lower debt levels than the developed world, though the threshold to debt sustainability is much lower for emerging economies (less deep markets, harder to gather taxes). What is more interesting is that within the emerging markets universe there is a decent number of large emerging economies that have relatively low levels of debt – Indonesia and Mexico for example.

Then third, rising stock markets and property markets, not to mention business creation, have created massive wealth. Remarkably, world wealth stands at over USD 500 trn, with nearly half of this in the USA where the wealth of the average adult is USD 620,000, according to the recent UBS wealth report. The USA is also home to about 60% of the world’s ultra-high net worth individuals, those with net wealth of over USD 50 mn. Surpassing this group, there are close to 3,000 individuals globally with wealth between USD 1bn and USD 50bn (collectively they are worth nearly USD 13 trn).

The point of sketching out varying levels of debt and wealth is that in the next five or more years, there will be a seismic transfer of power, influence and wealth between those who have ‘healthy’ balance sheets, and those who are encumbered with debt…as Dickens and Balzac have so skillfully demonstrated.

To give a few examples. The UK is notoriously fiscally constrained and cannot alone raise the capital to fund its ambitious AI Opportunity plan. As such, it will likely enter in partnerships with sovereign wealth type investment funds (Caisse des Dêpots, the Canadian fund, has just announced a CA$ 3.5bn investment in a nuclear energy plant in Suffolk).

The same is true in the US. In a recent research note, Morgan Stanley estimates that the US will need to invest USD 3.5 trillion in AI infrastructure up to 2028 (new energy sources and data centres), and that at least half of that capital will come from the large technology firms in the US. In the context of America’s fiscal constraints, cash rich technology firms will become more powerful, and critical to national

If the US has a debt crisis, and Treasury yields balloon out beyond 8%, an easy political remedy would be to co-opt (under threat of a punitive wealth tax) America’s wealthy to buy government debt. Equally, sovereign wealth funds of low debt countries like Norway, will have a unique opportunity to buy strategic assets across Europe in the event of a debt crunch.

My prediction is that France, the UK and perhaps the US will spend the next fifteen years in the ‘Debtor’s Prison’, while lower debt countries like Germany, Poland and the Netherlands and Norway will enjoy a strategic opportunity. In a world where democracy is under pressure, and in some cases inequality is rising, large cash rich companies will control more strategic assets, and the wealthy will find that governments need to court them rather than tax them.

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

Have a great week ahead,

Mike 

With the holiday season approaching I am putting together a new set of recommendations – along three criteria – books on finance, books that help us to understand the changing world and to take readers minds off this changing world, enjoyable fiction.

To start with finance and economics, Ireland is unusual internationally in terms of its budget surplus, other countries are in a much tougher place. In particular, Britain’s Chancellor Rachel Reeves has had a difficult year, granted the backdrop of a high deficit and heavy debt burden. It is a difficult job, as evidenced by Reggie Maudling’s letter to his successor in 1964 ‘Sorry to leave it in such a mess, old cock’. In this respect, Roy Jenkins book ‘The Chancellors’ is worth dusting off, and few other books by finance ministers are as analytical (Tim Geithner’s ‘Stress Test’ and Ben Bernanke’s Courage to Act’ were fairly dull). However, the other book in this realm that I recommend, with Fed chief Jerome Powell under pressure from the White House, is Liaquat Ahmed’s ‘Lords of Finance’.

With some markets creaking nervously (bonds) and others behaving complacently (equities), it is time to re-read Roger Lowenstein’s ‘When Genius Failed’ the story of the collapse of the LTCM hedge fund. I recall a seminar where David Modest, a partner in LTCM recounted, with some emotion how it came asunder. Another classic, from before the LTCM era, but that is relevant to private assets, is ‘Barbarians at the Gate’ by Bryan Burroughs and John Helyar.

Then, if the summer weather is too hot, it’s always good to have a few trophy books lying around, that will certainly never be read, but nonetheless confer an aura of wisdom on their owners, such as ‘A History of Interest Rates’ by Sydney Homer and Richard Sylla.

