Donald Trump’s latest attempt at escalating to de-escalate in the Middle East conflict has not had the desired effect. Since the bombing began over the weekend, bond yields have been rising across the world, the price of oil has shot back up and stock markets have turned shaky. 

On Tuesday, the conflict deepened further, with Iran launching missile and drone attacks at multiple American bases in the region. On Wednesday, Iran accused America, whose strike was reported to have hit a wedding party, of a “war crime”. If the exchange continues, with neither side making a show of retreating, the effects could multiply in severity. That’s because all of this is happening at a time when financial strains are beginning to become visible in the world economy — in both stock and bond markets, and in economies where growth is slowing but inflation remains stubborn. 

The AI bubble had already moved into a delicate phase. The hyperscalers who have driven the investment boom sustaining the US economy — counting among their number Anthropic, OpenAI, Amazon, Google and Microsoft — have burned through their ample reserves of cash and, to maintain the massive build-out of data centers and infrastructure, have now started turning to credit markets. They’ve been able to borrow on favorable terms because the rapid rise of their share prices has provided them with ample collateral. Those rising share prices have, in turn, been swollen by huge profits, creating a virtuous upward cycle which makes the new debt being taken on appear eminently manageable.

Unfortunately, though, all is not as it appears. A close look at the numbers reveals that tech leaders are making big money only because they’re spending big money. The actual rate of return on their investments is so far barely sufficient to cover the cost of depreciation of their assets, and from a long-term perspective they are essentially breaking even. Meanwhile, to justify their current very generous share valuations, the hyperscalers would need to see continued rates of profit growth that would amount to more than a doubling every year. This may be too much to ask: total revenues (not profits) from global AI sales have only just begun to surpass depreciation costs, which suggests that margins remain very tight.

Most importantly, the hyperscalers’ ascent has been underwritten by a massive expansion in the US national debt, with federal fiscal deficits expanding faster than the economy itself. More than half of US corporate profits have been funded by these deficits. Further flattering profit growth is that many more companies are today private than was the case a few decades ago, funded by private equity and venture capital, where creative accounting can keep weak performance “off the books”. But as depicted in Warren Buffett’s famous analogy of skinny dippers being exposed by a retreating tide, that sort of sleight of hand gets quickly exposed in a downturn.

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Two things could bring the blistering AI rally to halt: a drop in demand for its products, or a drop in the supply of the credit sustaining the boom. It is the latter which may now be coming into play. The fundamental driver of rising bond yields is falling bond prices, since the two move in opposite directions to one another: as bond investors demand lower prices on the bonds they buy, the effective rate of interest paid by the issuer goes up.

Over the last few years, Western governments have issued so many bonds to fund their spending that investors are getting stuffed to the point they can take no more. It began during the Covid pandemic, when governments borrowed an average fifth of GDP just to keep their economies from collapsing. It then continued during the recovery phase, and in the US was turbocharged by a bipartisan consensus to thereafter throw caution to the wind. Through both the Biden and Trump administrations, the US government ran large fiscal deficits in order to fund an investment boom, the former directly through government programs and the latter through tax cuts. But the end result is a national debt that has doubled in just the last ten years, and whose growth shows no signs of slowing down.

Add to that mix, then, the shift of hyperscalers from investing their savings to raising money in corporate bond markets, and the global demand for credit now exceeds its supply by a significant margin. Central banks could plug the gap by “monetizing” the debt — essentially, printing new money and then using it to buy government bonds — but are reluctant to do so because inflation remains above their target rates. And inflation has remained so sticky in large measure because of the same fiscal stimulus that is pumping money into the economy without producing equivalent growth.

Inflation had, however, shown signs of moderating over the summer, in part because the ceasefire between the US and Iran had allowed energy prices to fall back down. Had that continued into the autumn, we might have seen central banks lower interest rates further. Instead, due to the resumption of hostilities in the Middle East, oil prices are once again rising. Although this will raise gas prices, the greater damage will come through the prices of distillates like diesel, which are driving up transportation and farming costs just as the northern harvests are coming in. So the fertilizer shortages caused by the war are now starting to turn up in food prices on store shelves.

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This price resurgence comes at a most inopportune time. If it persists, the autumn inflation readings could prod central banks to further raise interest rates, raising credit costs for everyone. No G7 country will feel the weight of this expense more acutely than Britain. UK gilts have carried a premium for the last few years, imposed initially after the 2022 Liz Truss moment and then worsening after the 2024 election, when the incoming Labour government’s implausible tax and spending commitments caused investors to doubt the financial acumen of the British Treasury. The impact of perceived British mismanagement is that UK gilt yields are now the highest of any G7 country, and each day’s inching further upwards makes the government’s difficult situation even worse.

So pity the Chancellor, John Healey, who at the end of October will deliver his first Budget. Healey’s fiscal headroom, the gap between revenues and budgeted expenditure that he can “play with”, was tight to begin with and is now narrowing towards zero. At this rate, come Budget day, he will have to deliver bad news — either further spending cuts or tax increases. Either would probably bring an end to Andy Burnham’s honeymoon period, which has seen his net approval rating rise steadily since he became Prime Minister.

And if Andy Burnham faces a cold new reality, Donald Trump may become a lame duck. The odds of a Democratic sweep of Congress in the November elections, currently tilted slightly in their favor, will probably lengthen if gas prices go back up, inflation rises and credit card costs become more burdensome. Inflation that has been running over 3% has now begun to erode the incomes of ordinary Americans, and the bottom half of the economy can be forgiven for thinking there’s already a recession.

What has kept the economy from contracting has been the heavy consumption of the top half, fueled by the wealth effect of the stock market rally. So, if interest rates were to choke off the supply of credit and slow that growth, the market might fall as prices realign with the new reality. In that event, the reversal of the wealth effect could tip the US economy into recession, accelerating slowdowns elsewhere.

Worryingly, the capacity of Western governments to tackle recessions is not what it once was. As the Bank for International Settlements noted in its annual report, recent years have seen government debt rise during downturns, but without a concomitant decline during economic recoveries. The rainy-day funds of Western governments have then been further depleted by the rising demands of defense expenditure, aging populations and adaptation to climate change.

It seems unlikely that the rise in bond yields we’ve seen over the last week could continue much longer without something cracking. As debt-laden governments are forced to commit ever more of their revenues to interest payments — in the UK, they now suck out more money than the defense and Home Office budgets combined — they will have to either cut spending or raise taxes. 

In the US, such fiscal austerity would drain the supply of money that has kept the economy revving. That, in turn, would hit the profits of the tech companies inflating the bubble just as their access to credit dries up. In short, the scale of the recession could stand in direct proportion to the scale of the boom which preceded it, at a time western governments would be more constrained in their ability to engage in counter-cyclical policies. With the American economy already slowing and the job market at a virtual standstill, a slide into negative territory could deepen the hardship already being felt by many working people, strengthening the wind now filling the sails of political populists.

Thus, between the limited fiscal firepower of Western governments and the chariness of their central banks, reluctant to stimulate amid persistent inflation, this is not the time for a recession. Let us hope that Trump soon finds a different way out of his Middle East quagmire.

However, that understates the import of her promotion. Energy will be a vital component of Andy Burnham’s premiership. Net Zero has become a defining element of Labour’s offering. Consumers and businesses desperately want energy bills to come down.

Meanwhile, Fahnbulleh is anything but an underling. A child refugee from war-torn Liberia, she made her way to Oxford and proceeded to a doctorate at the London School of Economics. Here, she established her bona fides as a scholar with well-elaborated and nuanced academic publications on industrial policy and the climate crisis. Moreover, her strong vision for localism, rooted in the cooperative tradition, has earned her the moniker of Burnham’s brain. It’s therefore safe to say she assumes her position with both authority and clout.

That’s all for the better, because she will immediately face two big decisions: how to bring down energy bills about which consumers and businesses alike have been screaming; and how to reconcile that imperative with her commitment to Net Zero and the phasing-out of fossil fuels at a time of extreme volatility, when a rebel group in Yemen can push the price of oil to over $100 a barrel .

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To a considerable degree, this task comes down to balancing short-term with long-term goals, and strategy with tactics. In the short term, scrapping green levies and allowing for further exploration of Britain’s oil and gas reserves in the North Sea, as called for by both Reform and Conservative parties, would appear to be an obvious win: not only could the measures create jobs, advocates argue, but they would reduce energy bills and allow the country to substitute cheap, local gas for imports.

However, such benefits would be largely short-term, while the gains can be exaggerated. In the first place, it isn’t renewable energy that is driving up British electricity bills — it is the pricing model and the high cost of natural gas (a price which is itself set on international markets). Indeed, the most effective way to bring down bills in the long term would be to double down on renewables and completely eliminate gas from the energy system. As for green levies, these make up only a small share of total electricity bills, and in any case, the programs these levies fund, such as the Warm Home Discount for vulnerable households, would otherwise have to be paid for through general taxation. Distribution costs count for more, and one of the reasons electricity bills are rising so fast is that infrastructure must be upgraded to deal with increasingly severe weather events, itself a product of the climate change caused by carbon emissions.

Meanwhile, as an investment proposition, the fossil industry’s benefits are immediate, but possibly no more than that. Oil companies pay large dividends — but that’s because it’s an industry which appears to have a finite life and so their capital expenditure tends to fall below that of growth industries. This, indeed, has been a source of Donald Trump’s frustration with the sector: he wants the companies to drill, baby, drill to bring down prices, and they understandably reply: why bother? We’re happy to keep supply limited and make money off higher prices while the good times last.

Most of the future growth in demand for energy will come from the developing world, much of which is leading the way in the transition away from fossil fuels. Developing countries are not necessarily pursuing this path out of concern for climate change. What is driving this is instead energy security — that is, the eminently practical consideration that renewable energy relies on entirely local resources. Countries with abundant renewable energy reserves are not so vulnerable to foreign suppliers or the vagaries of the market — let alone price shocks like the recent interruption caused by the Middle East war. When the price of your input can leap in a week or its supply can suddenly get cut, as we’re seeing  now in both the Strait of Hormuz and the Red Sea, the attraction of relying on home-grown energy only grows stronger.

Meanwhile, renewable energy has turned out to be one of the most dynamic sectors of the UK economy, with a vibrant startup ecosystem that is riding on the back of Government policies and growing much faster than the overall economy. Investment in the sector has grown 20 times over in just the last decade and London is now Europe’s leading climate-tech hub. To roll back Net Zero would be to cripple a sector that could potentially be at the vanguard of a new industrial revolution — a spectacular economic own goal.

So, when it comes to industrial policy, which both Burnham and Fahnbulleh favor, there is much to commend Net Zero. In principle, it might be possible to partially reconcile the competing demands by allowing an expansion of oil and gas production — the windfall tax may come in for reconsideration — and then using the Government’s share of the revenues to support the energy transition. (This is the approach used by Norway and some of the Gulf states). But long-term, it makes sense for the Government to put its eggs in the basket of this rising sector rather than a legacy industry.

However, this is where the real challenge to the country’s energy policy will lie — namely, does the Government have any eggs to play with? Burnham has entered Downing Street with the same set of fiscal constraints that felled his predecessor, and there is little reason to expect those to ease much. Burnham has said that while he might look for a little flexibility, he will abide by the same fiscal rules Rachel Reeves had set for herself.

In truth, he doesn’t have much choice: if he doesn’t bind John Healey, the new Chancellor, this way, the bond market will do it for him. And while investors have greeted Healey favorably, with gilts moving in line with the bonds of Britain’s G7 partners, those rates have been rising across the board, and look set to keep doing so.

Meanwhile, given that Healey resigned from the Starmer government over its failure to adequately fund the country’s defense budget, it’s a safe bet that doing so was a condition for his taking his new job. So, in addition to having to find more money to pay rising debt costs, Burnham will need to find more money to pay for defense spending.

And yet for all that urgency, he has further tied his hands by making it impossible, at least for now, to tackle the one Government bill that everyone agrees has got out of control: welfare spending. Burnham campaigned on the pledge not to scrap the triple-lock that is the principal driver of that portfolio’s ever-rising price tag. As a result, we saw how tricky he made his task the moment he crossed the threshold of No. 10. The Prime Minister announced he would eliminate VAT on energy bills and fund it from the savings he’d make by scrapping the digital ID scheme, only to have a former minister point out that scheme was unfunded.

If Burnham is to proceed with his ambitious plans to remake Britain and shift the economy to renewable energy, effecting a new industrial revolution in the process, he will therefore need to make some very tough choices, lest he end up making lots of promises that his Chancellor nixes. Since the Labour manifesto did not ask for a mandate for such hard choices, he may have to secure one of his own.

But that poses a rather large dilemma. To secure his own mandate, Burnham would need to call an election, something for which there appears to be little appetite among either the public at large or his own backbenchers, many of whom would probably lose their jobs, given the scale of Labour’s current majority. But to make the sort of bold decisions that might underpin his attempt at national renewal — such as serious welfare reform, raising income taxes or reintegrating with Europe — Burnham would effectively have to tear up the manifesto Labour campaigned on.

On the upside, he comes to office with some advantages over his predecessor. He is, obviously, a more gifted communicator, and he also has a clearer message to deliver — a more fully-formed vision of government based on devolution, local action, and a constructive state presence in daily life. He also takes power with an evident plan to make government more effective, placing more power in the Cabinet Office rather than maintaining Starmer’s approach of relinquishing decision-making authority to a Chancellor who often gave the impression of looking at a computer spreadsheet before reciting “Treasury says no”.

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But he’ll need all these skills and powers, because his task isn’t enviable. He is shackled with the albatross that sank the Starmer premiership, bequeathed to him by Starmer and Reeves — a set of fiscal constraints, resulting from careless election pledges, which still make it impossible to do anything more than incremental tinkering — like ostensibly temporary VAT cuts, or £2 bus fares. His new energy secretary has the potential to assist him in his goal of transforming Britain — but only if he can figure how to pay for it.

He must therefore find a way to offload the weight of his inherited burden. If he doesn’t, he will join the lengthening list of short-term premiers that Britain has begun compiling.

The hard reality is that Britain is in hock to the bond market. Its options are limited, and all the democratic will in the world can’t change that — at least, not in the short term. Galling as it is that fund managers have come to assume a weight similar to, if not greater than, that of democratically-elected governments, that is the consequence of choices made by those same governments over decades — choices that deferred the costs of those decisions to a future that is now, suddenly, upon us.

James Carville, the Democrat strategist, famously said that he’d like to be reincarnated as the bond market because then he could “intimidate everybody”. But it wasn’t always so. There was a time when gilts were the only show in town. Fund managers who needed a stable income from a credit-worthy source had no option but to buy government bonds, and little reason to search for alternatives.

However, three developments have since converged to create the situation in which we find ourselves today. First, financial globalization opened the world to investors. This helped keep interest low in western countries as investors from emerging markets looked to park their money in “safe havens”. But it also opened the door to investors in those safe havens being able to look elsewhere if that status ever changed.

