A Land Full of Vibrancy and Hope

Avid readers of the ‘Levelling’ book will know that some years ago, I wrote

Latin America remains part of the satellite region of the US pole. Sadly, it has been overlooked by Washington. The prime example of this neglect is Venezuela. The country is failing and in the grip of an underreported humanitarian crisis. Economically, this crisis may lead China to take a deeper role in Venezuela and in its oil production. Diplomatically, the lack of a comprehensive reaction from Washington brings to mind an article entitled “The Forgotten Relationship” that Jorge Castaneda published some years ago in Foreign Affairs in which he bemoaned the deteriorating relationship between Latin America and the United States.

Finally, my pleas are heard, and the White House is organizing a rescue (by gunboat) of Venezuela, and possibly much of Latin America.

While it is hard to know how the new engagement between the Trump administration and the fifth largest repository of oil reserves is going to play out, this administration is different to many of its predecessors in taking an active interest in Latin America – note the partisanship with regard to Brazil, generally good relations with Mexico, a chumminess with Milei and the likely support for the new president of Chile.

Despite very active backchannelling between the US military and the Venezuelan army the course that events might take is unclear, and laden with risks – the chaos of popular unrest in Venezuela, the risks that criminals in Venezuela and surrounding countries become involved (and strike in the US), or indeed the risk that other actors or countries use any regime change in Caracas to hurt the US, cannot be ruled out. Another risk is that some of Venezuela’s allies – Iran, China and Russia – become obstreperous, and dig in with Maduro and his cohorts, or that they use any change of government in Caracas to further their own ends. It is worth noting that only last week China launched a policy document entitled ‘Latin America and the Caribbean: A Land Full of Vibrancy and Hope’.

This is a significant risk of the Trump administration’s fetish for a spheres of influence motivated foreign policy. In the recent school boyish ‘National Security Strategy’, which has caused great anguish in the diplomatic parlors of Europe, the document refers to the ‘Trump Corollary’ to the Monroe Doctrine.

For context, the Monroe Doctrine was likely the first coherent, muscular expression of American foreign policy – at the time it was aimed at keeping the Spanish and other pesky European powers out of Central and Southern America. Indeed, the dithering by the large European powers (notably France) over the long running Mercosur trade agreement, suggests that the European dare not go back to Latin America.

The NSS document gives a good deal of attention to Latin America, and this tilt will have the active support of Secretary of State Marco Rubio. Like it or not, Latin America is now in Washington’s sphere.

However, more generally, the establishment of a spheres of influence mindset in international relations may give the likes of Russia and China the sense that they may do as they wish in their own spheres of influence. In the same way that the invasion of Iraq, on the basis of flimsy evidence of weapons of mass destruction, apparently led Vladimir Putin to believe that the West was no longer respecting the rules of the international order, the ‘Trump Corollary’ strategy is a green light for bad policy actors.

That would of course be bad news for Taiwan, and perhaps Vietnam, the Philippines and Japan, who all to some extent count on the notion of a US security guarantee for Taiwan. It may also prove confusing for the US military which, when not loitering off the coasts of Cuba and Venezuela, is organized around the concept of a grand battle in the South China Sea.

Beyond the obvious implications for Ukraine, there are plenty of other open questions – will China take the ‘Stans’ from Russia, and who gets Africa? Russian mercenaries have forced France out of at least seven countries and China has a hand in nearly every African economy. The cancellation of US AID is already having deadly consequences for human and animal life.

A world of spheres of influence might conjure the diplomacy of the Great Game, but it would leave many countries worse off, and the nondemocracies of the world free to abuse their military and economic power.

A forlorn reminder of this was the jailing of Jimmy Lai, the Hong Kong democracy activist last week. Few Western governments were audible in protesting this act, save Britain, which used to count Hong Kong as part of its sphere of influence (Lai has British citizenship). The silent snuffling out of democracy in Hong Kong is the act that brought the curtain down on globalization in my view. An American spheres of influence foreign policy will sow further chaos.

Have a great Christmas week ahead, Mike (there won’t be a note next week, we return on the 4th January)

The UnRavelling Rule

Amidst the slew of corporate earnings and macro-economic data released in the past week, two developments struck me, both of which give the impression of the tectonics of geopolitics pushing against each other.