Moving on to books that will help steer readers through intense geopolitical change, I want to start with the late Joe Nye’s ‘Soft Power’ and ‘Life in the American Century’, which give a now nostalgic glimpse of a more internationalist America. Two pre-occupations in Washington are defence, and wealth. On the former, Alex Karp’s ‘Tech Republic’ was more thoughtful than I had expected, and the two futuristic books on the defence threats that the US faces, by Admiral Jim Stavridis and Elliott Ackermann ‘2034’ and ‘2054’, give us a sense of how conflicts of the future will be fought, even if these books are being overtaken by events.

Then, with the recent Trump budget (Big, Beautiful Bill) set to tilt the economic scales in favour of the wealthy, Evan Osnos’ book ‘The Haves and Have-Yachts’ is worth a read, as are Oliver Bullough’s books ‘MoneyLand’ and ‘Butler to the World’ on the topic of wealth and corruption.

Universities have been in the news this year, and ironically, there are very few good books about university life. In a previous note I had recommended Tom Sharpe’s ‘Porterhouse Blue’, and would add Lucky Jim by Kingsley Amis, Changing Places by David Lodge and for fans of university sports, the classic ‘True Blue’ by Dan Topolski.

Switching continents and genre to fiction, a few works of fiction are worth reading to help shape our view of Russia (and Ukraine), most notably Vasily Grossman’s ‘Everything Flows’ and Mikhail Bulgakov’s ‘White Guard, and then more generally Pushkin’s Eugene Onegin (decent as an audio-book on a long journey).

For well written fiction, I think William Boyd’s writing is superb (his latest book is Gabriel’s Moon), Shuggie McBain by Douglas Stuart is an example of very original, inventive use of English, and for those readers who can’t escape finance, Lionel Shriver’s ‘The Mandibles’ gives a glimpse of how it might be to live in a financially broken world. Sentimentally, I wanted to also mention Edna O’Brien, who died this time last year – have a read of ‘Country Girls’.

As a last word, I am taking a collection of very different books with me this summer – a friend has kindly given me a copy of Ed Luce’s ‘Zbig: The Life of Zbigniew Brzezinski’, which I look forward to not only for colour on one of America’s great strategists, but I expect for Luce’s generally excellent writing.

I would also like to read ‘Kingmaker’, Sonia Purnell’s account of the life of Pamela Harriman, former US ambassador to Paris, amongst many other roles. In addition, in a world of ‘deal-making’ I am packing the ancient, François de Caillière’ ‘L’Art de négocier sous Louis XIV’ and the ‘Letters of JRR Tolkien’.

Have a great week ahead,

Mike

The performative exchange of military strikes between Iran and the US means that a nuclear tipped hot war in the Middle East is off the cards for the moment, though the bad news is that a far greater crisis awaits.

In the past five or so weeks prominent financiers – Ray Dalio, Jamie Dimon and even Elon Musk – have warned about the burgeoning fiscal deficit and the mountain of debt that the US (and other countries) has accumulated. A very decent blog post by Indermit Gill, the chief economist at the World Bank, outlines the viewpoint.

Next week, there is a good chance that the Senate passes President Trump’s budget, which according to the independent Congressional Budget Office (CBO) will swell the deficit by close to USD 3trn and push debt to GDP towards an unprecedented 125% in the next ten years Additionally, rumours that the next Federal Reserve chair will be picked soon by President Trump (Powell leaves in May 2026) has upset the dollar, making life even more difficult for foreign holders of US debt.

What is interesting is not how gargantuan the world’s debt load has become, but how few people care. Politics in the West has changed so much that it has neutered what used to be a political class who in a very Catholic way, pronounced themselves to be fiscally responsible.

In the US, it used to be the case that a good number of Senators were what was called ‘fiscal hawks’, or had an aversion to large budget deficits, and an even greater aversion to resolving them through higher taxes (the US has only produced budget surplus twice – under Lyndon Johnson and then Bill Clinton – and in both cases taxes were raised). Paul Krugman has referred to deficit hawks as ‘deficit scolds’, because the spend more time warning about the dangers of the deficit than fixing it.