Second, defined-benefit pensions were increasingly replaced with defined-contribution pensions. In the short term this was another win for governments. With the population aging and retirements getting longer, defined-benefit schemes were going to demand ever bigger contributions if they were to remain sustainable. Switching the model saved employers money in the short term, boosting profits and thereby asset values, which was always a political winner. But it also meant the guaranteed supply of credit from pension managers needing long-term, stable returns diminished.

Third, slowing economic growth in rich countries drove debt higher, as governments postponed the tax rises or expenditure cuts which would bring budgets back into alignment. At the same time, rising economic growth and improving fiscal management in developing countries helped improve their credit-worthiness, creating new competition for creditors.

Today, as a result, hedge funds — increasingly foreign-owned ones — have replaced pension-funds as the main buyer of UK gilts. Footloose and fickle, they chase returns and dump bonds the moment they doubt a government’s fiscal prudence, as Britain discovered during Liz Truss’s premiership. And with plenty of options in a changing world, from higher-yielding but increasingly safe emerging-market debt to corporate bonds, investors can play hard to get.

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Voters like poetry — grand visions and promises of pleasure without pain — but fund managers don’t. They want the driest prose: that the bonds they buy will hold their value, that their money will be returned at the promised date, that they can sell the bonds easily if they need cash, and that the interest rate at which they bought them will be honored.

Keir Starmer and Rachel Reeves failed to bridge that gap. While the Chancellor often talked of hard choices, she seldom made them. On the expenditure side, Labour promised to restore public services but offered few compensating trade-offs. Instead, the Government maintained the triple-lock on pensions, reversed modest welfare reforms and froze most taxes, saying they would raise the growth rate of the economy to pay for it all.

Yet they offered no compelling narrative for how they would do this. The bold changes that might have had an impact, like deep planning reform, a major infrastructure program or re-integrating with Europe, were all ruled out since various constituencies opposed them. Starmer seemed to think that simply by acting like an adult, unlike some of his recent Tory predecessors, investors would return to Britain and the economy would take off.

It didn’t, and there was little reason to believe it would do so in the foreseeable future. And the fatal consequence of relying upon growth as a get-out-of-jail card, but failing to deliver it, was that Reeves could only keep bond investors on board by constantly sweetening the terms of their loans. Although her fiscal management prevented a Liz Truss moment, it merely spread the pain out over time. Since Starmer and Reeves took control of Britain’s economic direction, UK gilt yields have risen by 0.7%, making it the most expensive government debt in the G7. Investors didn’t panic and rush for the exits, as happened in 2022. Instead, they demanded ever more inducements from their hosts if they were to stay at the party.

In short, Starmer and Reeves began their term of office facing a daunting challenge — deteriorating public services, burdensome debt, a housing crisis, stagnant productivity and a restive electorate demanding action on all fronts — but having chosen first to bind their hands. It was inevitable they would spend their term bobbing, weaving and ducking, desperately holding out for the bell but destined not to end the round. Despite his claim that he bequeaths an economy that “is stronger, growing faster than our peers”, in truth GDP growth is slowing and real wages are stagnating.

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Burnham needs to digest that lesson fast, because there will be no time for him to learn on the job. Should he become prime minister, he would take office with the financial conditions facing the government even worse than they were when Starmer took office. As revealed starkly on the morning Burnham’s return to parliament was announced, the interest the government must pay on its debt now consumes nearly 10% of total expenditure, which is considerably more than it spends on defense (itself an area that Britain must spend more on, lest it alienate its many alliance partners). And with bond yields rising across developed markets, that is likely only to worsen.

Yet while the prose demanded by gilt buyers has become even colder and more austere, voters still want poetry. Burnham has offered plenty: re-nationalizing utilities, increasing defense spending, cutting student loans, business tax cuts. If he doesn’t rapidly pivot to a prose which the bond markets like reading, he’ll enter the same doom-loop that saddled the Starmer-Reeves duopoly.

Some observers have concluded that this is inevitable, that Britain has become ungovernable and no prime minister can succeed, the proof being that the electorate now cycles through them with stunning rapidity — six so far in the last decade, soon to be seven. This line of thought holds that Britain, like many western countries, is gripped in a sort of Cleopatra complex: voters beat any messenger who delivers news of hard choices, leading politicians to make impossible pledges only to be kicked out the door when they fail to deliver. For all that he spoke of the change he brought to the UK in his short term of office, Starmer shied away from anything major, and it hasn’t escaped notice that even some of the “change delivered” for which he claimed credit in his resignation speech were measures that didn’t originate in Downing Street but were forced upon him by his MPs who resisted change.

Perhaps what Britain needs is better voters. But it seems just as likely that what it really needs is better leaders. The country’s beloved wartime narrative is that in 1940 the country had the option of an easy way out by appeasing Nazi Germany but chose instead to follow Winston Churchill into battle. Is it really impossible for leaders today to muster a will to fight? If Britain wants to end its servitude to the bond markets, it can. All it needs to do is reduce its need for them – by making itself an attractive creditor that can turn down offers that are insufficiently appealing. That will require both a bold plan to boost growth and a credible one to keep current expenditure under control. Labour nostalgists who hark back to the Seventies, when Tony Benn called for a Fortress Britain that would put bond investors back in their place, overlook that Britain is an entirely different place today: our bond-buyers aren’t all Britons who can be corralled behind a national project and our debt is rising and not falling as a share of GDP, giving those buyers ever more leverage.

Perhaps devolution will produce positive outcomes, and perhaps Burnham can tweak Rachel Reeves’s fiscal rules a bit — though only if he’s to produce more convincing ones — but so far he’s produced little of an economic vision. He’d better do so fast, because he doesn’t have the luxury of time. Attention has thus turned to who he selects as his Chancellor as an indication of his economic vision: will it be the left-leaning Ed Miliband ushering in change, the right-leaning Wes Streeting heralding Blairite continuity, or possibly someone else all together?

But that’s looking for clues in the wrong place. Whoever Burnham selects will have their hands bound by the bond market into which Britain has delivered itself. If they have bold ambitions, they’ll need to match it with serious intent to preserve the country’s solvency, lest the markets discipline them. Doing as Starmer did and farming economic strategy out to his Chancellor would be a dereliction of duty. Burnham’s first job is to produce an economic vision for the nation — and if need be, to seek a mandate for it. If there’s one glimmer of hope, it’s that he has begun assembling an economics team, which suggests both a willingness to listen and a seriousness of purpose. One example is Jim O’Neill, a former chief economist for Goldman Sachs, who wants to increase infrastructure spending while keeping to the fiscal rules; another is Mark McVitie, the former director of the Labour Growth Group who has called for a watering-down of clean energy policy and a rise in capital gains tax to fund a 2p cut in national insurance.

On Sunday, the former Prime Minister Rishi Sunak offered him sage advice: “he’ll never have more power than on his first day in the job. It is vital he has a clear and achievable plan for what he wants to do in those opening hours.” One acid test will be what he has to say on triple-lock on pensions, a policy which dooms every government to an eternally worsening fiscal position and will deepen the country’s debt bondage.

If Burnham vows to keep it, his rivals should begin their leadership campaigns now, because his tenure will be as ill-fated as Starmer’s. Burnham will have to govern in a prose we might not enjoy, but there can still be lessons for him in poetry. As he makes the journey from Manchester to London, Burnham might therefore do well to reflect on a similar train journey from northern England chronicled by his favourite poet, Philip Larkin, who observed a car of young newlyweds at the peak of their joy rolling into their destination “ready to be loosed with all the power / That being changed can give”. Much like them, Burnham’s ride will be joyous — but will end in London, as Larkin’s poem ominously does, in a downpour.

A handsome and detailed study, the report offers a set of ambitious proposals that could only have from the minds of people enjoying the comfort of tenured positions: cap the growth of western economies at current levels; raise investment by rich countries in poor ones to 10% of GDP (a 25-fold increase over current aid levels); ensure per capita incomes converge to a common average across the world by 2100; reduce the consumption of material goods; cut the working week in half; tax the rich to equalize incomes across the globe; create a new international currency regime. Have these people spent any time canvassing in a by-election? Do they have any idea how this will sell in Peoria, Illinois?

In short, it seems difficult to picture this supposed action plan making it into the daily grind of retail politics. Not surprisingly, mainstream economists have been quick to pounce, the widely-read blogger Noah Smith calling it “total nonsense”, the taxation expert Dan Neidle dismissing it as “potty.”

And yet: step back and reflect on the document, and you see that Piketty and his co-authors might just be onto something. However impractical their solutions may appear, the authors have channeled an emerging zeitgeist in this age of polycrisis. The old neoliberal orthodoxy has fallen from grace but, like a zombie that keeps coming at you no matter how many times you kill it, it still dominates policy. The document at least offers an alternative vision of where things might be going. 

One striking thing, missed in the rush to dismiss this as fantasy, is the fact many of the things the report calls for in the future have already begun to happen. Cap economic growth in the developed economies at current levels? Check. Western economies have been slowing for decades and several have now approached virtual stasis. Indeed, there are signs that growth ultimately produces degrowth, regardless of what governments do. As I found in my recent book, economic growth triggers a cycle of behavioral and social changes whose effect, when aggregated, is to progressively inhibit a society’s economic dynamism while imposing new costs on that society, with the strength of these effects rising as a country grows richer. Western economies are now close to peak productivity. The one principal exception to the broadly-based slowdown of the rich countries is the US — but it has continued expanding thanks not to some internal dynamism, as is often supposed, but because of a massive run of debt-fueled stimulus. Take that added input out of the economy and the US too would be no outlier at all. In fact, real per capita income is already going backwards for all but the wealthiest Americans.

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Raise investment in developing countries? Check. It’s not nearly at the scale that the authors call for, but investors have been pouring money into developing countries for decades, lured by the higher average returns on offer in comparatively low-wage economies. Although the business story of the last couple of years has been about the “American exceptionalism” that has powered the boom in New York’s stock markets, the really exceptional performers have been in the developing world. Turkey’s stock market is up 40% over the last year, Taiwan’s has doubled, and Ghana’s has increased by over 130%. Forget AI, the big money’s in the Global South. 

Bring about a global convergence of per capita income? Also check. This mirrors the investment wave in the ascendant global periphery. While incomes within rich economies have diverged in recent years, the gap between rich and poor countries, which peaked at the turn of the millennium, has been steadily narrowing. For a while this finding was skewed by the extraordinary rise of China, but in recent years other countries have begun rising rapidly as well. Whether incomes could converge on a common level is another matter, and some war-torn countries have got stuck on the banks of the development stream. But all told, the old distinction between First and Third Worlds looks set to grow less relevant with time.

Reduce the consumption of material goods? Check. Consumers in Western countries have been substituting experiences for things for decades, with the result that the material intensity of developed economies has steadily declined. That is to say, the material component of each dollar’s worth of economic consumption is falling as people buy less stuff and spend more money on things like health and beauty, dining out, streaming videos and taking vacations. With most of the world economy’s future economic growth coming from developing countries, rising incomes are already causing a shift away from goods and towards services in consumption.

The other key proposals in the GJP report do not, when placed in the context of the century-long transition the authors envision, look all that unrealistic. Cut the work week in half? The average work week in Western countries has already nearly halved since the Industrial Revolution, so there’s no reason not to expect this trend to continue. It really comes down to whether productivity increases are used to raise income or free time: Americans have been more inclined to favor the former, Europeans the latter. This helps to explain the supposed “poverty” of Europe one reads about in the US business press; but outside of America, people have happily accepted more time off as a fruit of development.

Tax the rich to equalize incomes? There is a rising populist tide in many Western countries that advocates wealth taxes and greater limits to oligarchic power. With Elon Musk, a man described by one polling analyst as “political kryptonite”, on track to become the world’s first trillionaire, public patience with the ultra-wealthy is wearing thin.

Create a new international currency regime? Although the Western-based dollar order remains in place, it is rapidly eroding at the margins as the world moves towards a more pluralistic monetary system involving bilateral exchange, alternative payment systems like China’s CIPS, and the shift away from dollar reserves into other currencies.

In sum, it may be that the world economy is already moving in the direction advocated by the Global Justice Project, but organically rather than as a result of policy or an international revolution. Mind you, on current trends, the world will still face an ecological crisis. Many will take issue with the assumptions made in the report regarding the extent and impact of future climate change. However, there is little serious doubt that on current trends, the world faces a future of increasingly severe ecological crises. These, in turn, will hamper economic growth. Even though the material and energy intensity of production and consumption are declining, the sheer growth of both in the developing world over the next century will blow through all targets. 

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So in that regard, the Global Justice Project is a timely intervention. Admittedly, it doesn’t land at a propitious time. Western politicians are retreating from global campaigns, sweeping visions and anything that smacks of social engineering. It’s all about bringing gas prices down now. Thus as an action program, which it purports to be, the document seems out of touch with the times. In the chapter on political strategies the authors acknowledge there will be pushback from powerful vested interests to their proposals, before admitting there is “no magic bullet to address this issue, except trying to be more convincing and as precise as possible regarding the benefits of the GJP.” Erm, OK.

The problem, even for those who share Piketty and Co’s aims, is that there’s little evidence that the average citizen is moved by grand schemes. Indeed, as the success of Zohran Mamdani in New York attests, even self-declared socialists succeed best when they connect with voters around local, visceral issues, Mamdani’s focus on rental costs and grocery prices being no less ideological than Vladimir Lenin’s pledge of bread, land, peace and electricity.

But still. As an intellectual agenda, the document offers something sorely lacking in most modern political discourse, namely: ambition. Most mainstream economic commentary amounts to either fatalism that anything at all can be done, or a Pollyanna-ish optimism that technology will magically solve everything. The first option is a cop-out on the part of intellectuals whose job should be to solve problems; the second is as fanciful a belief as the most utopian assumptions in the radical literature. 

Yes, the energy-intensity of our economy has dropped dramatically as our technology becomes more efficient. But rather than bank those efficiency gains we have spent them. When, for instance, gas demand drops because our cars are made more efficient, we’ve spent the savings on adding bells and whistles to the cars, the result being a reduction in our carbon use that is much less than imagined. And that’s before we factor in the ravenous demand for energy that AI data centers are expected to add.

Building a sustainable path to the future will require both technological progress and human change. Economists have so far focused largely on the first and neglected the second. Even if it doesn’t provide the right answers, therefore, the Global Justice Project is at least asking the right question.

Such violent mood swings have become a recurring feature of this strange war, reflecting Donald Trump’s whimsical decision-making. But one consistent theme has been that the US President would like to keep the war as brief as possible and has been frustrated by his inability to force it to a rapid conclusion. 

The Iranian regime, which has been prepared to absorb a lot of punishment, has used Trump’s impatience to its advantage, and still appears to believe that time is on its side. Nonetheless, it too is showing signs of exhaustion, with its negotiation team reportedly staying back to craft a fresh proposal after the Americans left. The resulting willingness of both sides to carry on talking has thus brought a wave of relief to investors. 

Still, we should hold our breath and hope for good news. There’s already a lot of damage baked into the economy — damage that will become more apparent, and more painful, as the year progresses. Everything now hinges on these peace talks succeeding. If they fail, things could turn south quickly.