First, in the past year the number of children born in the US has caught up with the EU, at close to 3.6 million babies each (though the EU has a much bigger population). For comparison, Nigeria – whose population is less than half that of the EU – welcomed 7 million babies last year.

Second, in recent months the trend rate of consumer inflation in Japan has surpassed that of the US for the first time in decades, signalling a long awaiting shift in the Japanese economy that has been accompanied by a rise in long-run bond yields (a potentially critical development for the international financial system).

These two examples will give a sense of the rise and fall of nations, that is accelerating since the fall of globalisation (which I date to the effective end of democracy in Hong Kong). This rise and fall – think of countries like football clubs – is also associated by an unravelling of the world order. For example, in a recent note ‘Atlas Shrugging’, we detailed how the independence of the Federal Reserve was being undercut by the White House, and the attempt to remove Lisa Cook from the Fed’s rate setting committee confirms that Donald Trump wants to direct the Fed as an engine of his economic policy (as a giant bond buying machine I suspect).

The independent Fed has been one of the pillars of the globalised world system of the past forty years – and the snuffing out of its independence heralds the unravelling of that system. In the same way that the period of globalisation was characterised by low inflation and the absence of major wars – the presence of inflation and conflict today, is a sign that we are moving into ‘something else’.

In that context I find myself playing a mind game which I call the ‘Unravelling Rule’. Very simply, it is to identity the principal factors that have supported globalisation and that are positive outcomes of it and identify if and how they are unravelling. The crisis of democracy is one such trend (the Economist Intelligence Unit’s Democracy Index has fallen to its lowest level in twenty years).

Other certainties are also unravelling – notably the assumption that the USA is an unflinching ally of Europe and many Asian countries, and the possibility that it could even actively undermine them. In this regard, the fact that the Danish government had to summon the US ambassador over the conduct of three Americans in Greenland is troubling and reflects very badly on the White House.

The danger with the ‘Unravelling Rule’ is that in a chaotic world, it is tempting to see unravelling everywhere. It is more obvious though in the case of world institutions – the United Nations, IMF, World Bank and World Trade Organisation, who are frequently ignored by the very large economies, and sometimes badly undermined by them (the WTO is an example). These institutions need to be recast, most likely for the benefit of the populous emerging economies.

On a more speculative basis, there are at least four trends that have marked the past forty years, and that are now worth watching for a change of course.

The first is poverty. It is an underestimated facet of globalisation that it helped a billion people rise out of poverty, according to the World Bank. My concern is that in a world where the major economies (2/3 of the world’s GDP) have debt to GDP ratios above 100%, economic precarity may return, and this time to developed countries. We have already noted (The Road to Serfdom) the extremely high level of inequality in the US and broad economic vulnerability. In Europe, British and French policymakers conjured the spectre of IMF intervention in their economies (it would have to be a new, bigger IMF – which under this White House is unlikely). In that respect the growing disparity in incomes in the UK regions (relative to London) bears watching.

A second is corporate governance and the rule of law as it extends to international business. We have not seen a rule of law or broad governance crisis in sometime, but the rise of decentralised finance (i.e. crypto), the new idiom of the ‘art of the deal’ in the US, and the geopolitically tinged trade relationships that China is developing worldwide. As a global ‘way of doing things’ gives way to more regional or localised approaches, the watertightness of contracts and the oversight of business relationships is something that businesses will need to consider more carefully.

A true litmus test of the ‘Unravelling’ hypothesis will be the role of US multinationals in the world economy. Described as the ‘B-52s’ of globalisation in the late 1990’s by a prominent trade economist, they have shaped the world economy and come to dominate financial markets. I have lost count of the number of charts circulating that declare that Nvidia for example is worth more than the major European stock markets together. Whilst cash rich, they now face a number of challenges – the difficulty of selling into China as it broadens its technological self-sufficiency, and the collateral damage to overseas sales from the Trump trade and foreign policies, and the rise of more specific local tastes in markets like Africa and India.

A final unravelling, and one I would welcome, is for the EU to unleash its nasty side. In the past forty years the successes of the EU – enlargement, holding the euro together and the creation of a European identity (based on borderless travel the Erasmus programme for example). The likes of Poland and Estonia have benefitted greatly from this, and it is fair to say that the UK would be better off ‘in’ than ‘out’. But the emphasis has been largely on soft rather than hard power, and in a ‘harder’ world, the EU will need to take a tougher stance in terms of how it projects itself.