Ronald Reagan, and the policy makers who surrounded him – namely James Baker, Nicholas Brady and Don Reagan, were fiscally conservative by reputation but had the luxury of being able to grow the US economy through tax cuts and de-regulation. At the time (early 1980’s onwards) some Republicans had a ‘starve the beast’ mindset, which is to say that they favoured lowering taxes so that the government would have less revenue to spend, but there is little evidence that this worked as a strategy (partly because many of the initial Reagan tax cuts were aimed at the rich).

In the post Reagan phase, deficit reduction as a virtue came into its own in the Robert Rubin era (at the Treasury), and many of his former colleagues and acolytes continued this during the early years of the Obama presidency (a relevant private body is the Hamilton Project, where Rubin was a founder).

One of the notable initiatives of the Obama White House was the creation of the US National Committee on National Fiscal Responsibility and Reform or the Simpson-Bowles Commission as it became known, a bi-partisan body that aimed to reduce the fiscal deficit and debt. Its most noteworthy aspect, in my memory, was the degree of civility and collaboration between representatives of the Democrats and Republicans. Such a body could not exist today.

Indeed, the radicalisation of parts of both parties, in the context of quantitative easing (which has dulled the impact of rising debt and deficits) has broken the link between fiscal responsibility and electability. For example, the first crack in the Republican edifice was the advent of the Tea Party Movement, one of whose tenets was tough fiscal responsibility, as inspired by a ‘Chicago Tea Party’  rant from CNBC commentator Rick Santelli in 2009. Many of the Tea Party oriented voters and Republican politicians then gravitated to the Trump corner in 2016, the price of which was a surrender of their fiscal sacred cows.

Today there is only a handful of fiscally conservative Republican Senators (the Club for Growth publishes an annual scorecard of how fiscally rigorous it thinks members of the House and Senate are). The majority of Republican Senators appear happy to give the nod to a policy that edges the US closer to the financial precipice. Indeed, not only will the Trump budget favour wealthy households but it will increase the number of financially precarious households, and damage healthcare and education provision. 

The other interesting observation I draw is that the relationship between debt and politics has now reached a turning point, and from here debt will condition politics. I see this happening in at least three ways.

The first is that in the context of ‘zero fiscal space’ the constraints imposed by high levels of debt and deficits, will drive new splits within parties, for example between those who are keen to spend more on defence, versus those who wish to preserve social welfare safety nets. The revolt by a large number of Labour MPs against benefit cuts imposed by Keir Starmer is an example. In the future, this cleavage may inspire new political parties. To echo a recent note (The Power Algorithm) new ‘tech bro’ parties could materialise that prefer using robots to do the work of immigrants and that technology should be deployed for social control.

The second, related scenario is that in the absence of money to spend, the traditional ‘pork barrel’ cycle of politics disintegrates, and instead politicians tilt the broad political debate to non-fiscal issues – identity, foreign policy, and immigration.

A third element in the hypothesis is that voters observe mainstream politicians to be helpless and useless in the face of very high fiscal constraints, and they become largely apathetic about politics and in some cases vote for extreme candidates, such as ‘chainsaw economists’ as in the case of Argentina.

In this way, and perhaps exceptionally in history, the coming debt crisis (if the World Bank’s economist is correct) will be intertwined with the current crisis of politics.

Have a great week ahead,

Mike

Just over twenty years ago I had lunch in a roadside café near Natanz in Iran (on the way back from Isfahan to Tehran). At the time, it was well known that Natanz was a nuclear research site, and a location that was becoming more of a geopolitical focal point given George W Bush’s inclusion of Iran in the ‘Axis of Evil’ (despite large ‘Death to America’ murals in Tehran, it had offered to assist the US in the war against the Taliban).

Up until then, Iran was the host of one of the larger Jewish populations in the world (roughly 80,000 then) and historical ties between Iran and Israel were strong, as I outlined in a note last year entitled ‘Persepolis’, and I still believe that socially and culturally the populations of Tel Aviv and Northern Tehran have more in common than many would think.

This speaks to the potential that Iran owes to its heritage, but that has been smothered 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. They were notoriously responsible for the death of Masha Amini in 2022, and on average the Iranian state has killed 2-3 of its young people every week, something that should really elicit more anger from students across Europe and Asia.