So far, the economic harm of the war has been fanning out across the world gradually, at the lumbering pace of an oil tanker moving across the world’s oceans. It showed up first within the Gulf region, then in nearby Asia and Africa. It turned up in Europe last week, and this week began to reach the United States, with the last tankers to have left the Strait of Hormuz before the war broke out now arriving at their destinations. As a result, if the Strait is not reopened soon, refineries across the world will soon have to start cutting production. Should we reach that point, even the supposedly most sheltered economies, like the United States, will start experiencing shortages.

Given how badly the global economy was affected by oil shocks in the 20th century, it’s fortunate that panic-buying, long queues and energy rationing haven’t shown up in more places, being confined so far largely to Asia. After all, given that something like a sixth of global oil production has been taken offline, along with crucial exports of fertilizers and helium, the head of the International Energy Agency declared the resulting shock to the world economy worse than any previous energy crisis, including those of the Seventies. 

But what has softened the blow so far has been a buffer of oil accumulated by many countries prior to the war. Some countries, such as China and Japan, had long-standing strategic reserves. They and others have also benefited from the fact that it takes weeks for cargoes to reach them — again ensuring that shortages have taken a while to kick in. J.P. Morgan estimates that refineries have been able to run through those stocks until now, minimizing the impact of the sudden shortage. But the Bank expects that, over the coming days, those buffers will run out. While $4-a-gallon gasoline may seem excessive to Americans, it may only be the start.

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All this is contrary to the simplistic narrative that was circulating after the war broke out. The war’s victims, the narrative went, would be those countries which depended most on Gulf oil. China, by this telling, would suffer, whereas the US, since it was a net exporter of petroleum products, would come out a winner. But this isn’t how the war is doing its harm. What matters is not the scale of the shock to hit the economy, but its ability to absorb it. 

So, while China imports a lot of Iranian oil, it also accumulated large buffer stocks before the war and has been decarbonizing its economy for years, giving itself considerable resilience. The country was thus able to absorb a temporary hit. Nevertheless, it now appears to have burned through its fat. The strains are beginning to show, with rising costs and supply shortages starting to affect the manufacturing powerhouse. Moreover, the impact on global demand is hitting Chinese exporters, which in March recorded a sharp drop from earlier in the year.

Although further removed from the conflict, many Western economies had less of a cushion to absorb the inflationary shock. The dependence of many European countries on natural gas supplies from the Gulf was rapidly exposed. Britain, which was already struggling with relatively high inflation and interest rates, has taken a particularly big hit, since consumers already struggling with rising expenses now face the added burdens of pricier petrol and steeper electricity and heating bills. And as for the US, its relative distance from the conflict, the stimulus of tax cuts and its status as a net exporter of petroleum products have given it some resilience. 

Nevertheless, it matters little that the US can gain a windfall off new oil sales, because the oil and gas sector accounts for a measly 1% of the country’s economy. Everyone else, not least the beleaguered manufacturing sector that Trump promised to revive, is facing higher prices, which are helping to both drive up interest rates and empty out wallets. Not only did the recent reports on Consumer and Producer Prices reveal US inflation shooting up on the back of rising energy costs, but inflation had already been rising in recent months, and not just due to energy prices. In short, this inflation problem probably won’t be transitory.

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Price increases are manageable when outstripped by wage growth, but this is not happening in Western economies. Until now, American wages have stayed afloat on the back of lavish government spending, but it seems unlikely that a prolonged decline in real wages will not eat into consumption. Ordinary Americans hardly care that other countries have it even worse than theirs. They elected Trump to restore good jobs and bring down prices, but instead, prices are soaring, job growth is all but stagnant and real wages, which have declined since he took office, have now turned negative. That is, expenses are rising faster than paychecks can hope to meet them.

This helps to explain the recent collapse in consumer confidence, which last week was reported to have reached the lowest point ever recorded, with consumers expecting their finances to worsen and prices to rise over the next year, which will likely make their spending behavior more cautious. As of now, the only thing propping up the US economy appears to be rich consumers whose incomes have been swollen by tax cuts and the wealth effect of a buoyant stock market. 

As far as that goes, the Trump administration has so far managed the messaging to investors fairly effectively, repeatedly sending signals that peace is around the corner and thereby minimizing anxiety. This has helped to keep the market steady, which is for Trump the acid-test of his presidency and indeed of his conduct of this war, but at a possible cost: it buys more time for the administration to negotiate, in the hopes of securing the sort of surrender the Iranians are currently unwilling to contemplate; but it also prolongs the standoff. The markets haven’t collapsed, but nor has the Strait reopened, not least since the US is now enforcing a blockade of its own.

In the meantime, cracks in the wall of complacency are emerging. Goldman Sachs estimates that the rising cost of inflation will wipe out the stimulus from the tax cuts. That leaves the stock market to do the heavy lifting of keeping rich Americans spending. Expectations of a strong US earnings season, which just got under way, may well produce a rally in the next couple of weeks. But as the year progresses and the baked-in impacts of the war hinder the economy, the market could subsequently settle into a funk. In the best case, if the war ends very soon and normal business resumes, pent-up demand and damaged supply-chains could keep inflation higher than before, hurting the earnings of consumer-facing firms. In the worst case, if the war goes on for months, inflation and interest rates could rise sharply, potentially triggering a market meltdown and perhaps a recession. As it stands, Polymarket puts the chance of an American recession by the end of 2026 at around 30%. A prolonged war would raise those odds, and a market meltdown would probably push them over 50%. And in the event of a downturn, rising debt levels would make it hard for governments to commit to counter-cyclical fiscal policies without driving up interest rates and thereby choking off investment, while rising inflation would make it hard for central banks to cut interest rates.

Put it all together and we have a fragile European economy, a Chinese one whose export-engine may slow down amid weakening sales, and an American economy headed into possible difficulties. With the world economy looking decidedly fragile, it’s no surprise the IMF this week warned a re-escalation of hostilities could knock its growth down to the lowest levels since the pandemic.

Right now, optimism that an end to the showdown is nigh has kept oil prices from spinning out of control. Nevertheless, the gap between the futures market, where oil is trading at under $100 a barrel, and the physical market, where a barrel of oil now fetches $150, is growing huge. The first price reflects the hope the war will end soon, the second the reality that it hasn’t and the global shortage is worsening. 

That divergence can’t continue forever. If the peace talks fail and hostilities resume, the future price will move upward. If they succeed and the Strait reopens, the spot price will fall and everyone will be able to start rebuilding. All eyes will therefore be on Islamabad this week, to see if the peace talks resume and yield progress. If they do, we can resume breathing. But if talks fail and hostilities resume, we can head for the proverbial bunkers.

Since then, the White House jawboned the oil price down further with claims that the Iranians were talking and a ceasefire was on the table. Yet for all the chatter, the basic picture hasn’t changed: the war continues, the Strait of Hormuz remains effectively closed and oil prices are 50% higher than they were when the year began. While Iran has said that it will allow the ships of non-hostile countries to pass through the Strait in return for a few million dollars, it hasn’t made clear which those countries are — meaning it retains effective control over the flow of oil and goods from the region.

If the ceasefire talk turns out to be just talk then the oil price is likely to surge once more. But even before that, each day the Strait remains under Iran’s control and the bombing continues, the world economy gets pushed ever closer to the abyss. For each day that this situation persists, it will take several more days — and possibly weeks — for the world economy to fully reopen, because damage is getting locked in that will take proportionately longer to repair. 

Some estimates suggest that even if Trump’s more optimistic pronouncements are right and war ends today, it will take at least four months to return to normal. Gas plants that are destroyed now will take months or more to fully restore. Supply chains that have been disrupted, and shipping backlogs that have accumulated, could take up to a year to clear, while undersupplied energy markets will also take months to be restocked. 

The longer the war goes on, the worse all this gets. And with the US sending more troops to the region, Iran and Israel still trading fire, and now Lebanon in flames too, there is little sign of an end to the fighting. Even the American proposal, already rejected by Iran, is supposedly just for a 30-day pause while a final agreement is hammered out. And for all the effort in Washington this week to ease the anxiety in markets, so far there’s been little evidence of an increase in transit across the Strait: as of Tuesday, the number of ships passing through each day was still less than 5% of the pre-war average. Whatever the mood music in the markets, then, the physical shortages continue accumulating daily which suggests that should a ceasefire not materialize, the rise in prices could be brutal.

Given these shortages, inflation is headed upwards. Futures traders don’t currently expect oil prices to return to where they were at the start of 2026 for several years. In part, that’s because there’s little expectation of a return to the status quo ante in the Strait of Hormuz, even with peace. Iran has shown it can control the Strait, and absent the installation of a friendly regime in Tehran, traders will likely attach a risk premium to an export tap that can now be shut off at any time.

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Moreover, the pain of higher prices spreads beyond energy to other products and services whose supply is affected by the war. In particular, food prices are going to rise because of a fertilizer shortage from the Gulf, which will hit just as the northern planting season begins. That will inevitably reduce this year’s crop yields. Though the pain will be most acute in countries like Sudan and Somalia, which rely heavily on fertilizer from the Gulf and where food insecurity is already a problem, it will be felt everywhere. In Britain, the National Farmers’ Union is predicting we may start to see increased prices on cucumbers and tomatoes as soon as next month. Aluminum prices are also rising, which could feed into the cost of a range of manufactured goods, from cars to beer cans. And the shortages building up via wartime backlogs will put upward pressure on prices for a while, as happened after the pandemic.

Reflecting this, interest rates on government debt have risen sharply. In part, this reflects a growing expectation that central banks will hold off cutting interest rates, and indeed may even raise them, to ward off inflation. But in part too it probably reflects a growing hesitancy about lending to governments whose fiscal accounts show no sign of coming under control. The US national debt, already approaching $40 trillion — about 124% of GDP — suddenly looks set to get $200 billion bigger as the Pentagon seeks a top-up of its rapidly-depleting weapons stockpile.

Rising interest rates, in turn, will force budget cuts elsewhere, not just for governments, but for cash-strapped consumers and businesses. One alternative, of course, is more borrowing. But that could potentially produce a vicious upwards spiral in interest rates. The resulting decline in investment could then be exacerbated by a contraction of global liquidity. Why? Because the Gulf states, which have been investing a lot of their surpluses abroad, may now have to close their purses to foreigners to focus on rebuilding at home.

Stock markets are anticipating all this, with indexes down across most of the world (though interestingly, many developing countries are still holding up). In the US, where over half the population invests in the stock market, this could create a negative wealth effect that restrains consumption at the top end of the income spectrum, tipping the economy further toward recession. On the prediction markets, the odds of the economy falling into recession, rising by the day, have now reached one in three.

Sluggish or falling stock prices could also generate strains in some of the more opaque corners of the market, such as private equity, where the lack of exit options for firms has led investors to start demanding back their money — only to be rebuffed. It’s therefore possible that the worst is yet to come for asset markets.

This raises another worrying possibility. It may emerge that Donald Trump’s improv theater of war —  which has already raised uncomfortable questions about whether its purpose is to move markets for the advantage of insiders — doesn’t reflect anything other than the whims of the president and his short-termist entourage. The madman theory of international negotiations, once associated with Richard Nixon, presumes a rational actor who persuades others of his folly to extract concessions; what it doesn’t anticipate is a genuine madman, or merely someone who doesn’t have a complete handle on his policy briefs.

So far investors, and some political analysts, have opted to believe that there is a method behind Trump’s apparent madness — for instance that the closure of the Strait of Hormuz actually serves his strategy of establishing global energy dominance at the expense of China. Of course, this thesis doesn’t really square with the fact that the shares of Chinese battery makers have risen more than those of US oil firms since the war began, while volatility in oil and gas markets seems likely to accelerate the world’s transition away from fossil fuels, an outcome that would be beneficial to China.

If, then, investors begin to doubt that the President has an actual plan and is merely fumbling his way toward improvised, temporary and sub-optimal solutions, a new risk premium may get attached to US securities. This could lower their value yet further on world markets. Investors dare not entertain that possibility yet. Should that ever change, though, the turn in US markets could be sharper than expected.

But even assuming that Trump is a rational, calculating operator, a fundamental problem remains: the two sides to this negotiation appear to be approaching risk in entirely different ways. Trump’s approach to negotiation and combat is based on arithmetic. It assumes that whoever has the resources to do the most damage has the upper hand — and will therefore win. 

However, humans only sometimes make decisions in this way. More often, they use calculus, or indeed no mathematical reasoning at all. For many people, there really are things you can’t put a price on. For the Iranian regime, submitting to Trump’s latest demands — for instance suspending their ballistic missile program — would amount to the end of the Islamic Republic. Little wonder, then, that they’d sooner die than give in. And if there are opportunists in the ranks of the Revolutionary Guards, willing to be bought off in some Venezuela-style putsch, disloyalty doesn’t seem common in the high command. Again, that’s hardly surprising: as a group, the Guards are deeply ideological and committed to the regime’s survival at all costs. 

Despite Donald Trump’s cratering poll numbers, one thing that can be said is that Americans who voted for him knew what they were getting. He might have said he would stay out of forever wars, but the way he makes and implements decisions was always well known. If he somehow pulls a rabbit of triumph out of the Middle Eastern hat, his followers will be vindicated in their judgment. If he fails, they have to take their share of the blame.

As for Iran, even if an agreement is cobbled together in the short-term, the Islamic Republic looks set to persist with what Israel calls the “Samson strategy” — even if that means bringing the house down with everyone in it. If that makes them the true madmen, it’s at least madness based on rational calculation. The US’s pain threshold is likely to be met earlier than that — and the only question is whether Trump postpones that surrender until the damage done to the world economy makes a rebound this year impossible.

The horrific game of chicken being played in the Middle East will only end either when Iran goes over the cliff — or when the US slams the brakes. The first doesn’t appear imminent and the second is impossible to predict. In the meantime, we therefore seem stuck in an escalation loop which will only end when the damage becomes very severe. Until then, the war drags on, and the world edges closer to the abyss. 

Yet when Asian markets opened later in the night, the search for oil and gas resumed and prices came back off their lows. With traffic through the Strait of Hormuz still at a virtual standstill — and the Islamic Republic warning “the end of the war is in Iran’s hands” — the President is learning that it’s easier to start wars than finish them. Trump may now have to confront an unpleasant dilemma: either stand down US forces and allow a murderous regime its victory parade, or save face and risk derailing the world economy. 

Yet despite chatter to the contrary, such a downturn wouldn’t reprise the Seventies. Then, an oil-price spike triggered by a Middle East war caused inflation to skyrocket. Now, the impacts will be considerably more muted, for several reasons. 

First off, the world economy is much less carbon-intensive than it was back then. On average, it takes half the energy to produce a dollar of output than it did when the Yom Kippur War began, with the productivity gains most pronounced in Western economies where the shift from manufacturing to services and more efficient technologies have greatly reduced dependence on imported energy. Second, the US has gone from being dependent on the Middle East for its energy to being a net exporter of oil and gas: making it less vulnerable to external shocks. Third, many countries are well into an energy transition towards renewable energy, and so are more able to withstand a surge in oil and gas prices.