There are many challenges but three in particular are the potential exclusion of existing and prospective member states like Hungary and Serbia who habitually refuse to act in accordance with EU values and interests, a specifically more aggressive approach to countering sabotage by Russia (and at times China and Iran) in Europe, and then a retaking of the narrative as to what Europe stands for.

Have a great week ahead,

Mike

The Policeman Premium

I vividly recall seeing Imran Khan give a speech in the mid-nineties, in an era where many sportsmen had what was described as colourful backgrounds he stood out as particularly ‘Bond’ like – at the very top of his game as a cricketer and a ‘playboy’, as the saying goes (at the time he was engaged to Jemima Goldsmith). There are few people who have had such adventurous lives – and Khan’s is interesting for the ways in which he changed tack – towards Islam and politics (he served as Pakistani prime minister from 2018-2022) and his change of fortune (he is currently in solitary confinement in a Pakistani prison).

Whilst Khan’s rise and fall is complex, he ultimately fell foul of the Pakistani security establishment who allegedly became uncomfortable when Khan condemned foreign (US) influence in Pakistani public life. Khan was also the victim of an assassination attempt in 2022, something that has marked Pakistani politics (Benazir Bhutto was assassinated in 2007 and her father Zulfikar was executed in 1977).

In this regard one of the few constants in Pakistani politics has been the ever-present role of the security services in the affairs of the state, and specifically their tactic of creating private armies and terror groups. This has embarrassed them on at least two occasions – the discovery that Osama bin Laden was living in near plain sight in Pakistan and repeated attacks by the Taliban inside Pakistan. Add to that the 2008 Mumbai attacks perpetrated by Lashkar-e-Taiba, and the sense grows that Pakistan has been playing a dangerous game.

In this regard, India’s response to the killing of 26 people in Pahalgam (in Indian controlled Kashmir) took aim, it said, at terrorist infrastructure, in the most serious escalation between the two countries since the very early 1970’s. The subject of this note is not to predict how this conflict will play out – it could be costly, bloody and messy (India has reportedly lost five jets in its initial sortie) but to wonder why this confrontation is happening now and how much of this has to do with the alliances that the two countries have struck.

While India and Pakistan are both members of the Shanghai Cooperation Organisation, Pakistan is the much more active member and very close to China, Iran and Russia. While a lot of Indian hardware comes from Russia, its foreign policy projects the country as an independent actor, India is aiming for a close relationship with the US with whom it may sign a very high level trade deal (it has just completed a modest trade agreement with the UK).

It is very likely that in a different diplomatic regime the Pahalgam attack would have been met with intensive diplomatic engagement by the US, with India whom it regards as an ally and Pakistan, which it funds generously. This has not happened this time, and the tempo of involvement of the White House in this particular regional conflict has not been on a par with other administrations. It is so poor that vice president Vance has declared, in a most un-Kissinger like manner, that ‘it is none of our business’.

Indeed the recent death of Joseph Nye, the political scientist who developed the term ‘soft power’ and who wrote much about America’s engagement with the rest of the world is a reminder that one of the key elements in the old, globalised world order was America’s role as a policeman – with a near monopoly over deadly force and a very active, alert diplomatic corps. An example of this can be found in Brad Hope and Justin Scheck’s book ‘Blood & Oil’ that describes the rise of Mohammed bin Salman as the ruler of Saudi Arabia. For decades the US has steered Saudi diplomacy, and Saudi rulers have guided America in the region. However, the book describes in some detail the lack of strategic direction of the first Trump administration in the military and diplomatic affairs of Saudi Arabia, beyond the organisation of a lavish welcome ceremony for a Trump visit to the Kingdom.

The second Trump administration looks set to entirely do away the role of world policeman, and cynics might say, replace it with the role for rent collector. As such, the geopolitical risk premium will rise, and may help to explain why there are at least two conflicts where basic needs (water) are being weaponised (in Gaza and India/Pakistan). When it played the role of world policeman, the US kept the peace, much to its own advantage.