What happens to Iran is now an open question. During the week I had the benefit of hosting a call for a group of investors with Ambassador Dennis Ross, the authority on the region from a Western point of view. His sense is that granted Israel views the threat from Iran’s nuclear programme as existential (the jawboning of the former Iranian president Mahmoud Ahmadinejad did much to reinforce this), the permanent dismantling of Iran’s nuclear program is the de minimus goal of Israel.

It is reported that Iran has been reaching out to other countries in the region to signal that it is ready to negotiate, and a negotiation process that is stewarded by Russia for example would help the Iranian regime avoid embarrassment (I recall the advice of Seamus Mallon, a key participant in the Good Friday Accord, who said that a good negotiator makes sure that his opposite number ‘can get up with his pants on’). If Iran is ready to offer serious, verifiable concessions, it is possible that this conflict can come to an end, something that may please Donald Trump who has been quicker to associate himself with the success of the Israeli operation than to offer Israel unconditional military support.

Indeed, the next few weeks are a test of Trump’s mettle and credibility. In reality his two week pause is yet another sign of indecision.

A joint US/Israeli strike on the Fordow mountain nuclear centre, near the holy city of Qom, and strikes across the wider Iranian theatre may provoke a counter-reaction by Iran, notably so against the Emirates and Saudi Arabia and might ignite a response from other quarters that have been relatively quiet (Iraq and Yemen for example). There is very energetic communication from the Gulf to Washington that a US strike could have very negative consequences for the region and might lead to a broader, less predictable conflict.

The tail-risk for the regime in Iran is a deeper recession, financial crisis and internal political strife, though it is most likely that the succession around Ayatollah Khamenei provides the best opportunity for a political turning point. Most Western observers vastly underestimate how difficult it would be to foment regime change in Iran, as much as that is highly desirable.

On a more positive tack, an agreement from Iran that removes the existential risk to Israel might also provide the geopolitical climate to bring an end to hostilities in Gaza, and for a meaningful calm across the region with the potential of an economic recovery. This might well be the catalyst for my ‘Fourth Pole’ thesis of an increasingly coherent economic zone in the Middle East, whose diplomatic centre is Abu Dhabi, geopolitical and technological power is Israel, and where the populations of Saudi Arabia, Turkey, Egypt and Iran, to name a few, contribute to a growing regional economy.

Europe would likely benefit from this, though my sense is that it is increasingly less relevant as a diplomatic power in the Middle East. Emmanuel Macron for instance has lost enormous sway in Israel, Lebanon and Saudi Arabia. In this regard, there are two lessons for Europe to bear in mind relating to Israel’s operation in Iran.

The first, in parallel to Ukraine’s resistance to Russia, is the demonstration that Israel has offered in military strategy and the multifaceted uses of technology. The second lesson is that Israel’s action is also illegal and contributes to an increasingly lawless international geopolitical climate.

Finally, Russia and China have been discretely critical of Israel, though they will be dismayed at the ease with which Iran’s defences have been dismantled, and they should be cognisant of the role that corruption has played here. Losing Iran as a member of their club (the ‘Shanghai Cooperation Organisation’) would constitute a major blow, but in the short-run their attention will be focused on how America responds to Israel’s move.

Have a great week ahead,

Mike

As the ‘end of globalization’ thesis plays out in dramatic form, some of the more speculative views I had laid out in the ‘The Levelling’ book are coming into focus. One of these is that we would see the emergence of new political parties to meet, and in some cases to exacerbate, the challenges of the 21^st century, especially in the US and UK, and even in China.

Unlike say, France, where political entrepreneurship is relatively easy (in the sense of forming a new party), two party systems dominate the two large Anglophone countries – the dominance of fundraising in the US makes it difficult to break the Republican-Democrat nexus, whilst the first past the post electoral system in the UK has made it hard for new parties to gather the mass and momentum to dent the influence of Labour and the Tories (Duverger’s Law).  

That ‘wall’ now seems to have been broken by the rise of the Reform party in the UK, and a renaissance of sorts for the Liberal Democrats. Both parties still have relatively few seats in parliament but have won recent by-elections and if opinion polls are to be believed, the British political system is about to be fragmented into four parties.