All the same, while the world is more resilient to an energy shock than it was 50 years ago, in other ways it is actually more vulnerable to the impact of an oil shock right now. To begin with, the interruption of oil flow is bigger than it was then, with one prominent industry analyst arguing that the supply removed from the market has been twice the size of any previous shock. That’s unsurprising: this time, the entire Gulf supply has been cut, representing 30% of the world’s output.

This price shock hits the world economy at a delicate time. All three of the world’s biggest economies are already showing signs of weakness. China just downgraded its growth target, recognizing that its economy is slowing, and that boosting domestic consumption will be harder and more time-consuming than hoped. Europe, for its part, is still in a funk and is being hit hard by the price rises — especially when it’s so dependent on oil and gas imports.

As for America, there are already signs that its economy has also been softening. As last week’s employment report revealed, the job market is in bad shape – 90,000 jobs lost last month and revisions to previous reports that reveal the economy hasn’t created any new jobs since last spring. Meanwhile, the GDP report for the final quarter of 2025 came in much weaker than expected, and while most economists have anticipated a bounceback once new tax cuts kick in, higher oil prices would neutralize their effects. 

While the oil shock will be less severe in the US than in Europe, meanwhile, it will nonetheless encourage inflation if oil prices stay on their current path. Even though futures markets indicate traders expect oil prices to start falling soon, they also expect them to finish the year some 25% higher than was expected just a few months ago. In other words, even in the optimistic scenario, higher prices may be here for a while.

Nor is oil the only inflationary challenge here. Because such a large share of the world’s fertilizer supply comes from the Gulf, prices here have shot up too. This will feed straight through to food prices — and because the northern hemisphere has already begun its spring planting season, these increases are already informing production costs. Farmers could adjust by using less fertilizer, particularly in developing countries, but given the tight correlation between fertilizer input and crop yield, this pretty much guarantees production shortfalls and so higher food prices later in the year.

For their part, aluminum prices have shot up too, with shipping costs rising by about a fifth. If the war lasts for more than a few weeks, supply chains may take months to re-establish, and backlogs will persist for a while, just as they did after the Covid  lockdowns. Aluminum, for example, is widely used in construction and in the production of cars, consumer electronics and packaging. Its increased cost will ripple quickly through the economy.

All this is happening as inflationary pressures rise across the US economy. Last month’s Producer Price Index came in much hotter than expected, suggesting inflation was looming. That’s as a recent report from the Institute for Supply Management found that manufacturers are expecting substantial price increases this year. At worst, then, this oil shock will raise inflation; at best, inflation won’t come down, possibly for the rest of the year. 

Either way, it will now be harder for the Federal Reserve to cut interest rates, which will provide a headwind to the stock market. Wall Street has traded sideways for four months, and is now down slightly since the start of the war. So far there’s been little sign of panic, and stocks are far from bearish. Even so, that may not offer much solace to investors. With the job market now so weak, and American consumers having run down their savings, the so-called “k-shaped” economy has been kept afloat by rich Americans spending their stock market gains.

Any interruption could therefore slow consumption in the top half of the economy, contributing to a wider slowdown. But it could also store up some even bigger problems. In particular, private equity firms were looking to a positive 2026 to finally unclog the pipeline of IPOs they need to generate the cash for shareholders. A weak stock market may affect their cash flow negatively, which could in turn force their owners, including big institutional investors like pension funds, to sell other shares to generate income. Already, we’re seeing strains in the credit part of the private equity industry, where Goldman Sachs is now pitching funds that will short corporate loans, pointing to what could be a difficult year.

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All told, the US economy, like most of the world, can ill afford a protracted shock. And while global markets won’t follow the plotlines drawn in the Seventies, they’re still at risk of decelerating if Trump’s war doesn’t end soon. 

For the moment, we must see where oil prices go. If they keep falling through the week, it may suggest that traders genuinely see an end to the war. But if they keep rising, or even stay where they are, the global economy faces a grim 2026.

To be sure, a global downturn wouldn’t necessarily mean a global recession; many economies would continue growing, albeit more slowly than before. But for developed economies, the risk of outright recessions would be high. And, given the debt burdens already accumulated by Western governments, their space for fiscal stimulus could be constrained, meaning any recession could prove quite stubborn.

In short, we must hope for peace — and soon. Unfortunately, those prosecuting this war don’t appear to have a clear idea of how to end it. Part of Trump’s challenge now is that even if he cuts and runs, the Gulf will remain volatile, which could prevent normal traffic. Israel, for its part, may continue its strikes even if the Americans step back. Without a definitive defeat for Iran, the Islamic Republic may opt to keep the Strait closed in order to secure better peace terms.

Worse for Trump personally, meanwhile, is that he’d lined up several investment commitments from regional governments, which were to benefit both the US economy and his own family. With Gulf governments understandably distracted, these plans may be put on hold.  Already, governments which had pledged hundreds of billions of dollars of US investment and offered to fund Trump’s Gaza Board of Peace are reconsidering their plans. So even if Trump wants to believe he’s exempt from the old Pottery Barn Rule — if you break it, you own it — he may now be stuck with a hell of a bill: whatever he does next.

In short, we get a policy that will over time make the UK poorer in a quest to keep it rich. Yet as damaging as it is to the country’s long-term economic prospects, nobody can bring themselves to end it. And so, logically, amid economic stagnation or reversal, if some groups can maintain or even grow their wealth and income, as is the case with the triple lock, others must experience falls in their living standards and life opportunities. So even amid tepid growth, degrowth has started for some — namely, those whose livelihoods depend on income from labor rather than proceeds from capital.

Mind you, this revived class struggle now brings a novel twist: the owners include not just the uber-rich but people with comparatively modest incomes, such as pensioners whose capital is tied up in the funds that are today among some of the world’s biggest investors. Nevertheless, their livelihoods require preserving asset values no matter how sluggish the growth. The inevitable outcome is that workers get squeezed, both directly and indirectly: directly through higher taxes on labor — out with free tuition, in with the triple lock — and indirectly through fiscal and monetary policies that ensure asset values rise faster than the economy.

At the heart of this deepening political rift between capital and labor, driving a resurgence of anti-systemic populism on both the Left and Right and a turn against democracy by young people, is a reality that few whatever their politics want to confront. The rapid economic growth rates of the postwar period, which made possible the expansion of the welfare state and promises of future benefits that presumed an endlessly rising supply of resources, are not returning — because, as with the pursuit of the triple lock, we’re now trapped in a cycle where the pursuit of growth produces degrowth.

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Western economies have been slowing for decades, and a handful of rich countries have crossed the threshold between growth to degrowth in per-capita terms: while gross domestic product has kept rising in Germany and Canada, real per-capita income has begun declining. Almost everywhere else in the developed world, including Britain, growth has been close to stagnant since before the pandemic. And even the supposed star performer of developed economies, the US, whose real per-capita income has continued rising steadily, hasn’t escaped this trend towards deceleration, because its added growth results from added debt. If you deduct debt from growth to come up with a true picture of the economy’s dynamism, the country would have already started going backwards.

This partly has to do with profound shifts in the world economy, and in particular the relative decline of the West compared to the rising global periphery. But increasingly, there’s evidence of endogenous forces which act to inhibit growth — something I refer to as the “Icarus effect”. Simply put, as an economy grows richer, its growth rate slows, because it encounters forms of natural resistance that slow and eventually reverse growth.

The growth-retarding effect of Covid-19, the first truly global pandemic in history, has been obvious, but the bigger threat will come from climate change, whose deleterious effects are already creeping up on us. With the average annual number of extreme weather events having so far increased sevenfold since the Sixties, not only will capital be depleted but inflation will remain permanently higher due to the rising costs of production (the recent Mediterranean storms being just the latest event likely to jolt food prices this winter).

Yet while such feedback loops inhibit growth for the whole world, there also appear to be changes which specifically affect the countries where growth has advanced the furthest: the rich ones. Because in addition to external pressures, we’re now starting to better understand changes which occur in the internal environment — which is to say, within us, as individuals and societies. As a society grows richer, it undergoes social, political and cultural changes which reduce dynamism, raise vulnerabilities and diminish resilience, all while increasing the cost of preserving wealth.

To begin with, fertility declines, which raises a society’s average age. From there, the economically productive share of the population declines. As a proportion of total economic output, consumption therefore rises and investment declines. Meanwhile, the investment which does occur shifts in character, becoming more focused on dividends rather than long-term growth (which favors legacy industries). It also becomes more risk-averse, one manifestation of which is a shift towards real-estate investment: and real estate, of course, produces nothing. Consider Canada, Germany and Italy, all which have been among the slowest performers, even as real estate now accounts for a third of fixed capital formation.

Adding to this, fiscal and monetary policies become increasingly oriented towards preserving asset values, through such measures as Nimbyism and the shoring up of asset values after market corrections with bailouts and easy money — real interest rates were kept near or below zero for years after the financial crisis — since any fall in asset values would hurt the growing share of the population which lives off them. The anti-growth measures which follow are thus more a symptom than a cause of the Icarus effect, but the consequent rising cost of capital makes it harder for new businesses to form, reducing dynamism in the economy.

In addition to these changes, vulnerability to external shocks rises as a society grows richer. For starters, the more capital you have, the more there is to be destroyed in natural disasters, and while mitigation measures can reduce risks, they further increase the price of wealth preservation. But just as importantly, and in contrast to the prevailing assumption that “rich is resilient” — the assumption being that wealth provides you with the resources needed to adapt to and bounce back from exogenous shocks — there’s compelling evidence that the reverse may be the case.

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The first hints of this came during the Covid pandemic, when it was widely expected that poor countries would do far worse than rich ones. The latter, so the theory went, could not only care for their sick but pay people to stay home and reduce transmission. In fact, on balance, poor countries emerged no worse from the pandemic than rich ones, and in many cases actually did better, all at a fraction of the cost borne by rich countries. For every dollar spent per capita in a developing country fighting the pandemic, developed countries spent 12; for all that money, the average death rate in the rich countries was only marginally better than in poor ones, while many of the poorest nations on Earth — especially in Africa — were star performers.

This probably shouldn’t surprise us. There’s a growing body of research in public health which suggests that regular exposure to disease prompts stronger immune response. Known as the hygiene hypothesis, this theory suggests that frequent exposure to natural shocks, from storms to floods, forces people to be adaptable and flexible. This research has been widened to look at societal resilience and finds exposure to shocks makes societies more resilient — in part because the weak states of poor countries make for strong societies, providing individuals with adaptive support through stressful times. Anyone who has lived in a developing country will be familiar with the community groups that form in neighborhoods or at churches, mosques and temples, and which provide everything from basic welfare and storm preparedness to watch groups in under-policed areas.

The upshot is that the mix of declining economic dynamism and resilience with rising vulnerability will mean rich countries take bigger economic hits from ecological feedback loops. Given their already slowing growth, moreover, this means they’re especially at risk of getting knocked backwards — when a country’s annual economic growth rate is around 1%, a shock like a pandemic or severe flooding can quickly tip it into recession.

Degrowth isn’t inevitable, but two things could make it so. The first is if Western countries try to carry on as we always have in the expectation growth will somehow return to past levels. That would only hasten the degrowth that has begun. The second is if we neglect the externalities of growth, especially climate change, in a quest to prioritize growth. That will produce the perverse outcome of accelerating our decline.

***

Icarus Economics: Why Rich Economies Are Struggling – and How to Fix Them (Atlantic Books) is out now.

Earlier this week, House Republicans moved a motion which would have put off a vote on Trump’s tariffs. Three of their members, however, crossed party lines to join all their Democratic colleagues to block the motion. The Democrats will now be to table motions to roll back the tariffs and, in fact, did so promptly, passing a resolution the next day to terminate the ones imposed on Canada. And while the measures are unlikely to succeed — Trump can simply veto the resolutions, even if the Senate can be persuaded to back them — the Democrats will keep jabbing at this fissure like a boxer targeting an opponent’s eye’s wound. They won’t stop driving home the message that Republicans are on board with Trump’s trade war.

It therefore seems likely that more Republican dissidents will surface in the months ahead — the total already rose to six on the Canadian vote — because the tariffs are becoming a political albatross. With polling suggesting that a large majority of Americans, and even a quarter of Republicans, oppose tariffs, the future of Trump’s trade policy is undecided.

The risk that the Republicans would lose their slender majority in November’s House elections was always high. But until recently it was considered a near impossibility for the Republicans to lose the Senate majority. Now, though, the betting markets give Democrats a better than one-in-three chance of seizing the upper chamber too, and the odds have been slowly narrowing. Amid this febrile atmosphere, a growing number of Republicans caught between the monster of Trumpian wrath and the whirlpool of an angry electorate are opting to take their chances taming the latter.

Quite apart from the fact that Trump’s tariffs overturn decades of the party’s free-trading principles, Republicans are also uneasy with them for the simple reason that they’re not doing what they’re meant to. If the President has always held one belief consistently, it’s that tariffs could make the American economy great again — reducing the gaping trade deficit, returning manufacturing jobs to America and boosting workers’ wages, all while costing Americans nothing, since foreign producers eager to sell to America would have to pay them.

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But none of these things have happened yet. Assessing the state of the US’s trade deficit isn’t straightforward, since the figures can vary from month to month, not least when trade policy is as volatile as it has been since last April’s Liberation Day. However, the US’s most recent figures suggest the trade deficit isn’t improving.

The same is true of the employment situation. Plainly put, manufacturing jobs show no sign of coming back. On the contrary, manufacturing employment continued falling through Trump’s first year back in office while in the wider economy, good jobs are getting harder to find. As Wednesday’s employment report revealed, in all of 2025 only 181,000 new jobs were created in the US, a monthly average that would have translated into a rapidly rising unemployment rate were it not that Trump’s immigration crackdown has removed so many workers from the workforce.

That, the administration retorts, is just the point — the deportations are reserving jobs for Americans and thereby boosting their earning power. But in fact, instead of workers seeing gains, the labor share of income has fallen to an all-time low. Wage growth slowed throughout 2025; especially for workers at the lower end of the income scale, the sort of voters who played such an important role in bringing the MAGA coalition to power, it is now barely keeping pace with inflation.

Most ominously, there’s no reason to expect a manufacturing renaissance will come at all under existing policies. For all the White House’s grandiose boasts about the massive investments other countries have pledged in the US — the amount varies but most recently Trump offered a figure of $18 trillion — construction of new factories is currently declining, with no end in sight.

As for being costless, ever since Liberation Day the administration has pointed to a steady inflation rate as proof that the critics were wrong, Americans aren’t paying higher prices for their imported products. It’s true that since Trump started his trade war, consumer price inflation hasn’t got worse. But as the recent producer price index revealed, businesses are paying higher prices. Research by the Kiel Institute has shown that almost the entire cost of tariffs has been absorbed by businesses, with foreign exporters paying an average of a paltry 4% of the cost of tariffs. Federal Reserve economists have come up with a similar estimate.

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It makes sense that businesses should have chosen to absorb the tariffs rather than pass them on to their customers. When the Liberation Day tariffs were first announced, importers rushed to frontload shipments before they took effect, building up good stocks then running them down over the next several months. Thereafter, given the legal challenge to the tariffs before the Supreme Court and Trump’s frequent flip-flopping, with postponements, carve-outs and changes to rates amid trade deals, businesses were reluctant to raise prices and lose market share to rivals, only to find their own tariffs were later lifted.