Now in the context of the very obvious dropping of moral guardrails around international relations, other countries will be less bound by a sense of world order, emboldened by an arms race, and will start to take risks and make mistakes. India-Pakistan is a very dangerous case of this, and one that draws into focus the trade-off between the cost to America’s role as world policeman, and the global ‘peace’ dividend it brought.

Grasshopper

I had intended to write about universities this week but, strolling through the City of London, I was surprised, shocked even, to find myself on Trump Street, and then amused to see that it is joined by Russia Row.

My first thought was that this was part of a grand plan by the British establishment ahead of President Trump’s visit to London in September, the idea being to stage an event at the nearby Guildhall and to then tell the president that a nearby street had been named after him. Trump Street was apparently named so because several trumpet makers lived there in the 18^th century, but let’s ignore that for the time being.

Yet, the far more meaningful coincidence of Trump Street is its proximity to Gresham Street.

Sir Thomas Gresham was a trader and financier in 16^th century London, at a time when coffee houses in the lanes around the Royal Exchange formed the basis of what is known as the City. Gresham was an important player in Queen Elizabeth I’s economy, and his emblem – a grasshopper – is still present in various parts of the City (there is a giant-sized golden grasshopper on the roof of the Royal Exchange….if you can dare to make it up there).

While Gresham’s imprint can be seen across the City, he is remembered by Gresham’s Law which was named after him and states ‘bad money will drive out the good’. Gresham’s Law which echoes similar observations from Copernicus and other scientists through the ages is founded on the idea that in an economy where coins with the same face value but that are made from different base metals (say nickel and copper) there is a tendency for traders to hoard the coins made of the more valuable metal and to circulate lower quality coins. Bad coins stay in circulation, good ones are re-commoditized. From an economics point of view the law is conditioned on all the coins (of variable quality) having the same face value.

Unlike the 16^th century, today, coins have the same physical consistency and in general there is little incentive for people to shave bits off coins (historically coins have serrated edges to prevent this) but broadly the Gresham’s Law is applicable in different domains.

Think of how cheap goods (made under questionable labour conditions) have forced quality players out of markets, or how in the run-up to the global financial crisis, low quality financial institutions offering generous loan conditions caused better quality banks to step back from lending. In both cases, regulation or policing of markets is necessary to ensure that ‘bad’ actors do not gain an advantage over good ones. Social media is another example, where it seems a lot of nonsense thrives at the expense of information.

Additionally, the idea of Gresham’s Law is applicable to politics, where in many countries it appears that political actors with extreme views and extreme modus operandi are forcing out ‘good’ ones in the sense that most normal people would be terrified of a career in politics.

Readers will guess that my argument is leading back to Washington. Bad behaviour, bad ideas and bad policies are infesting themselves in public life, the economy and markets – to the surprise of many ardent supporters of President Trump. What is not clear is whether this will result in an evacuation of capital and talent from the US, or whether there will be a counter-reaction. Gresham’s point in describing how bad money drives out good was to avoid the debasement of the currency (schilling), which when Elizabeth I came to power, was already in a bad state. She appointed Gresham as a finance minister of sorts in 1560, and within a year he had ‘bad’ coins taken out of circulation and replaced them with money made from precious metal, the result of which was a dramatic improvement in Britain’s status as a trading and economic power.

The lesson of this should be very clear today. As a final point, it is interesting to note, from the point of view of coins and money, that the ratio of gold (precious metal) to a cyclical commodity (copper) is the most stretched it has been since at least the 1980’s, suggesting that markets at least are thinking of Gresham’s Law.

Have a great week ahead

Mike

The Road to Serfdom

I was sauntering through the centre of Vienna last Wednesday, admiring its stylish cafes and bars, and Friedrich Hayek came to mind.

Hayek argued against the suffocating role of government (‘central planners’) on the economy and for greater individual liberty, and his arguments still contain a grain of truth in the context of many European economies. Ironically, Austria’s brand-new finance minister had previously worked as an economist for a trade union and might well prove to be an ‘anti-Hayek’.

Hayek was one of the inspirations (after he won the Nobel Prize in 1974) behind what many American libertarians call the ‘Austrian’ school of economics, and his book ‘The Road to Serfdom’ is undoubtedly on the bookshelves of the most ardent members of team Trump, alongside works like Ayn Rand’s ‘Atlas Shrugged ‘.