In the context of a world where only 6% of the population live in ‘full’ democracies, according to the Economist Intelligence Unit, it should be a worry that the tendency in Washington is towards a contest between autocracy and oligarchy, as witnessed by the spat between President Trump and Elon Musk.

What struck me as an interesting, though tenuous development was the threat by Musk to set up a new political party the ‘American party’ and such a move, if it occurs, is part and parcel of the transition to a new world order.

In the UK, there has already been an attempt by an entrepreneur to set up a new party. Back in 2018 Simon Franks started a new party called ‘United for Change’. He had reportedly raised GBP 50M to support the launch and having attended some of their early meetings I can attest that a decent roster of candidates was being lined up.

The project soon fizzled out, a sign that political life requires a certain set of skills, and that there was little appetite in the UK for a centrist party – the battles have been taking place at the margins of public life, and even Keir Starmer now regards Reform as the party to beat. This is a mistake in my view and the centre should not be evacuated but populated by parties willing to tackle difficult issues head on.

In the US, it looks like difficult issues are inspiring difficult people to enter politics, Musk being an example.

In the Levelling I had speculated that several new parties might be spawned by the end of globalization – a right wing ‘Heimat’ party, pan-global environmental party with a large Chinese membership called the ‘Diggers’, and a traditionalist ‘Pilgrim’ party to give a few examples. One idea that might materialise soon is what I had called the ‘Governance Party’, whose core philosophy is that technology should be put at the centre of public, social and economic life and that it can be used to shape human behaviour. Governance ID cards and governance scores will become part of life in this vision, and artificial intelligence will penetrate our everyday activities. I paste the full description from the Levelling below.

When I wrote this description, it was a throw-away, speculative idea, but in an age of big data, fast AI and the rise of exceptionally powerful entrepreneurs it is a distinct possibility.

The infusion of social media into our social and political lives has shaped and also muddied perceptions of reality, and social media is, in many political systems, the best way to quickly reach voters and understand their preferences. In this sense, social media helps to ‘soften’ voters up (the Reform Party has mastered TikTok for instance).

Whether this means that electorates would accept a ‘Governance’ style form of government is not at all clear. In a way, China with its social scoring system is a precursor, and a good number of the China hawks (geopolitically) in the US are thought to be admirers of China’s approach to governance.

DOGE and some of the prospective projects in the department of Defence give an inkling as to the vision for technology within the state. If the idea of a ‘Governance’ Party is to become a reality then the signs to watch out for are a further digitisation of the official economy (such as a digital central bank currency), the digitisation of identification and democracy (to the point where voter ID is an iris scan), and the use of the digital in law enforcement.

On the other, pro-democracy side, the struggle to protect open democracy will increasingly have the equal and opposite aim – the curbing of the effect of social media on political debate, the restriction of social media use for young people and the encouragement of active participation in public life.

Have a great week ahead, Mike

Appendix.

The Governance Party

The Governance Party started life as a virtual or online party, inspired by debates among academics, bloggers, and tech entrepreneurs on the role of technology, data use, and government. The budding use of blockchain in healthcare and social welfare systems opened up a whole range of new possibilities for the ways in which countries might be run, and the early promotors of the Governance Party, primarily from universities and the technology sector, were responding to those possibilities. They found that incumbent political parties had little by way of response to their ideas on how to use technology and data to better run countries.

The Governance Party preaches that technology should not be feared and should be actively used by government. The party’s early successes came in some European city councils, parts of India, and the West Coast of the United States and led to the formation of a fully fledged party.

It believes in codes of conduct in public life, society, and business and that these can be overseen through technology. With this approach, corruption should be wiped out. Blockchain is the favourite technological modus operandi here. In addition, citizenry is closely tied to electronic-based identity systems so that nearly all forms of behaviour—consumption, voting, contribution to pension plans, to name a few—can be monitored and optimized. In some countries a citizenship card (“Governance card”) is in issue, and in certain countries citizens are awarded a Governance score.

The Governance Party believes strongly in equality and believes that it can be optimized through the use of technology in society and the co-option of large technology enterprises by the state. It has introduced two recent innovations: first, a proposal for a cybercurrency through which a central bank could optimize household and company balance sheets, and

second, the use of artificial intelligence programs in the running of cities (e.g., in transport networks, police resource deployment, and environmental efforts).