However, the longer the trade war persists, and that it grows apparent the tariffs are here to stay, the pressure on businesses to pass costs onto consumers will rise. Ironically for the administration, a heads-they-win-tails-we-lose logic may now apply here. As things stand, working Americans have borne the brunt of tariffs not through price increases but through wage growth that has trailed the booming asset gains of richer Americans. The effect has shown up in retail sales that appear to be weakening, all while consumer credit is rising, suggesting ordinary Americans are feeling stretched.

But amid stronger-than-expected job gains in the most recent employment report, some (if not all) economists now think 2026 may finally see an improvement in the earning power of working Americans. But if such came to pass, it seems likely that businesses would feel more confident to raise prices, secure in the conviction that consumers will be better able to afford them.

We might then expect consumer inflation to begin rising in the coming months. This wouldn’t come as a surprise to everyone. Adam Posen of the Peterson Institute for International Economics has consistently maintained that it would take about a year for tariffs to work their way into consumer prices and if they do, whatever workers gain in better wages may get eaten up in higher prices. What would make such inflation especially fraught is that the inflation rate on the basket of goods consumed by working Americans is higher than that on their wealthy compatriots, who are benefiting disproportionately not only from comparatively lower inflation but from rising stock markets.

Donald Trump’s remarkable achievement was to build a political coalition that united two classes once seen to be in conflict — owners and workers. Owners with deep pockets powered the Republican Party’s fundraising edge, which currently sees the party raising twice the funds of the Democrats. Meanwhile the working class, and especially the white working class, which traditionally was a Democratic constituency, were won over by his populist pledges and provided the bedrock of Republican support.

The owners are as happy as ever — why wouldn’t they be? Their asset values and profits rise by the day and their taxes are falling. But workers appear to be growing disgruntled. What may yet save the Trump coalition is that the attachment of the white working class to the Republican Party appears to be as much cultural as economic, so voters may be willing to swallow their discontent. On the other hand, Trump’s success owed also to his ability to motivate low-propensity voters, and rising discontent at their economic lot could cause many of them to just stay home in November.

If the Republicans consequently lose control of Congress in November, Trump’s entire agenda will get bogged down in inquiries and legislative obstruction. When Bill Clinton lost Congress in the 1994 elections, his political program largely came to an end, and he was forced to govern as a soft Republican. Trump wouldn’t likely shift towards the other side, but he would find his room for maneuver, particularly on the home front, constantly reined in. Democrats could de-fund ICE, launch impeachment proceedings against administration members, block his appointments and pass anti-tariff resolutions.

Along with immigration, trade was to be a signature policy that defined the second Trump administration. At the moment, he appears to be losing control of both narratives, with polls suggesting growing disapproval of his performance on both immigration and the economy. He has less than nine months to turn that around, and for that to happen his policies will need to deliver on the pledges he made. When it comes to tariffs, he needs manufacturing employment to pick up, wage gains to grow and inflation to stay low. Right now, the omens don’t look good for him.

But then, if a week is a long time in politics, nine months could feel like an eternity — for better, or for worse.

As it turned out, the crash was only just beginning. Gold plunged some 15% over the weekend and silver more than twice that. In their fall to earth, these precious metals had joined the crypto-crash, which has so far seen Bitcoin shed over 40% of its value since its all-time peak in October.

On their own, such price falls will burn some wallets but needn’t hurt the economy. The danger, though, is that they could trigger falls elsewhere in the market. And one corner of the market which we really ought to keep an eye on is private equity — that tranche of firms that raise capital to invest in other companies but don’t themselves trade on stock exchanges. Following a roaring decade and a half during which it made fortunes for many institutional investors, from pension funds to university endowments, investors have recently soured on private equity. Now the sector appears to be looking for government lifelines, and that’s seldom a good sign.

Although a major player since the Eighties, the heyday of private equity came in this century, and particularly after 2008. The assets under management by private equity firms mushroomed from $1.5 trillion in 2010 to nearly $10 trillion today. Following the global financial crisis and the advent of ultra-loose monetary policy, private equity followed a simple but lucrative rule: borrow cheap, buy low, ride a rising market, sell high, pay back your loans, bank the profit, repeat. Different funds have deployed different strategies, with some specializing in buying troubled companies then taking them off the market while they restore their health, others investing in startups that they then list publicly, and others still cannibalizing assets after buying state companies (of which the British Thames Water case was a notorious instance). But most funds used a common financial model to drive their growth: secure capital from institutional investors, leverage that to obtain loans, use the money to buy companies, keep the companies private while developing them to the point they can be sold in an IPO (initial public offering on the stock market), then distribute the profits to investors.

The scale of funds managed by the big private equity firms is vast because investments have been restricted to institutional investors like pension funds. Some of the largest funds exceed $100 billion. This has given fund managers inordinate market power. That leverage has enabled them to obtain good prices for their investors and prod the firms they buy to change more to their liking.

In theory, expertise, flexibility and the lack of a quarterly reporting requirement that binds publicly traded firms allowed private equity managers the space — away from the prying eyes of investors charting their portfolios online — to build competitive firms that would ultimately earn attractive share values once they went public. But another factor was working in the industry’s favor. Private equity firms rode the cheap-money train to all-but-guaranteed riches. Once central banks cut real rates of interest on short-term debt to about 0% after 2008, it became difficult for private equity managers not to make money.

The loose money policies of central banks flooded the economy with so much cash that virtually all asset prices, from real estate to crypto to stocks, were driven up. From its trough at the start of 2009 to its 2021 peak, the US stock market rose 13% per year on average. That steady rise all but guaranteed that private equity firms would deliver a profit on the sale of the companies they’d taken into their portfolios. As a result, in the years following the financial crisis, the capital of the private equity sector grew far faster than the stock market, and the industry now raises more money than the public market. While private equity rose, the number of publicly traded companies on stock exchanges fell.

However, ever since the inflation spike of 2021-22 and the consequent rise of interest rates, particularly in the US, which remains the epicenter of the global private equity industry, the breakneck growth of the stock market has begun to slow. Amid the slowdown, private equity’s ability to offload assets at a profit has been crimped, while its debt-financing costs have risen.

In this environment, investors are beginning to rethink their allocations, and some want their money back. As a result, last year the growth of private equity began to lag the public markets for the first time since the turn of the Millennium. With fundraising becoming more difficult, and investors demanding their dividends, private equity managers increasingly started resorting to opaque deals, like transferring assets across their own funds to generate cash, while awaiting more propitious conditions in the IPO market. This use of “continuation funds” reached a record last year, with private credit funds in particular selling unprecedented amounts of debt to themselves. Faced with this drying up of revenue, investors in the sector have begun pulling back.

President Donald Trump’s return to the White House last year stirred hopes of a revival of activity in this segment of the market; instead, as his policy-making injected turbulence into the economy, the market all but froze. By early last year, the number of IPOs dropped and the gap between private equity investments and exits reached a decade high. Between the last quarter of 2024 and the first quarter of 2025, private equity “realizations” — essentially, the profits paid out to investors — fell by 50%. Immobilized by the market inertia, funds that held off on IPOs were left sitting on $3 trillion of assets they would normally have offloaded by then. Although the market reopened somewhat as 2025 advanced, it was not enough to unblock the pipeline.

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This year could therefore prove pivotal to the future not only of private equity, but of the broader market. With hopes rising that some big players like SpaceX, OpenAI, and Anthropic will go public this year, all eyes will be on the valuations they obtain. If they blow through expectations, it may signal that the market has come back to life and a rally for the ages awaits.

But in the meantime, to meet its short-term financing needs, private equity has resorted to private credit, since this remains the one corner of its universe which is still attracting significant investor interest. But as JPMorgan chief Jamie Dimon warned last year, that poses huge risks: retail investors are crowded in, but since the industry isn’t regulated, they’d be on the hook for private losses. Recent research has highlighted the dangers posed to the financial sector as a whole by private credit, given the degree to which the regulated banking sector and the private credit industry have become intertwined. In other words, private equity could become the spark which ignites the next financial conflagration.

Conventional analysis of the current situation in Western economies downplays the risk of financial crisis because both households and the banking system have better balance sheets than they did at the time of the 2008 crash. But this overlooks the fact that private debt has declined as a proportion of debt to GDP because public debt has surged, with much of the increase being taken on by non-bank financial institutions — including private equity and pension funds. As the Bank for International Settlements emphasized in last year’s annual report, this creates the risk of a liquidity crisis, similar to what happened during the 2020 bond market panic and the Liz Truss gilts crash.

Private equity fund managers have shown their inventiveness and adaptability in the past, and so it’s possible that amid this turning-point the best of them thrive and the industry grows stronger. Nevertheless, it is revealing that the industry has also begun quietly pressing politicians for what sounds suspiciously like a rescue package. Recent lobbying succeeded in getting Congressional Republicans to slip some tax breaks for the industry into Trump’s Big Beautiful Bill, and the administration is also looking into regulatory changes that would open private equity to retail investors for the first time. Many see this as a way of lining up suckers onto whom fund managers can offload bad assets. Were a crash to happen then, the costs would be transferred from rich fund managers to mom-and-pop investors, making it a repeat of 2008.

Short of the much hoped-for late-year turnaround in markets, private equity may be steering us towards stormy seas. When late last year JPMorgan took a $170 million loss from its investment in the failed private credit-backed auto lender Tricolor, Jamie Dimon warned: “My antenna goes up when things like that happen. And I probably shouldn’t say this, but when you see one cockroach, there are probably more. And so everyone should be forewarned at this point.” The falls in gold, silver, crypto and other frothy corners of the market may be one-offs. But if any private equity firms have borrowed to invest in them and are consequently forced to begin selling other assets to cover losses, a few scattered cockroaches could quickly become an ugly infestation.

Since the operation to extract Nicolás Maduro from Caracas and fly him to the US to face trial, much has been said about how the American operation will shake up geopolitics and the world economy. China, which imports about half a million barrels of oil daily from Venezuela, has just lost a key strategic partner, delivering the advantage in the US-China rivalry to Washington. Meanwhile Venezuela’s vast oil reserves, which we keep being reminded are the biggest in the world, have now fallen into the grip of the US. With this control secured, America will control a vast supply of cheap energy, which it can use to enrich its oil companies, power its industrial renaissance and dictate policy to world energy markets.

But if all that were true, we’d have expected to see big movements in world markets. As traders digested the dramatic news, Chinese stocks would have plunged as the country’s growth prospects dimmed; oil prices would have either plummeted as the world anticipated the massive supply of new crude, or alternatively soared as the risk of conflict and attendant supply disruptions heightened; government bonds and the dollar would have rallied as investors flocked to the safety of US treasury paper in anticipation of wider conflict. That was, after all, what happened in past conflicts over oil: the 1973 Yom Kippur War tipped the world economy into recession, and the 1979 Iranian Revolution, by sending inflation skywards, helped bring down governments in the British and American elections in the next year.

But none of that came to pass this time round. Chinese stocks were up on Monday. Bonds barely budged. Currency markets revealed few signs of major movements to safe havens. The oil price moved sideways for most of the day. Essentially, traders were telling us there was nothing much to see here, folks.

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Put simply, little has changed. The suggestion that a sudden flood of Venezuelan oil will swell global supply rests on the apparent assumption that all you need to do is sink a well a few feet down and black gold, ready to put into automobiles and diesel generators, will come gushing out. In fact, Venezuela’s oil infrastructure is so degraded by years of neglect, and its business environment so difficult to navigate due to decades of corruption and poor governance, that the scale of investment required to revive production, refinement and exports is vast — typical estimates being north of $100 billion over 15 years.

Where will all that money come from? Venezuela is broke and, in the absence of US security or financial guarantees, is unlikely to suddenly obtain access to abundant cheap credit. Even though Venezuelan bond prices shot up some 24% on Monday, that means investors will still pay a mere 41 cents on the dollar — which, when converted into a yield, leaves Venezuelan interest rates well into double digits. As for the private sector, although in the wake of the operation US President Donald Trump said US oil majors would “go in, spend billions of dollars, fix the badly broken infrastructure, the oil infrastructure, and start making money for the country”, those same companies have so far been noticeably silent on their own plans. A former executive for Chevron, the only American major that still has operations in the country, has floated the possibility of raising $2 billion for further Venezuelan investment. But the majors are, at least so far, waiting for more clarity.

With projects already underway elsewhere, it’s not clear what advantage they’d gain from suddenly re-allocating capital to Venezuela — not least because the long time-horizons involved would require a stable, predictable environment before the majors feel comfortable sinking money again. Which is to say, a regime change. And what happened on Saturday fell far short of that.

Instead, all that the weekend’s military operation accomplished was to change the leader, not the regime. And while the administration maintains that the new acting president Delcy Rodríguez, who is seen as a relative pragmatist among the Chavistas, will effectively do what the White House instructs it to do, the idea that the US can simply install a satrap and then retreat to the comfort of Pennsylvania Avenue stretches credulity.

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With hardline Chavistas still in control of the military and a network of militias throughout the country, Trump will find it difficult to shape events without putting boots on the ground. Assuming he doesn’t do that, he will likely get lip service and not much more from a leader that is likely to have a weak base of domestic support. It’s hard to imagine any Venezuelan leader who acts as a US puppet being able to retain significant backing from either rival elites or the population at large. If Trump does try to bolster her by sending in American soldiers to establish order, it will do to his presidency what happens to most presidencies that start with a major foreign invasion: mark the beginning of the end.

Americans seldom like foreign military incursions, except for those that are brief and successful, like last summer’s bombing of Iran. And as the President who was elected on a pledge to end the country’s “forever wars”, Donald Trump has little political leeway to commit resources to a major Venezuelan operation. With his Venezuelan action already polling badly, he can talk the talk but will find it very difficult to walk the walk.

Investors therefore know that little has changed, which is why their response to the operation has so far been to stand by and wait for more. Which makes one wonder, what was this all for? As a piece of theater for the home audience, the daring and stunningly effective intervention may have been a ratings hit. But if it now bogs the US down in a country which has previously given it a lot of grief, all while hurting America’s international standing, it risks turning into a Pyrrhic victory.

In fact, there’s something about this whole operation that feels strangely anachronistic. Although some see this fight as an extension of the US sphere of influence or even a battle over drugs, most of the commentary, at least in the Western media, has treated this as a resource war, a variant of the Great Game to secure control of a key resource and thereby gain a stranglehold over one’s rivals. The sort of great-power conflicts which defined much of the past two centuries.

But the world has changed. The global economy is far less resource-intensive than it once was, and its oil intensity has been in long-term decline. In the 20th century, the world economy was powered by oil and coal. Today, even though that remains the case, the world is rapidly transitioning to diversified supplies of renewable energy which depend entirely on local resources. Over time, the carbon intensity of the world energy supply will thus decline further, making oil less strategically important. That no doubt explains why China’s markets were unmoved by the weekend’s events — it had already reduced its dependence on Venezuela to the point it accounted for only about 4% of its total oil imports. The country is leading the world into the energy transition at a rapid pace, installing renewable energy and reducing its oil imports precisely to end such vulnerability to disruptions to global supply.