In the Americas, Hayek is a favourite of the ‘chainsaw’ economists, with a large dollop of irony given the push for total control of the economy by an elite. Indeed, the risk for Americans is that the dismantling of the government led economy in America risks turning Americans into serfs of the private sector. But, this scenario is not yet immediately obvious given the way public attention remains focused on Ukraine and the victims of American tariffs.

In the past six months, a very strong international narrative has spread around the notion of ‘American exceptionalism’. The US is exceptional in a few domains – fighting (military), finance and its multinationals. Donald Trump is using these exceptional pillars to influence other countries and to set in train his vision for a more isolationist America. The response from America’s erstwhile allies has been to rapidly re-arm and re-finance.

An important sign of this was the announcement by Friedrich Merz (with the SPD’s Lars Klingbeil and the CSU chief) of a new defence spending plan, which largely swerves the issue of the debt brake. That German and Japanese bond yields rose suggests that markets are pricing the reallocation of the bill for security as an international public good to America’s former allies.

The return of war as a topic in European debate will alarm many people, and it should not be underestimated. One of my recent notes highlighted how Europe likely faces an ongoing campaign of harassment, sabotage and destabilisation from Russia. The idea that Europe is on its own is now quite starkly taking hold.

While the drumbeat of war will add to stress in our lives, it is not (yet) part of them. For the great majority of people, the geopolitical debate remains one between elites, and so far, does not impact their everyday lives.

This is where European leaders need to pay more attention and try to reset the international narrative. If America is strong in fighting and finance, it is weaker in areas where Europe is strong, and we might say that the two continents are the mirror opposite of each other. In my view, Europe is strong in the areas that matter to most people, most of the time. Specifically, Europe, as a social democracy is the best place to live in the world (6.6% of the world’s population live in ‘full’ democracies), has generally free education and healthcare and its societies are peaceful (according to the UN, the murder rate in the US is 14 times that of Italy). Life expectancy in France for instance, is four years ahead of the USA. Health spending per capita in the US is well over double what it would be for a European country (13k vs. 6k).

In this context, my counterintuitive argument (to the ‘chainsaw economists’) is that America needs less Hayek, and more ‘Europe’.

The absence of a deep social security system in the US, and the difficulty of accessing decent healthcare at reasonable prices means that a huge number of Americans live in precarity. Demolishing the department of education and cutting state aid to veterans are just two measures that increase vulnerability.

The trend that is emerging, and which will become starkly visible in a recession, is of an American society where a small but important number of households (say 20%) are wealthy enough to live well and access high quality education and healthcare, 40% of households live with the stress of becoming economically vulnerable and a further 30% live in serfdom in the sense that they have no leisure time (Newsweek estimates that one third of American workers has a second job).

Income inequality in the US is at historically very high levels, and the share of total income garnered by the top 1% of the workforce is tipping levels only seen in the 1930’s. Viewed from the point of view of wealth, 38% of the world’s millionaires live in America and over half of the ultra-high net worth (wealth over USD 50mn) individuals in the world are American. Indeed, the top 1% of wealthy Americans own 18.5% of all wealth in America, while the ‘bottom’ 50% of Americans own just 3% of wealth.

As such, the Trump 2.0 programme may not free Americans from serfdom to the government but will make them serfs of a private sector.

As a parting shot, Europe might need a little dose of Hayek. To that end, social welfare systems, state pension plans and healthcare spending may need to be streamlined across Europe as the security agenda becomes more prominent.

Have a great week ahead,

Mike

Un train peut cacher un autre

Adam Smith, though better known now as an economist held the chair of Moral Philosophy at Glasgow and as such it’s fair to assume that he knew a thing or two about the intersection of economics, philosophy and politics, and that often a political crisis is motivated by an underlying economic crisis…hence the title of this note.