Detroit used to be the richest city in America, some said it was the wealthiest in the world (in the early 1950’s). Within a period of fifty years, it became the USA’s poorest city, ignominiously falling victim to the largest municipal bond default in 2013.

I visited the city some eight years ago, to witness the kick-off of an ambitious plan to revive the city, led by Mayor Mike Duggan, with the support of local business leaders. For instance, Dan Gilbert, an insurance firm owner bought and then gave away inner-city apartments to encourage people to move back into the city.

Having spent a couple of days in Detroit last week I am pleased to report that the renewal of the city centre is bearing fruit – it is a hive of construction activity, iconic buildings have been impressively scrubbed up and there are plenty of stylish restaurants and shops.

My initial visit to Detroit sticks in my mind for two reasons. The first is that I did a speech there alongside JD Vance – my topic was how small European countries managed to achieve high growth rates and social cohesion (as an example to Detroit), and his emphasis was on the need to focus resources and policy on ‘forgotten’ parts of America like Michigan. 

Our double act was good enough that we were invited to do another event in the new World Trade Centre in New York. At the time, I recall he was anti-Trump, pro-innovation and very much an advocate of third level education. A lot has changed since, but his book ‘Hillbilly Elegy’ is still worth a read.

My second memorable Detroit experience was a visit to the Ford factory in Dearborn, to witness the full power of a robot-based manufacturing line, which at times was quite intimidating. I am tempted to say that in the next ten years, robots will have a bigger impact on America’s society and economy than JD.

The rise and fall of Detroit, and its wide hinterland out to Michigan towns like Flint has been undercut by many factors – immigration, the exit of the wealthy to other America cities, a failure to renew skill sets and an industrial base, and the economic side-effect of the rise of China as a manufacturing zone.

The issue worrying people in states like Michigan is whether AI and robotics will have the same effect on the local economy, as the model of globalization was perceived to do (by the likes of JD Vance) in recent years. Indeed, there has been a flurry of articles in the US press in recent days warning that AI will wipe out swathes of jobs (for example a pwc report on Agentic AI promises cost cuts of up to 40% in the software and legal sectors).

My instinct is that new technologies do not necessarily ‘kill’ jobs but shift them to other sectors and value chains, a process that is usually contingent on the quality of education systems and government policy.

Much of the research on the potential impact of AI on work (from McKinsey for instance and most notably David Autor at MIT and Carl Benedikt-Frey at Oxford) points to a nuanced view that sees AI and robotics helping less able workers participate in the workforce, and emphasises reskilling.

The risk to this enlightened outlook is that AI is unique in the sense that its take-up is rapid, especially so within large services firms, and this may give corporations greater power over labour (and downward pressure on wages). Equally there is not enough commentary on the fact that the critical AI projects are owned by a small, connected set of investors.

In the emerging world, AI will likely have the greatest positive impact on public administration and on healthcare (through better and broader diagnoses), though employment in service sectors (especially where those services are exported) may take a hit.

With professional and specialised workers in mind, I would also like to re-state my ‘One Man and His Dog’ hypothesis as a model for how professionals can use AI. ‘One Man and His Dog’ was a cult British tv show based on sheepdog trials. In this context the sheepdog is an intelligent, non-human actor helping the human to solve a complex problem – which is what AI does. Like a dog, if mistreated or provoked, AI can bite back but in general the idea is that like the sheepdog, AI can make the professional (doctor, commando or researcher) do their job in a more effective way.

Those who worry about the labour market should instead focus on debt, and the perilous finances of the developed world. The global financial crisis demonstrated that debt can kill millions of jobs when it provokes a deep recession. To that end, the Trump budget will prove increasingly controversial, and arguably what America needs is a very different fiscal approach.

The lesson from Hillbilly Elegy is that the spoils of globalization went to the few – bankers in New York, scientists in Boston and tech firms in California. Arguably they should have paid much higher taxes and this then used to bolster education, training and infrastructure across America.