And while Western countries are following Trump’s lead and starting to temper some of their moves towards renewable energy, the rest of the world is instead following China’s lead. The main markets for Chinese exports of EVs and solar panels are now shifting from Europe to the developing world. What is driving their transition is not concern with climate change but the more immediate gain of reducing import dependence and foreign exchange bills.

If anything, Trump’s move on Venezuela will further incentivize developing countries to speed up their efforts to decarbonize their economies. American administrations of all stripes have demonstrated their willingness to use their control of energy and financial markets as weapons. What better way for developing countries to remove that weapon than by eliminating one’s dependence on what America — or any other country for that matter — controls? They’ll localize energy supply and look for other ways to manage their money than parking it in the US. (Perhaps not coincidentally, gold was one of the few assets whose price did move sharply higher on Monday). Ethiopia, with its abundant hydroelectric resources, recently banned the importation of internal combustion engine cars in order to reduce its fuel bill, while Ukraine is making its electrical grid more resistant to Russian bombs by shifting away from big power plants to rooftop solar. Europe, one recalls, fell into recession when the 2022 Russian invasion of Ukraine cut off its gas supply, so it knows a thing or two about strategic vulnerability.

All that helps to explain why oil has been in a long bear market and has largely shrugged off the events that would have once caused major shocks to world energy markets, from Middle East wars to Latin American invasions. Trump has devoted American resources to seizing a prize which will over time be increasingly less sought. Which is why when he brandished it before the world, investors scarcely budged.

For all the talk of a return to 19th-century style gunboat diplomacy, a lot has changed since the high age of European imperialism. As Robert Pape, a specialist in insurgency at the University of Chicago puts it, the capacity to resist imperial aggression today far surpasses then. Where Gatling guns once faced men with spears, today, potential guerrillas have access to modern lethal weaponry on an industrial scale. It takes a lot of gunboats to assert supremacy today. Trump thus faces an unpleasant choice: either cut bait now, or go all in and watch his presidency be defined by the successes, or more likely failures, of what will be seen as his war.

But now, how distant that era seems: the US and China are locked in an apparently existential race for technological supremacy, and instead of becoming liberals, the Communist Party has become even stronger under President Xi. Yet ironically, that may be what it needs to engineer a capitalist transformation to rival the West.

A recondite Marxist debate makes today’s events make curiously relevant. In The Communist Manifesto, Marx argued that the state, in a capitalist society, was merely the executive committee of the bourgeoisie. Many years later, in the Seventies, Left-wing intellectuals argued over whether capitalist states amounted to government by or for the capitalist class. On one side were the instrumentalists, among whom the most famous was Ralph Miliband (father of the Labour politicians David and Ed). On the other were the structuralists. The instrumentalists said that the capitalist state was controlled by a business elite who used it to advance their interests, whereas the structuralists said that if the state was to manage the capitalist economy, it needed “relative autonomy” from the owning class to discipline it and manage its evolution.

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Today, you could hardly ask for a better representation of the instrumental state than the second Trump presidency: run by a real estate magnate, surrounded by oligarchs, staffed by businesspeople — a banker as Treasury Secretary, a fund manager as commerce secretary, an oilman as energy secretary. This has given rise to a curious type of state interventionism. If industrial policy is about picking winners, then the leitmotif of the second Trump administration is that a cabinet of proven winners meddles directly to reward those they see as best placed to win the future.

Yet the paradox of capitalists is that they don’t necessarily like capitalism. Rather than a free market, what is resulting is a form of oligarchic capitalism in which wealth is becoming highly concentrated. America’s richest and most powerful players are able to use the penetrability of the democratic state to capture and shape power, using it to limit competition and secure their position. So, while the US has many more AI startups than China, capital is flowing heavily towards a handful of tech titans.

In contrast to this strategy of maximization, in which the ultimate goal is to secure an uncontested position at the vanguard of a new technology, China seems to prefer an optimization strategy. In its approach, the government first nurtures the development of a large set of players, something facilitated by the structure of the Chinese state. Using open-source technology, China’s provincial governments, competing with each other to meet national growth targets, steer resources to local firms. Then they are cut loose on a fiercely competitive playing field, in which a Darwinian struggle is allowed to rip.

This relentless competition drives a breakneck speed of development. So, for instance, while the US auto industry is dominated by the “three big” firms, along with a number of national champions operating US branches like Toyota and Hyundai, China’s auto sector has over 100 auto firms struggling against one another. It is this fierce competition to survive that has driven the industry’s development to the point that China is now the world’s largest carmaker.

But while the winners of these competitions become national champions of sorts, there is little patience for them trying to manipulate state power to their advantage. On the contrary, whenever oligarchs show signs of becoming too powerful, the Communist regime doesn’t hesitate to cut them down to size. In effect, China enjoys the relative autonomy needed to discipline the market and keep it competitive. China’s ruling class can’t be called capitalist, but it may just be doing a better job than America’s in creating an environment in which competitive capitalism can thrive.

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China’s aim is not primarily the creation of a tech titan at the very frontier of technology, but rather to move quickly to embody existing technology in products and services, achieving a sort of fungibility. Put differently, China is developing AI with an eye to producing usable products at a reasonable cost, dispersing them widely throughout the economy. In contrast, the US is placing a huge bet that it will develop a radical technology that will so transform the economy that the country will own the future.

But how is that future shaping up? If we consider the release of ChatGPT three years ago as the launch of the AI era in America, that revolution seems a little underwhelming. While there are signs that AI has marginally raised productivity in sectors that have adopted it, the increase has so far been well short of the dramatic rise the tech firms say would justify the massive increase in investment going into their companies. Meanwhile, AI is sucking all the oxygen out of the market. While the headlines speak of trillion-dollar investment plans in this emergent industry, in the rest of the economy, capital expenditure remains flat as other sectors are comparatively starved of capital. After peaking early this year, capital expenditure in the US has fallen in the course of 2025, which means that in non-tech sectors, things are going backwards.

Compounding this is the Trump administration’s energy policy which appears to be building a wall beyond which it will be difficult for AI to continue scaling at its current rate. Reflecting both Trump’s biases and the role of oligarchs in shaping policy in the US, the administration is blocking the rise of renewable energy to strengthen the powerful oil and gas industry, going all-in on a strategy of “energy dominance” based on fossil fuels. But one effect of this has been to slow the installation of new electrical capacity to a rate much lower than China’s. Thus, as demand to power energy-hungry data centers surges, electricity prices are rising — up 40% in the past five years and nearly 7% since just the start of this year. Good for the bottom lines of energy companies, perhaps, but not for the economy.

Nor, apparently, for society. One of the impacts of the AI boom in America is that it is stirring a groundswell of opposition, not only because it is helping drive up prices, but also because its benefits seem to flow into the hands of oligarchs alone. In previous technological revolutions, new technology not only seemed to confer broad-based benefits but also lifted wages. Amid the dot-com bubble of the late Nineties, American incomes rose strongly for a few years and everyone was able to do exciting new things on the internet. In contrast, tech oligarchs keep on insisting that AI will destroy millions of jobs — how else to justify the sky-high valuations of their companies’ shares except with a pledge to save loads of money in labor costs? The public is turning against the technology, with very large margins of both Republicans and Democrats more anxious than excited about AI.

China seems like it will avoid this fate, in part because its system enables the government to produce joined-up policy. For instance, the country’s education ministry is encouraging AI use in universities so as to create a ready market for AI products whilst encouraging their more effective use. Moreover, ordinary Chinese people already see the applications of AI in their everyday lives in ways that make things simpler, like biometric turnstiles at train stations, creating a more receptive environment for the technology.

America’s AI revolution may now be running out of time. Investors are growing antsy: they note that the much-promised breakthrough that will turbocharge productivity still remains notional, and there are signs that they are running out of cash. (This shortfall of cash explains why the big tech companies are starting to issue a lot of debt to fund their further expansions). Meanwhile, the public is warming to populist politicians who will campaign against the tech oligarchs. 2026 is likely to deliver a Congress more willing to question Trump’s economic strategy.

If the result is that the AI bubble gets punctured in the US, that wouldn’t be all bad. All the startups doing inventive things by optimizing existing AI innovations, rather like what the Chinese are doing, would have more space to thrive. Nevertheless, a market crash could tip the US economy into recession, just as China’s economy is slowing as it reorients away from investment to consumption.

In short, the euphoria of 2025 may well give way to a global slowdown in 2026. China may emerge in a comparatively favorable position, but any “victory” may prove Pyrrhic. Meanwhile, the rest of us will feel the fallout.

The long and bumpy journey there began one hot summer night in 1992, in the same city that gave us Mamdani. Then, Bill Clinton stood before a packed Madison Square Garden to accept the Democratic nomination for president. “The Cold War is over,” he said. “Soviet communism has collapsed and our values — freedom, democracy, individual rights, free enterprise — they have triumphed all around the world.” Having declared the death of socialism, he then outlined a program to pivot the Democrats towards a new ideology that would “end welfare as we know it” and create a “government that is leaner… that expands opportunity, not bureaucracy… that understands that jobs must come from growth in a vibrant and vital system of free enterprise”.

The previous Democratic president, Jimmy Carter, had begun experimenting with neoliberal policies in the late Seventies — trying deregulation and the use of tight monetary policy to fight inflation — but Clinton went full-hog and made small government the new creed. Its basic premise, that social progress resulted from individuals pursuing their self-interest in an enlightened manner, essentially took Adam Smith’s theory of moral sentiments and gave it a liberal sheen. Most significantly, by burying the Keynesian consensus that had dominated the Party since the days of Franklin D. Roosevelt, Clinton joined the Democrats to the Republicans in a new neoliberal consensus. This doctrine, which would dominate American policy-making for the next three decades, would prioritize free trade and globalization, deregulation, a leaner state with less generous welfare, low taxes, balanced budgets, and an independent central bank that used monetary policy as the final arbiter of the government’s fiscal rectitude.

Ever since, it’s been an article of orthodoxy among Democrats that no party which welcomed socialists could ever stand a chance outside of America’s liberal heartlands. Candidates could talk a good line on change, as Barack Obama did in his 2008 election campaign, but once in office quickly reasserted the hold of the neoliberal wing on economic policy. Obama did just that when he handed his economic policy-making over to Larry Summers and Timothy Geithner.

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Mamdani heralds the radical American city

By Joel Kotkin

Various theories have been put forth to explain the seemingly visceral antipathy Americans have long had to socialism. The frontier thesis posited that European settlement of the West created a culture of rugged individualism; the fragment thesis suggested socialism came to America via German rather than British immigrants, and so was Marxist and counter-cultural rather than Fabian and non-revolutionary. Marxist historian Mike Davis held that organized labour chose not to form a party, as happened in Europe; instead, they hoped to play one party off against the other to secure maximal benefits. Sociologist Barrington Moore believed the outlet of Western settlement acted as a pressure-release valve of urban working classes in 19th-century America’s industrial seaboard. But to this day, polls consistently show that most Americans dislike anything that smacks of communism. Mamdani, for example, polls better in the Big Apple than in the wider country.

That doesn’t mean Americans haven’t been building an appetite for significant change. Over the course of the Obama presidency, the public began turning against the neoliberal consensus, spawning the Occupy movement on the Left and the Tea Party revolt on the Right. But when the 2016 presidential primaries saw insurgent candidates openly challenge the neoliberal orthodoxy, the Republicans succumbed to the anti-free-trade populism of Donald Trump while the Democrats stood firm, delivering the nomination to the uber-establishment Hillary Clinton rather than the self-declared socialist Bernie Sanders.

In hindsight, though, that was the beginning of the end for the Democratic neoliberals. Clinton’s subsequent humiliating defeat at the hands of Trump rankled with the Democratic Left, which pointed to polls that said a hypothetical Sanders-Trump contest would have been won by the Brooklyn-born firebrand (though hypotheticals rarely tell us much). Since then, Left-wing populists have repeatedly surfaced, and the establishment has kept beating them back. Most recently, Alexandria Ocasio-Cortez, who was working as a bartender in the Bronx when she won a shock victory in the 2018 House of Representatives election, found her wings clipped last year when she tried to win the top Democratic position on a powerful House committee, only to be beaten by a septuagenarian. AOC, as she is popularly known, then set off on a nationwide “Fighting Oligarchy” tour with her mentor Sanders, drawing large and enthusiastic crowds in unlikely places such as Oklahoma, Utah and Montana. The tour culminated in September in her native New York City, where the star attraction was none other than Mamdani.

On Tuesday night, more than 30 years after Clinton pronounced socialism dead, the self-declared socialist Zohran Mamdani stood before a raucous crowd as proof that it had risen once more. Like AOC, Mamdani came out of nowhere to rocket to victory. Like AOC, he is a charismatic and articulate master of new media. Like AOC, he deeply unsettles the Party establishment — the Clintons refused to back him, as did Senate leader Chuck Schumer.

But by defeating the establishment and its deep-pocketed backers in a hugely lopsided contest, Mamdani may have given the Left both inspiration and a significant base from which to launch a run for the 2028 presidential election, with AOC frequently topping lists of the papabile. While that possibility still seems a long shot, she and Sanders may well emerge as kingmakers in the Democratic primaries, one way or the other.

And while the Party leadership still invokes the need to cleave to the center, the Left-wing Democrats seem to have two things going in their favor. First, sentiment is shifting. Ever since the bank bailouts that followed the 2008 crash, Americans have grown less enthusiastic about capitalism, with Democratic voters now expressing strong and growing support for socialism. Most notably young voters, who broke strongly for Trump last year, have soured quickly, apparently disappointed that his anti-establishment rhetoric gave way to a warm embrace of tech oligarchs. Meanwhile, Sanders remains one of the most popular politicians in America and even AOC, who is more divisive, enjoys substantially better approval ratings than Trump.

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The second thing going for the radicals is that Americans don’t always do what they say they’ll do. The received wisdom in 2016 was that Clinton was a shoo-in because Americans would not vote for a candidate as far outside the mainstream as Trump. But they did, twice. The secret to Trump’s success seems to be that even though he seldom enjoys majority approval, his supporters are so devoted to him that the Party has opened an enthusiasm gap with the Democrats. It may be that the secret to Democratic success lies in a similar strategy: don’t worry if a majority don’t like your candidate, provided a highly-motivated plurality turns out on election day. Mamdani may show how to do it.

While a socialist is still unlikely to win the Democratic nomination for president in 2028, the resurgence of radical populism within the party makes it probable that the next candidate will have to repudiate neoliberalism. In other words, the odds have improved that the 2028 election will pit a MAGA Republican against a Left-wing Democrat. The resulting pyrotechnics might obscure the true significance of that development: a definitive end to the neoliberal era.

A new consensus might not immediately emerge to replace the fallen neoliberal one, given that both parties are engaged in internecine warfare between rival wings. Among the Democrats, the establishment won’t give way without a fight, and they can point to the fact that centrist Democrats did well in other elections on Tuesday night. Among the Republicans, while loyalty to Trump binds the Party together, splits are emerging between different factions as the fight for the 2028 nomination heats up. Policy volatility could result, as one administration after another repeatedly undoes its predecessor’s work, as Trump has done with the Biden administration’s.

