Forecasting, as they say, is difficult, especially about the future. Two recent examples spring to mind. First, the DGSE (Direction Générale de la Sécurité Extérieure) or the French secret service was lauding itself that it had spotted and followed the Wagner rebellion in Russia, but it seems it badly missed the other Wagner rebellion (against French interests) in Niger.
Second, tacking away from the DGSE to DSGE (Dynamic Stochastic General Equilibrium) models, which are the basis of how policy makers try to frame and forecast economic progression, the Bank of England has slapped itself on the wrist and called upon Ben Bernanke to lead a study into the poor forecasting ability of the Bank, which missed the 11% rise in inflation over the course of the past eighteen months (19% rise in food prices) and has scrambled to raise interest rates in order to compensate.
There is an element of irony here as some ten years ago Mervyn King the former governor led a similar inquiry into the monetary policy framework of Sweden’s Riksbank. To be quite fair to the Bank, which has long been regarded as a standard bearer in the monetary policy community, its governance framework encourages such a review and it would be a very good idea if the European Central Bank would carry out a similar, necessary post-mortem. Instead, I suspect it will carry on, in the hope that the European public have not noticed its blundering.
War by other means
With those brave words, I acknowledge that I also get things wrong, from time to time. For the moment, I am happy to stand by the prognostics in the year ahead outlook ‘War by Other Means’ I penned with David Skilling last December. The central tenet of the note is the way in which the strategic rivalry between the US and China will shape military, industrial and commercial interests.
Surprisingly, the big moves in this domain have come from the EU, with its AI Act and EU Economic Security Policy. The other theme is inflation and the way in which governments are dealing with it. Bond markets are decidedly unimpressed with the view that inflation is dead and yields (US ten year) are rising to levels where they have previously provoked stress in the economy.
In this respect, one prediction for the second half of this year is that we will hear more about debt sustainability – which I define as the ability of companies, households or governments to meet their debt payment obligations without help (through assistance, default or forbearance).
That the US government now spends more on debt repayments than defence, shows the toll of indebtedness, and its geopolitical implications. I have written about the rise in indebtedness for some time and have a theory that upon the centenary of the word debt conference of 1924, we may need another ‘conference’ in 2024 (my forecasting might be a little off). I am going to spend a good deal more time talking about debt in the coming months.
Populism
Another deepening of an existing theme to watch for the remainder of 2023 is the tension between democracy and populism, which in many countries is a close-run thing. As a general trend Europe (except the UK which looks ready to move centre-left) is moving to the right, and in those countries where this move is sticking, politicians are carefully navigating the issues upon which to sound ‘populist’ (identity) and those where it is less advisable (economy). The risk is that their guile induces the public to sleepwalk into a state of mind that permits the enfeebling of laws and institutions.
In the US, the alarming element is that, according to opinion polls, a large group of people are prepared to support Donald Trump (who willingly denigrates democracy) and Ron DeSanctis (who witlessly does so), in apparent disregard for the withering consequences for America’s institutions and reputation (this may have been one factor that prompted the Fitch downgrade of US debt). By the end of the year the 2024 presidential campaign will be in full swing, and the commentariat will devote endless pages to the prospect of Trump II.
As a final word, a recurring theme this year has been the ways in which artificial intelligence will disrupt our economies and lives (i.e. One Man and His Dog). As the year develops, I expect to see at least two sub-trends materialize. The first will be the race to set the rules, regulations. and possibly the institutional architecture around how AI is used, and here I think the UK is in an interesting position, if only its government knew how to ‘play’ this.
The other is that as the weight of high interest rates on economies builds, and activity levels falters, there will likely be more chatter as to how AI can replace humans and make companies more efficient. My One Man and His Dog theory is that AI can help rather than replace skilled humans, and that there is plenty of room for humans to work with skilled, intelligent non-humans (dogs or robots). The fear that AI could displace workers may actually be a positive force in pushing a debate on how to frame its use, notably in China where unemployment and diminishing productivity are another issue to watch.
For the time being, granted the holiday period, the ‘Levelling on Sunday’ will pause for two weeks, returning on Sunday the 27th August.
Have a great week ahead,
Mike