Smith lived during a time of mercantilism, which we might describe as a nationalistic approach to trade that aims to maximise the exports of a country whilst keeping imports to a minimum. In this context, Smith wrote of mercantilist nations that ‘their interest lies in beggaring their neighbours’, and the phrase ‘beggar thy neighbour’ has been often used in the economic context, usually when growth is scarce (the aftermath of the Great Depression and the Global Financial crisis)

With mercantilism and ‘beggar thy neighbour’ back in fashion, it is worth returning to Smith’s ‘Wealth of Nations, book IV’ where many of the observations Smith made chime with America today, such as:

‘The sneaking arts of underling tradesmen are thus erected into political maxims for the conduct of a great empire … . By such maxims as these, however, nations have been taught that their interest consisted in beggaring all their neighbours. Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity’.

To that end, beyond the bonfire of American values and diplomatic relationships, there is an emerging, underlying logic to the policies of the White House that China, Japan and Europe need to pay attention to.

I have written many times in this note that the world economy is in the antechamber of a fiscal-debt crisis (listen to ‘Waking up to World Debt’). Unusually, all of the major economies have become indebted at the same time, and the process(es) by which they try to reduce debt at the same time will likely prove extremely hazardous financially.

It seems that the Trump entourage understands this, and that logically the unifying factor behind disparate policies from the creation of ‘DOGE’ to the enfeebling of NATO are driven by a brutal sense of austerity, that starts with the cutting down of all the international public goods that the US has invested in since Bretton Woods.

In this context, the ‘beggaring’ of Europe pushes the bill for European security back across the Atlantic and has shaped the debate in Europe towards greater debt accumulation (for example the debt brake is one of the most contentious topics for the new German government and the EU will soon embark on the issue of EU defence bonds). Japan, South Korea and Australia might be next.

In effect, the White House is using areas where America is exceptional – financial markets, the military and multinationals – to coerce its allies, and in the case of Ukraine to undermine them. Debt might be next.

The closest we have to a template for a Trump grand macro plan is a paper written by Stephen Miran, who may soon take up the role of head of the Council for Economic Advisers. The elements in this plan have popularly become known as the ‘Mar-A-Lago Accord’, which is not unlike the world debt conference idea I have written about in The Levelling, though my version takes place in the recently refurbished Raffles (Singapore).

One of the pillars of the cited ‘Mar-A-Lago Accord is that holders of Treasuries exchange these securities for very long-term loans (that might not provide a coupon). The result would be to restructure the maturity and fiscal burden of America’s debt load. It is a neat idea but will not work in practice. Any debt accord will likely need the impetus of a major financial crisis as a motivator, will need to restructure the debt of all the major economies and will entail a rewriting of financial regulations across the world (for pension funds for example).

In reality, an attempt to enact a Mar-a-Lago Accord, in the same fashion as the debate around NATO, may create aversion (distrust in) to US financial assets and the dollar. Whilst Europeans may not appreciate the extent to which a ‘beggar thy neighbour’ philosophy is driven by US security policy, the White House is underestimating the value that America’s wide ranging financial, diplomatic and commercial infrastructure bring it. An example is that close to 40% of the revenues of large American firms come from overseas.

In the short-term, we are also starting to witness the effects of austerity on the American economy. Though ‘hard’ data on the economy remain solid, the outlook will become very noisy in the next few months as government job cuts take hold and as social welfare cuts (notably in the mortgage industry) sow anxiety. Markets have started to become jittery too, amidst a belief that the administration is much more focused on lowering bond yields (and thus the cost of government debt) than boosting the stock market.

In a scenario where the (US) economy weakens, investors normally turn to Treasuries, but the prospect of a Mar-A-Lago Accord being foisted upon them could lead to a buyers’ strike. The public attack on president Zelensky has disabused diplomats of the intentions of the Trump White House, investors could be next.

Have a great week ahead,

Mike

Remember the Washington Consensus?

Does anyone remember the Washington Consensus? Such a phrase might seem odd in today’s world but in the early 1990’s the notion of a ‘Washington Consensus’ was very powerful as a method for globalisation, and hotly debated by the left.

Globalisation worked well because, to be overly simplistic, it was facilitated by a very clear world order that helped to establish the rules of the ‘globalisation game’ and the norms associated with this. At their core, these rules were American, or at the very least they were made in Washington within the institutions that were set up to marshal the post-World War II world order, the IMF (International Monetary Fund), the World Bank and the United Nations in New York. America held the purse strings of these organisations and regular meetings at these institutions became a means of schooling ministers from both developing and emerging economies in the ways of American economic power.