Nevertheless, on several points, MAGA Republicans and the Democratic Left seem to be converging — not least because some of Trump’s neoliberal reversions, such as tax cuts, deregulation and a rollback of public health care, have landed uneasily with many of his supporters (witness Marjorie Taylor Greene’s recent meltdowns). But the deeper trends seem increasingly clear. Globalization will likely diminish as trade deals and immigration policy pay more attention to worker rights and supply-chain resilience. Central bank independence may no longer be sacrosanct, and the Federal Reserve may be expected to underwrite looser government spending. Inflation may consequently settle at the higher level it’s at now. There is likely to be some restoration of regulation, and the tech oligarchs especially may come back into the crosshairs of populists on both sides of the political aisle. Tax policy may be revised to be less favorable to the rich, and more to the middle class. A cross-party consensus on health care reform may yet emerge. In other words, American capitalism may be entering a new and uncertain age. The future could look quite unlike anything we’ve seen before.

And yet, after a rally to an all-time peak at the start of October, Bitcoin has fallen hard, shedding some 15% of its value in just the last two weeks. Sharp volatility isn’t unusual in crypto but this pullback has happened at a time when the broader market has either held steady or kept rallying. G7 markets are off by 1 or 2% but emerging markets remain buoyant. Meanwhile, gold — the heavier, klunkier version of the “digital gold” that Bitcoin purports to be — is soaring, rising 7% over the same two-week period, and taking its gain since the new year to an eye-popping 60%.

It could be that Bitcoin’s seemingly relentless upward climb will resume in the coming days and that all this will turn out to be much ado about nothing. But the past fortnight could also be a harbinger of its eventual demise. The Bitcoin oligarchs may find it eventually explodes in their hands.

When Bitcoin was created amid the angry fallout from the 2008 bank bailouts, it was designed to take money out of the hands of the bankers and oligarchs who dominated finance and hand it to the people, offering them an alternative system in which to conduct their business. Its political purpose was buried in the very first block of Bitcoin mined, which contained the line:  “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” The digital currency was built upon the novel blockchain technology, which substituted a digital chain for the ledgers used by banks to record transactions, enabling users to thereby circumvent the banks. By fixing its supply at a maximum of 21 million, Bitcoin’s creators ensured that unlike the fiat currency managed by central banks, it could not be devalued: the more money central banks printed to re-capitalize the collapsed financial system, the more valuable Bitcoin would become.

Yet the revolution in finance it was meant to bring about never took place. True, for those rebels who got in early, Bitcoin has certainly paid off handsomely. Worth mere pennies at its creation, it surpassed the $10,000 mark by the end of its first decade and is worth over $100,000 today.

Beyond that, though, not much remains of Bitcoin’s early, idealistic vision. There was admittedly some democratization, as over 50 million people bought Bitcoin — more if one includes people who’ve bought shares in funds that own Bitcoin. Yet it never managed to become an actual currency, being too cumbersome and volatile to be useful as a medium of exchange.

More tellingly, the crypto universe is now dominated by a handful of oligarchs managing large funds and “Bitcoin treasuries” who, by forging close ties with the Trump administration, have used state patronage to boost their asset values, much as the banks did in 2008. Trump and his family have themselves reportedly made $1 billion off their crypto creations. And with investment banks now offering crypto products to their clients, the formal takeover of crypto seems complete. This isn’t the radical, decentralized financial system we were promised.

Rather than treat crypto as an alternative financial system, these “crypto-garchs” have turned it into a speculative asset, whose price they manipulate through Bitcoin treasuries — large funds whose purpose is to take Bitcoin off the market so as to further boost its price.

The biggest of these funds is MicroStrategy (which, though recently re-branded as Strategy, still goes by the stock-ticker label of MSTR). MSTR was originally a software company founded in 1989 by American entrepreneur Michael Saylor. After a history of setbacks and repeated run-ins with regulatory and tax authorities, Saylor finally found his pot of gold in 2020. At that time, as central banks responded to the Covid crash by flooding the market with money, Bitcoin rallied strongly. Saylor used his company’s cash to buy a relatively small stash of Bitcoin. When it rose in value, his plan took flight.

The business model was simple: by buying Bitcoin in large quantities, MSTR helped bid up its price. As the value of its holdings rose, so did the company share price. That meant MSTR could both sell new shares and raise new debt, further boosting its holdings. And on it went for the next four years in a virtuous — to the company and its shareholders — upward spiral. The value of MSTR’s Bitcoin holdings rose from $250 million in 2020 to over $40 billion this year, while MSTR’s share price shot up from $12 to over $400 in the same time span. Other funds soon followed suit, and today the vast majority of Bitcoin are held by just 2% of its owners, with a few dozen of them alone controlling a fifth.

Taking over the market in this way gave the crypto-garchs both economic and political leverage: economic, in that by removing Bitcoin from circulation they reduced the market’s liquidity, which amplified the impact of their further purchases, since they were now bidding for a smaller pool of Bitcoin. And political, in that they now had deep pockets with which to influence politicians in the 2024 election.

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With the Biden administration taking a skeptical view of crypto, the crypto-garchs turned to Donald Trump. Although originally a crypto-skeptic, calling it a scam as recently as 2021, Trump saw the opportunity in forging ties with an industry that was then out of favor. The industry donated more than $130 million to election campaigns, with an eye on displacing crypto-skeptics and supporting their backers, led by Trump. In return, Trump promised to lift regulation and promote the industry.

After Trump won the election, he came good on his pledges. He appointed big crypto-donors such as Howard Lutnick to his Cabinet, ended investigations into firms such as Gemini, which is owned by the same Winklevoss twins who’d donated $3 million to his political action committee, and withdrew a lawsuit against Coinbase, which together with some of its owners had contributed some $16 million to Trump’s campaign funds. After announcing his plan to create a strategic Bitcoin reserve, Trump hosted several crypto-garchs at the White House, Michael Saylor among them, to discuss its implementation.

All this paid big dividends to MSTR. In the month after Trump’s election victory, the price of Bitcoin rose over 50%, which enabled Saylor to return to the market with a major share flotation. MSTR raised $21 billion in share sales, giving it a powerful armory to juice the Bitcoin price further.

But for all its lucre, there was an obvious flaw in this plan. Given their dominance of the market, that amplification of the impact of their purchases worked both ways. Given the relatively low volume of Bitcoin trades on any given day, even a small sale will sharply raise the supply — MSTR alone owns more Bitcoin than trade daily, so even a small liquidation of its portfolio would cause prices to fall sharply. If the crypto-garchs sold in volume to cover their debts or meet expenses, they’d crash the market. In for a penny, they were now in for a pound.

The crypto-garchs may now be holding a time-bomb. If MSTR is anything to go by, the money may be drying up: of the $21 billion the company raised last year, MSTR blew it all in the following three months. Since then, the company has struggled to raise new share capital.

The company isn’t under any imminent pressure. The debt MSTR raised to buy Bitcoin doesn’t come due for another two years, and having purchased its stash of Bitcoin for an average price of around $74,000, it’s still nearly 50% up. But if Bitcoin doesn’t resume rising, MSTR will struggle to raise more capital. In the meantime, its purchases of Bitcoin are diminishing, and failing — for now, at least — to bolster the price. MSTR is still buying Bitcoin at a weekly rate, but it is paying above market rates and its purchases have grown much smaller. Amid this, smaller Bitcoin treasuries are now starting to go to the wall.

This may explain why the gold market is booming as Bitcoin suffers. It appears that investors believe that if the only thing left of Bitcoin is a digital equivalent to gold — a store of value with limited fungibility — they might as well stick with the original. After all, humans have turned to gold amid social and economic crises for millennia, but have only held Bitcoin for a few years. If they sense a major crash might be coming, atavism may lead them back into the fold of what they know to work.

In the short term, given all the favorable tailwinds, it seems more likely than not that Bitcoin will resume its rise. But the events of the last two weeks may foreshadow Bitcoin’s eventual endgame: the spark that lights a fire under markets. Bitcoin has now spread so deeply into the formal system that a major crash would likely force other liquidations as fund managers looked to cover their losses, possibly starting a chain-reaction through markets. And while oligarchs in 2008 had every reason to expect the government would bail them out, this time might be different. The proportionate size of US debt has doubled in the intervening years, and bailing out the Bitcoiners would likely send bond yields soaring. The crypto-garchs may thus not find the shelter they’d expect in a storm.

If this ends up toppling a few oligarchs, Bitcoin’s original creators may feel their vision came true after all.

The most common explanation one hears for the continuing rally stateside is that investors are pricing in the phenomenal productivity growth being unleashed by the AI revolution. Those espousing this viewpoint to the regular ratcheting-up of earnings expectations among market analysts as evidence, arguing that rising optimism regarding future profits suggests investors are already seeing the benefits of the boom. With firms planning investments of some $3 trillion in AI over the next three years, they argue, the potential payout ahead should the technology live up to its hype could well be massive.

Except, there’s a minor flaw in that reasoning: if AI really explains the American market’s performance, that may be a bad omen. A gain since the start of the year of 13% for the S&P 500, or 17% for the tech-heavy NASDAQ, might sounds mighty good, but only until you see what’s happening in other markets. Investors are hedging their dollar holdings, which suggests they’re getting anxious about long-term exposure to the US. As a result, the dollar is 10% weaker than it was at the start of the year, canceling out most of the gains in US share prices.

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Meanwhile, over the same time period, Germany’s market gained nearly 20%, Italy’s even more, Spain’s more than 30%, and Greece’s over 40%. Meanwhile, the markets in Mexico, Brazil and Canada all appear to be shrugging off the effects of Trump’s tariff war, with all of them up more than 20%. Over in Hong Kong, the market is up a third since the year began. But none of these can hold a candle to what’s happening in Africa’s markets: Nigeria’s market is up 40%, Kenya’s nearly 50% and Ghana’s a dizzying 70%. That’s to say nothing of gold, up 50%, or silver, up 60%.

Throw a dart at a board with all the world’s markets today and you’ll probably land on one in rally mode. Which is strange, because almost everywhere growth is either anemic, or slowing quickly. So this isn’t about anticipated profits. In fact, outside a handful of tech giants which are making money hand over fist selling the hardware for the AI buildout, US profits have been flat this year. The same goes for investment: although the tech behemoths are pouring vast sums of money into what remains a speculative AI bet, overall corporate investment is down in the US this year. That would suggest expenses are rising just as sales are slowing — good news neither for the economy nor for share prices.

What, then, is behind these spectacular rallies? You can get a feel for what’s going on by looking at any of the star performers of the world economy this year, little stock markets such as Ghana or Kenya or Greece. While they may be small — you could probably fit the traders on the Accra and Nairobi stock exchanges into a large living room — such minnow stock markets aren’t for the faint of heart. Thinly capitalized and dominated by a small number of companies, they can swing wildly from low to high. An influx of new money is all it takes for share prices to surge.

And that’s essentially the story of our time: major central banks and governments are pumping money into the world economy, and it’s bidding up virtually all asset prices. Over the last five years, US real GDP grew about 14%; in the same period, the US money supply grew by 40% — nearly three times the pace of the growth of the economy. That helps to explain the surge in inflation, which knocked nearly 24% off the purchasing power of the dollar. But it also explains the explosion in asset values: the S&P 500 stock market index rose some 85% over the last three years.

Add to this the massive fiscal stimulus in which the US government has been engaged since 2020, first with the pandemic rescue packages, then with the Biden administration’s industrial policy, and latterly with the Trump administration’s Big Beautiful Bill of tax cuts. Over the last five years, the US government has thereby pumped over $13 trillion of borrowed money into the economy. Yet the economy has expanded by roughly half that much in that time, which means a lot of the money is being parked in savings, or just leaving the economy.

And therein lies the basic problem. Most of the money is flowing into an increasingly small number of hands, limiting the boost from consumption the stimulus can give the economy. At one time, Western governments responded to economic downturns with Keynesian fiscal stimulus, putting money directly into workers’ hands through public works programs or other employment-generating policies so as to boost consumption, which would then drag investment along. But ever since the neoliberal turn of the late-20th century, this strategy has been reversed: amid fiscal austerity, governments have left it largely to central banks to stimulate investment by injecting cheap money into the economy, the idea being that these investments would create jobs.

It hasn’t worked out that way, but that hasn’t stopped governments from repeatedly trying it. Prior to the Eighties, Western governments on average spent about 1% of GDP on fiscal stimulus during recessions; that figure rose steadily, and by the time of the 2008 crash it had reached 12% of GDP. Meanwhile, the flood of cheap money debases the currency: one way of looking at it is that expressed in gold, the US economy has not grown since 1990.

Of course, the US isn’t on the gold standard. Yet even when expressed in dollars, economic growth has been slowing for decades. Meanwhile, prices have kept rising, eroding the real value of wages while raising the share of total wealth held by the bulk of the population (since prices on assets have risen much faster than wages). In 1990, the wealthiest 1% owned 23% of the wealth while the richest 10% owned 60%; today, those figures are up to 31% and 67% respectively. Meanwhile, half the American population today own a mere 2.5% of their nation’s wealth.

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In effect, the neoliberal model has become one in which a minority of the population continue to enjoy rising living standards through the redistribution of wealth from the bottom to the top. That explains why today in the US, 10% of the population accounts for nearly 50% of the economy’s consumption — a fragile base on which to build a recovery: should asset prices begin to wobble for any reason, the reverse wealth-effect could make them pull in their horns, tipping the economy into recession and thereby creating a self-perpetuating downward spiral in markets. Now, the internal contradictions of this strategy appear to be driving it closer to a crunch point. Workers feeling the squeeze have begun turning on immigrants, and nativist sentiment is rising across America.

Although their anger may be misplaced, the effect of immigration restriction will be to tighten labor markets. Since the beginning of ICE raids in the US, for instance, the labor force has stopped growing. That tightened supply will keep wages from falling as fast in downturns as they previously did and will cause them to rise faster in any upturn, either squeezing profit margins or raising inflation, or both. If interest rates rise as a result, given that margin debt is at a record high, the need to liquidate holdings to pay debts could produce a harsh turnaround.

This makes for a fragile US market. Aware of this, foreign investors appear to be keeping their money at home rather than rushing into America as they were before. That raises an interesting possibility. The rule amid past global market crashes has been that in a storm, the whole world heads to the safe port of US assets. However, the old rules may no longer apply. While on the way up, money being pumped into the American market appears to be fueling booms across the world; on the way down, that money may not come back. America’s spending binge may end up leaving everyone else with the prize.

With this announcement, the US government indicated its readiness to do whatever was necessary to ensure the success of Milei’s agenda of economic reform. The next day, after his rambling address to the United Nations, Donald Trump met the Argentine President himself. Milei and his government didn’t need a bailout, said Trump, but he promised support. “We’re gonna help them.” 

The effect was instantaneous. Investors who had been fleeing Argentina now began returning, if cautiously. The Argentine stock market rose from the lows it had hit on Monday. The Argentine peso, which hit a low at the end of last week, bounced back strongly this week. Argentine government bonds, whose prices had been nosediving, driving up interest rates, also rebounded — although interest rates still remain well into the double-digits. The White House has given Milei a bit of breather; it now hopes that respite will last until next month’s legislative elections. 