The same logic is true with AI – its commercial benefits will accrue to a very small number of people, but millions will need help readjusting to the side-effects it has on labour markets. The debt outlook makes this doubly the case and the Trump budget, which will add USD 2.4 trillion to the national debt by 20234 (according to the Congressional Budget Office) will not only break the bank but break the labour market.

Have a great week ahead, Mike 

In the last week, I have fielded questions from audiences in Frankfurt and Dublin on the net effect of Donald Trump’s economic policies on investment portfolios. Such is the day to day rhythm of policy chaos that many investors likely overestimate the effect of Trump on markets, and the oddity is that as I write, US equity and bond markets are at roughly the same levels they traded at in March….though investor confidence has taken a battering.

Indeed, the luxury of financial markets is that some of the risks that Trump has unleashed can be hedged, whereas it is harder for societies, economies, and the body politic to offset the implications of his behaviour on foreign direct investment flows and the quality of political debate for example.

From an investment point of view, I term the net effect of Trump on portfolios as ‘The End of Privilege’ which is to say that the idea of US assets in general and the dollar in particular befitting from what Giscard d’Estaing had famously referred to as ‘exorbitant privilege’ is coming to a slow end. In concrete terms we can expect investors to question the role of US Treasuries as a safe haven, and for the dollar to slowly weaken (from a very expensive level) over time.

The set of economic policies that Trump is pursuing are confusing and damaging to long term American growth and the fabric of its society (his ‘big, beautiful’ budget bill will disproportionately favour wealthy over poorer households). Moreover, any sense of accountability has been snuffed out and corruption is shamelessly creeping into public life (Evan Osnos’ article in the New Yorker on this topic is excellent). In short, America risks taking on the economic traits of a badly run emerging economy (look at how the Turkish lira and bond market have performed in the past five years as an extreme comparison).

To take the long view, Trump has decisively smashed the Bretton Woods system that had elevated the US financial system to be first amongst equals. The Bretton Woods conference was a tussle between Britain and America to shape the new world financial order and with it, bodies like the IMF. The US was very much the winner, and effectively the meeting formalised the transfer of ‘world power’ from Britain to the US, or as Keynes (Britain’s chief negotiator) 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 job

was to negotiate a deal for Britain that would rescue it from ‘losing face altogether and appearing to capitulate completely to dollar diplomacy.”  

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.

The dollar has become so important to the financial system, that two economists (Pierre-Olivier Gourinchas and Hélène Rey) have taken the notion of ‘exorbitant privilege’ a step further in a relatively recent paper, and  introduced the idea of ‘exorbitant duty’, which refers to 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. Alarmingly, there is a section in the trump budget (sec. 899) that permits the administration to tax holders of US assets in certain circumstances, which can only erode confidence further.

The question then is which assets and currencies stand to benefit from a less ‘privileged dollar’. First, my sense is that when something goes wrong in emerging countries like Turkey, capital flows to countries like Switzerland (simply because much of it is held by a small number of individuals). As far as much greater institutional flows are concerned, the obvious destination should be the euro-zone. But, this is not the case. At the end of 2024, I spent a week in Singapore and also the UAE and was surprised by the number of investors who considered the euro-zone as barely investable, this might reflect some ignorance on their part, but it is also redolent of a greater problem of international credibility for the euro-zone.

In that context I was interested to see that Christine Lagarde, the president of the ECB gave a very good speech on currencies in Berlin on Monday 26^th, entitled ‘Earning Influence – lessons from the history of international currencies’. In the speech she noted three properties of dominant currencies – they are issued by large economies (zones), they have deep pools of financial assets which foreigners can buy and they are backed by sound legal systems.

There are two important contemporaneous facets to the speech – the first is the expectation that the actions of the Trump administration will structurally weaken the dollar and the second is the very grown-up admission by the ECB president that the euro-zone (Bulgaria will become a member in 2026) has failed to deepen its capital markets and become the provider of safe assets in an increasingly unsafe world.

The backdrop to these comments is a renewed push by the euro-zone on capital markets union, or the savings and investment union (SIU) as it is now called. In essence it has three components – single regulators across EU financial services, the creation of poles of expertise in different EU financial capitals (i.e. Amsterdam is the equity hub, Paris is where PE is, etc) and the sanctioning of retail savings and pensions flows into private assets.