These discussions aired what soon became known as the ‘Washington Consensus’ – effectively an approach to world economic development and globalisation, that was denounced by critics on the left as a neo-liberal policy recipe book. With the benefit of hindsight today, the Washington Consensus was valuable in the sense that it was a consensus, it encapsulated an approach that many countries were content to go along with as part of their first foray into real economic development.

Today, the Washington Consensus is in disarray. The institutions that it was built around, like the IMF are defunct, and others like the WTO have been undermined by both China and the US in recent years. The decision of the US to leave the World Health Organisation is another blow. The ‘Consensus’ is dead because there are now other competing methods as to how countries can develop, and of the independent paths they can take.

Here, an important milestone was Xi Jinping’s China Dream speech, in November 2012, which well before MAGA (Make America Great Again) coined the term ‘China Dream’ during a visit to the National Museum of China. Now, countries like Indonesia or Nigeria can try to follow the classical Western model of development, or China’s non-democratic, state led approach. Or, like Argentina and El Salvador, they can pursue the ‘Trumpian’ model that is taking a grip on Washington, but that is anything but a consensus.

Without going into day-by-day developments coming from the White House, the second Trump presidency can be seen as an early stage in the post-globalisation world order.

Globalisation was based on American economic and political strength and promulgated by the ‘Washington Consensus’ and the B-52’s of American capitalism (multinationals). Eventually globalisation ran out of steam, and events like Brexit, the first Trump presidency and the snuffing out of Hong Kong’s democracy shattered it. We are now in a multi-polar world where at least three large powers (EU, China and the US) do things increasingly differently (look at how they treat AI).

Uniquely, this Trump presidency represents an attempt to do something new and can be seen as an early chapter in the formation of the new world order, and to an extent its success depends on the will and the coherence of the groups of people that are driving the Trump project (from sectors like private equity, innovation and wealthy families). One stark difference with globalization is already clear. Globalization was built on the US being umbilically tied to much of the rest of the world, and vice versa, by flows of ideas, money, trade and people. In contrast, it now seems that Trump 2.0 relies on American exceptionalism, attempting to rise above the rest of the world, and in the process severing the relationships and ties built up since the end of the First World War.

For example, consider the words delivered to Canadians by President Kennedy in May 1961 ‘Geography has made us neighbors. History has made us friends. Economics has made us partners. And necessity has made us allies’ and how remarkably different they are to the way the Donald Trump has treated Canada.

In that context, the rest of the world may increasingly choose to avoid America, and the risk to ‘Exceptional America’, notably with the dollar as strong as it is, is that its financial power ebbs, in the way that of many other empires has. The template for this is expertly laid out in Barry Eichengren’s ‘Mars or Mercury’ paper that analysed the link between empires and their monies, though I feel that in the absence of obviously strong competing currencies, this thesis could take time to play out.

A more plausible side-effect of ‘exceptional’ America, is the advent of a new point of economic gravity, pinpointed at the UAE (United Arab Emirates). This is my ‘Fourth Pole’ thesis – that the UAE together with India and Saudi Arabia has the makings of a new pole of trade and commercial activity, with low regulatory barriers and that encompasses a potentially huge market (Prof Afshin Molavi calculates that there are 2.5bn bn people within five hours flying time of Abu Dhabi). The Mercosur trade deal between Latin America and the EU might also be the basis for a new trade corridor.

The other necessary outcome in a world where America is going its own way, is that Europe stops trying to contain Trump, and takes a far more aggressive stance with respect to its risk environment, notably Russia. The German election in two weeks’ time might be the start of that stance.

Have a great week ahead,

Mike

Empire

Donald Trump will be president of the United States for a second time, defying those who thought his first term was an anomaly and who considered that the American people still care about the rule of law. He will preside over the 250^th anniversary of US independence, the next Olympics and World Cup.

This is an election result of such great consequence that it will decide whether America’s hegemony is renewed, or that its empire fades like so many others have done through the ages. Fittingly, I woke up to the news of Trump’s victory in Vienna, a city that knows a thing or two about empires. In that context, an interesting and possibly underread book is ‘The Hapsburg Way – 7 rules for turbulent times’ by Eduard Habsburg, known formally as the Archduke of Austria and now a career diplomat for Hungary.

Of Habsburg’s seven rules, the most important are ‘Believe in the empire, and your subsidiarity’ and ‘Respect law and justice’. Trump will likely not do well on these counts, nor does he score on ‘Be Catholic’ though the Catholic church has chased his coat-tails through the electoral campaign. He does better on ‘Get married and have many children’ and ‘Be brave in battle’.

The book is full of interesting snippets, such as that the first governor of Texas (in 1691) was installed by the (Spanish) Habsburgs. In that respect the only blemish in the book is the foreword, written by Habsburg’s boss Viktor Orban, who this week held court over his European counterparts in Budapest, in the wake of the Trump victory.

While I think that Trump will be much more disruptive for Asia and Europe, and that his presidency will see an unprecedented re-shaping of the Middle East, a great deal of media attention is devoted to his impact on Europe and NATO. Overall, the reaction is far too alarmist and the vision of world leaders cowering before Trump gives little acknowledgement of his and America’s vulnerabilities.

Despite this, with near comic timing, only hours after Trump’s victory was confirmed, the squabbling German government fell apart, a development that has been simmering for some time.

Germany will likely have an election next March, and this is good news. Scholz’ ineffective and indecisive government will be thrown out (Scholz may also be replaced by Boris Pistorius at the head of his party), and Germans will vote in a centre-right government, if polls are to be believed. There is very strong appetite on the part of German businesses to restart the economy, unblock planning laws and rethink energy policy. This much was very clear to me when speaking with investors and businesspeople in Hamburg (after Vienna).

If a new centre-right government transpires in Germany, this should re-engage the political engine at the heart of Europe between France and Germany. But there is a small chance that Emmanuel Macron will not be president of France in a year’s time. Macron, who this week compared Europe’s fate to ‘herbivore in a climate of carnivores’, is fantastically unpopular in France and it cannot be discounted that the Rassemblement will try to bring him down in 2025. Similarly, there is a risk that far-right parties in Europe are emboldened by the Trump victory.

Apart from the travails of the German and French leaders, there is a shift of power going on across Europe – in favour of Poland and Italy, and towards the Baltics/Nordics. The sense is that a Trump led US will bring about the end to the Pax Americana, which may initially leave Europe more vulnerable diplomatically, though ultimately it will become more independent (to America’s disadvantage). Arguably the loser here is the UK, stranded offside the EU, and at odds with Trump and his vice-president.

A Trumpian America, if true to the caricature, will leave Europe as the last bastion of democracy and independent institutions. This is a great challenge and one that most people are not ready for. In events I speak at, a trick question I pitch to the audience is to ask how many of them (usually accomplished, educated people) would enter politics – in most cases there are few volunteers. If European democracies are to be renewed, politics must re-civilise itself and to quote Eduard Habsburg, politics also needs more brave people.

Another area to watch is institutions. Donald Trump already politicized the Supreme Court and might well do the same with the Federal Reserve. On Thursday the Fed, oddly in my view, cut rates, but the press conference after the meeting was dominated by Chair Powell denying that he would resign if Trump requested, he do so. As America’s institutions may become more politicised, and world institutions like the UN and WTO become less relevant in a Trumpian world, Europe needs to ensure that the independence and competence of its institutions is pristine.

Returning to the topic of defense, perhaps the most interesting confirmation hearing (by the EU Parliament) of EU commissioners designate was that of Andrius Kubilius, the Lithuanian, first defense commissioner. His first task will be to deliver a paper (in 100 days from now) on the state of defense procurement, the integration of defense supply chains and the opportunities for a more intensive commitment to space technology. In his commentary, he revealed that a pan-European missile defense shield could cost up to Eur 500bn. So, we should brace ourselves for the issue of EU war bonds to pay for this.

To end this note with a very big picture view, in the context of the theme of the ‘Levelling’, Trump’s first victory was a wrecking ball to globalization. This second one shatters it completely and will try to remake America and the world order with a narrative and vision (‘tariffs’, ‘deportation’, ‘loyalty tests’) that will deglobalize. Politically, Trump has sold Americans a political vision based on the Leviathan (the people surrender their liberty to a singular leader in return for protection). Europe is still a ‘Leveller’ type system (bottom up democracies). Of the two approaches, I am with the Levellers.

Have a great week ahead,

Mike