In many respects, SIU is a strange phenomenon – a policy critical to the future of Europe that most Europeans have very little attention span for (who would blame them). Apart from the releasing of hundreds of billions of euros in German savings banks for example, into private and private investments, what Europe also needs is a structural shift in the appetite for risk. For that to happen, we might need a European Donald Trump.  

Have a great week ahead, Mike

In 2013 President George W. Bush referred to the Greeks as ‘Grecians’. At the time the ‘mis-speaks’ of the second Bush president provoked much amusement and some concern, though by comparison to the current occupant of the White House, the author of the disastrous invasion of Iraq is a strategic genius. The ‘Grecians’ came to mind this week when tuning into commentary by the Japanese prime minister Shigeru Ishiba who compared his country’s fiscal situation to Greece in the early 2010’s as he rejected calls for tax cuts. By the staid standard of Japanese political pronouncements this is controversial and will help draw attention to the rise in Japanese interest rates in the past two weeks.

Ishiba’s comments are a harbinger of what is to come as we head into the ‘Age of Debt’, an era where indebtedness will dominate politics, economics and geopolitics. I have spent enough time in Greece over the years to know how brutally painful the consequences of austerity were, and how reckless economic policy had become in the late 1990’s and early 2000’s.

Indeed, I recall the late years of the (Andreas) Papandreou period, when the social debate in Athens revolved around his younger, second wife ‘Mimi’. Papandreou was a very interesting character, and an example I often deploy to show that an education in economics is no guarantee of good policy – before he entered politics Papandreou was the Dean of the economics faculty at Stanford.

Often a finance minister will need political as well as policy skills. In his book, Stress Test, Tim Geithner, who was appointed Treasury Secretary by President Obama and who as head of the New York Fed had very good technical skills, worried aloud that he did not have the political skills for the role (arguably Robert Rubin was the master here) and the Obama team spent some time coaching him in this field.

There is a small but interesting literature on the backgrounds of finance ministers, which hypothesises that more left leaning governments (like Obama?) will choose economics experts to bolster their economic credibility, while right leaning governments often choose a finance minister with a financial services background – Donald Trump’s two Treasury Secretaries, Steven Mnuchin (ex Goldman Sachs banker) and Scott Bessent (hedge fund manager who worked with George Soros for some time) fit this profile.

The point of my dragging up the cv’s of finance ministers is to state that difficult times are ahead, and will require political courage and policy acumen, most of all in the US as President Trump takes aim at the budget deficit. Unfortunately, his lead policy manoeuvre on tariffs have shown that he has neither of these attributes.

In the US, President Trump has driven hard to have his budget (Big, Beautiful Bill) passed by Congress. It contains some elements that are quite sinister such as the ending of an excise tax on gun silencers, and one particular policy I agree strongly with – the introduction of MAGA (Money Account for Growth and Advancement), whereby the Treasury would create tax preferred savings accounts for children and give each one an initial deposit of USD 1,000. Europe should do the same!

However, the broad strokes of the budget look like they could rob many Americans of what they need most, notably MEDICAID. Worryingly from an economic point of view the budget is expected to add nearly USD 3.5 trillion to the budget deficit over the next ten years, according to a range of bodies from the Penn Wharton Budget Model to the Joint Committee on Taxation, and the implication is that the indebtedness of the US will rise further (estimates point to a historic debt to GDP ratio of 125% in ten years’ time). The Congressional Budget Office publishes an intimidating chart that puts this in perspective and shows that the debt to GDP ratio in the US has only been higher (going all the way back to 1790) in the post-World War II period.

This is the daunting backdrop to two poor bond auctions last week (demand for US and Japanese bonds was well below the norm). In this respect, the case of Greece is instructive – notably the devastating effect of forced austerity, the difficulty in trying to make policy when a government has lost the confidence of markets and the reality that once this confidence is lost, it can take time to regain it.

Ultimately, Greece was a small economy in the scheme of things, though its membership of the euro made it systematically important. The US and Japan are on a different scale altogether.

We are all Grecians now.

Have a great week ahead,

Mike