There’s been little evidence of contagion-risk from Argentina’s recent financial travails. Its plunging peso hadn’t dragged any other currencies down with it, and regional stock markets continued rising even as the Buenos Aires market shed a quarter of its value since early August. But Bessent’s stark choice of language was revealing. An awful lot has come to ride on the success or failure of the chainsaw-wielding libertarian in the leather jacket. 

The Trump administration has made Argentina its line in the sand, its Vietnam, the bastion that must hold lest it fall before the Leftist tide sweeping the region. It is a tide that has already washed over Brazil, Colombia, Mexico and Chile. The administration may not have intended to invest the Milei experiment with such significance, but the fact is that American Republicans, enthusiastically egged on by Elon Musk and celebrated by conservatives across the Western world, had already lionized the chainsaw-wielding libertarian as a hero. He can’t now be seen to fail.

There was always going to be a lot of risk involved in putting so many eggs in the Milei basket. This is Argentina, after all, a country in which rescue packages repeatedly yield success, only to eventually unravel. It’s often said that Argentina is the most European country in Latin America, a place where Spanish is spoken with an Italian accent, and where the considerable degree of regulation in the country’s economy mirrors that of some European countries. But, like those countries, Argentina can be repeatedly crippled by inconsistent policymaking. It has a long history of boom-and-bust cycles, lancing inflation only to resume business as usual once the worst has passed.

Milei won election as president in 2023 on a platform of slashing the state and taming the country’s runaway inflation. Initially, things went better than hoped. By cutting public spending by the equivalent of 5%, Milei plunged the economy into recession. But that downturn reduced demand sufficiently to take the sting out of inflation, which fell from 300% in 2023 to 30% today. Whereas previously, the price of a cup of coffee could change by the time you finished it, now there is at least a growing predictability in household budgeting. 

After two years of economic contraction, the economy has rebounded strongly. While government spending remained tight, private consumption picked up the slack, and investment took off and exports resumed, growing by 7% this year. Milei’s voters liked what they saw, and his approval rating briefly touched 50% early last year. In Argentina, a country that is deeply divided, this is about as good as it gets. 

But thereafter, things started to sour. While exports have been strong this year, imports have surged past them, rising six times quicker. In no small part, this is due to Milei’s determination to maintain a currency peg. This means that the peso is allowed to trade within a fixed range of valuation. The Central Bank can maintain this valuation by buying or selling foreign exchange whenever the peso moves outside the band. Mindful that a sharp devaluation of the peso could reverse his progress on inflation, Milei has wanted to gradually adjust the band. But in recent months, increasing demand for hard currency has forced the government to dip into its reserves. With the Central Bank burning through cash, the risk of a self-fulfilling run on the peso had risen.

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But the resulting strong peso has enabled middle-class Argentinians to keep holidaying abroad. Meanwhile, imports remain affordable, helping to drive that surge in foreign purchases. By the late summer, pressure on these reserves was becoming acute, and the government ran the risk of running out of money. What made the situation especially delicate was that Argentina’s reserves had been swollen in April by a large disbursement from the IMF. But this use of borrowed money to defend the currency has troubled bondholders, who have begun to worry whether the government will be able to meet its debt payments. After all, Argentina has form here: for fear that bondholders from previous defaults might seize the country’s assets, the government is still reluctant to fly its officials abroad in government airplanes.

Hoping to reduce the appetite for imports and make exports more competitive, Milei wanted to devalue the peso further. Knowing the move would be unpopular, he was holding out until after the legislative elections. But his hand was forced by a shock result in the Buenos Aires provincial election earlier this month, when his La Libertad Avanza coalition was soundly defeated. Although Buenos Aires is a bastion of the opposition Peronists, the province also holds 40% of the country’s people, so it’s a good bellwether of what to expect next month. Currency traders, pondering the possibility that Milei would suffer a setback and lose authority, started dumping their pesos.

Milei does not currently have a parliamentary majority. Because only half the legislature is up for election next month, there is no prospect of that changing, but he hoped to secure enough seats that he could govern in coalition with centrist parties. Thus the poor showing earlier this month raised the prospect that Milei could end up weaker than expected. Compounding matters is that Argentina’s federal system means the president must get provincial buy-in for many of his measures to be effective. Absent a strong mandate, Milei could find himself struggling to govern effectively.

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And that could impede his plans for further reform. In addition to liberalizing trade and allowing the currency to float, there are structural reforms Milei must implement if he’s to improve productivity. These reforms include a reduction in labor market regulation and social security taxes; reforming the tax system; reforming the rules by which revenue collected in Buenos Aires is transferred to provinces; and lowering the obstacles to new business formation. Yet all these existing barriers to economic activity have powerful constituencies behind them, from unions and business groups to political lobbies. Though Milei has made more progress on business deregulation, the road ahead is getting bumpier. Austerity eliminated many subsidies, on items such as gas, water, transport and electricity, all of which have hurt ordinary people. 

To top it all off, Milei’s brand — that of a fiercely new kind of politician — was tarnished by the news last month that his sister and close adviser was under investigation for corruption. Leaked audio recordings caught a former government official revealing a kickback scheme that Karina Milei was running on government contracts. Outrage erupted. Following the revelation, Milei found himself pelted with stones when he attended a party rally late in August.

He has a narrow course ahead. A collapse in the peso now would jeopardize his hopes for gains in next month’s elections, and could thus be the death knell for his government. The White House’s rescue may therefore enable him to make it to election day, but it’s a gamble for Washington. If all the White House needs to do is offer the “whatever-it-takes” reassurance it has given Argentina, and it doesn’t actually have to bail the country out in any way, it will have been a well-judged intervention. But the US administration will have to hope that investors don’t call its bluff. If the run on Argentine markets resumes, Trump will have to decide whether he is prepared to back up words with money. And bailing out a foreign government at a time the US is cutting its spending on domestic programs could go down badly with American voters. 

As for Milei, he still has his date with the electorate next month. Endorsement and backing from the Trump administration may be all he needs to get his reform program back on track. Equally, in a country where nationalism runs strong, it could backfire. Javier Milei can breathe easier today, but only for long enough to resume the race.

Amid weak growth and a worsening budget outlook, British gilt yields are now higher than they have been in nearly 30 years, rising steadily for months and nearly 1% since last year. With national debt of nearly £3 trillion, every percentage point increase in interest drains billions from the government’s budget. Nor is there much hope this will change anytime soon. 

Britain’s inflation is proving even harder to dislodge than that of other developed economies, adding a premium to its bonds. To a greater extent than other countries, too, it depends on external creditors for its lending — with 30% of gilts held abroad compared to an average of 18% for other Western countries. Surprisingly, though, investors seem to trust the Chancellor, Rachel Reeves, to keep the books in balance. When there was a hint she might be fired in the spring, the brief bond rebellion showed that investors don’t want her replaced. But they seem to have less faith that she will succeed in getting the economy going again, as evidenced by the fact yields keep rising nonetheless. This means that, as Britain continues to face upward pressure on interest costs, investors are looking to park their money elsewhere.

That certainly seems to be the signal we’re getting from the gold market, where the surging price shows the money is rushing into the one port that, throughout history, has been the safest in a storm. Priced in dollars, gold is up nearly 40% since the start of the year, its surge driven in large measure by central banks shifting out of dollar-based assets as they anticipate a debasement of the US currency.

The chickens of two decades of cheap money are coming home to roost. The World Bank estimates that, over the past 15 years, the global economy has expanded about 67%. At the same time, the world money supply has risen by more than double that, some 145% and rising, at last count. Most of that rise, in turn, was driven by a handful of big central banks — the US Federal Reserve, the European Central Bank, the People’s Bank of China and the Bank of Japan — and the ultra-loose monetary policies which were rolled out following the 2008 financial crisis. 

Central banks debased their currencies by increasing the supply of money faster than the supply of goods and services. The purchasing power of money fell. Loose monetary policy would therefore stoke inflation: to beat price rises, people would rush out shopping, which in turn, the theory had it, would stimulate economic recoveries. Meanwhile businesses, with access to cheap credit, would then be able to invest to expand operations. 

Things didn’t quite work out that way, though. Instead, asset values soared, driven largely by real estate and cryptocurrencies. (The supply of these assets was relatively fixed, ensuring all that new money bid up a limited amount of assets). But this only made life less affordable for many and so constrained their spending. Economies thus remained sluggish. And try all they might, Western governments still struggle to conjure growth. In the US alone, debt is now rising at twice the rate of the economy. In other words, for all the talk of US exceptionalism, the country has been relying on credit just to keep the lights on.

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It is now becoming apparent that what was meant to be a temporary measure risks becoming a permanent one. Despite DOGE, spending cuts and rising revenues from tariffs, the US’s government’s fiscal deficit continues to worsen. As a result, investors, who are losing faith that the world’s leading economies will ever get a handle on their finances, are starting to demand higher interest rates on long-term loans. In all the developed economies, markets are defying the rate-cutting of central banks and driving interest rates higher. Debt is becoming more and more expensive.

The pressure against further borrowing has been building for some time, but three recent developments brought things to a head. First, across the West, inflation has stopped falling and in some major economies, including the US, Japan and Britain, it has now resumed rising. Yet despite this, central banks have continued to ease policy, cutting rates on short-term debt. Now, with the world’s biggest central bank, the Federal Reserve, coming under intense pressure from the Trump administration to slash rates further, analysts are reckoning that we’ll enter a period of “fiscal dominance” — a time in which central banks will subsidize runaway government spending with cheap credit.

Second, amid this loosening of the purse strings, the supply of bonds, which governments sell to raise credit, is rising quickly. Central banks can only control short-term interest rates, since long-term ones are determined by what investors are prepared to offer.

For instance, the government could offer a £100 bond that pays £105 at the end of one year, for a return of 5%. But an investor could offer only £99, raising the effective interest rate above 6%. And if no other investor offers a better price, the government is stuck paying more in interest.

World bond issuance recently reached over $145 trillion, substantially bigger than the world economy, creating a pipeline that is gushing faster than investors can soak it up. Governments are thus being forced to compete with each other to bid up rates and attract funding. It’s become a buyer’s market in which investors, anxious to protect their investments from inflation, are demanding more to lend to governments.

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Third, the aging of Western societies has led to a change in the profile of assets held by pension funds, which account for a large share of global investment. Fund managers were once happy to hold 10- and 30-year bonds on their books, given they didn’t need cash flow while workers were still paying into their accounts. But now, as more of those people retire and begin drawing their pensions, managers are moving to shorter-dated securities, reducing their appetite for long-term bonds.

Amid all this, a less-noticed but equally significant change has taken place over the past couple of decades. There was a time when Western governments were known for their fiscal prudence while developing countries grappled with runaway borrowing, debt crises and hyper-inflation. But that script has flipped. Today, it is the developing world where governments are acting more prudently, and where central banks tack against the wind, keeping credit costs high when governments spend too much.

Add to that the faster economic recovery from the pandemic recessions in much of the developing world, and it’s apparent the world’s investors have attractive new options to choose from. That helps explain why some of the world’s best-performing stock markets this year have been in developing countries — Brazil’s is up over 15% since the start of the year, South Africa’s some 20%, Hong Kong’s (where the Chinese tech sector is concentrated) by over 25%.

But just as significant is what’s happening in bond markets. Because bond yields are much higher in emerging markets, but governments there are behaving more responsibly— developing countries account for a much lower share of world debt than their share of the world economy — what analysts call “yield compression” is underway. Global fund managers, eager to increase their holdings of emerging-market debt, have been bidding up its price, which brings down interest rates. Thus, for example, whereas five years ago South Africa’s ten-year bond paid 9% more than the UK’s, today that gap has been cut nearly in half, to around 5%. Similarly, Brazil’s 10-year bond paid 5% more than the US’s back then, while today that gap is less than 2%. Whereas once the governments of the West had the world’s bond investors largely to themselves, now they’re having to compete with dynamic borrowers in the global south. They’re no longer the prize dogs at the show.

And at the heart of this evolving landscape, in which emerging markets are becoming more attractive than those of the developed economies, lies China. Given the much lower rates of interest on offer there, some borrowers in the developing world have begun to convert their US debts into ‘”dim sum bonds” – renminbi bonds that are issued in Hong Kong. This will further lessen demand for securities in developed markets and drive up the value of the Chinese currency. While use of the renminbi as a reserve asset remains paltry compared to the US dollar and the euro, it is now rising, which will further impede the flow into western bonds.

So in the West, the combination of rising long-term bond yields but falling short-term rates, as central banks cut interest costs, is prompting governments, businesses and households to switch to short-term, variable-rate borrowing. On one hand, that is helping to keep their costs down for now. But on the other, it is loading a huge amount of risk into the system. If inflation were to worsen significantly across the West, central banks would eventually have no choice but to raise interest rates, possibly sharply. Then we could be back to a late 1970s scenario of plunging markets and deep recessions.

That risk may not seem imminent. Inflation today is nowhere near the double-digit levels it reached back then. On the other hand, the direction of travel in Western politics makes it look unlikely anything will arrest the growth of government debt. Governments are unstable – the French one looks set to fall next week, Japan’s is teetering, Germany’s coalition is bickering internally, and in the US, the legendary fund manager Ray Dalio this week warned the country was sliding towards Thirties-style authoritarianism. Even in Britain, whose government has four years to run with a solid majority, the sense that the government is failing to provide direction to the economy is raising concern that the next government will be led by Nigel Farage.

Like Farage, populists everywhere are on the rise. Skilled though they may be at politics and PR, though, few of them, on either Left or Right, have had much luck making their sums add up. This makes it harder to envision future Western governments getting a handle on their spending. Hence long-dated yields will probably continue rising. Ultimately, a point could be reached when the interest on bonds offers more than the dividends from stocks, which could push a sharp rotation out of riskier assets. Why buy the share of a company that pays an annual dividend of, say, 3% when you can buy a better-paying bond from a government which, unlike the business, can never go bankrupt? In other words, all this government borrowing could ultimately crowd out private investment, further slowing the economy.

As autumn draws in, inflation and economic reports will assume considerable importance. Governments and investors will be reading them anxiously, just as they will await with growing concern Rachel Reeves’s next budget. The fact it will be nearly Christmas before we know what’s coming may only raise the temperature in markets, which don’t love ambiguity. What we need is a perfect mix of tame inflation but steady growth. Disappointing results on either front will only worsen the jitters. If, say, inflation keeps rising – and there is every reason to expect it will – a point could come that markets panic.

Will there be a crash? Possibly. Will things get rocky? Almost certainly. Faced with such anxious uncertainty, the one safe bet may be to keep buying gold.

The cause of her problem is clear enough — making promises she couldn’t keep, and which now darken her days. Having pledged during last year’s election campaign to rebuild the country’s degraded public services without raising taxes on working people or worsening the fiscal deficit, she was left to load the burden onto a small share of the tax base. She also held out hope she could restore the country’s growth rate sufficiently to generate most of the revenue she’d need to fund the repairs and investment she wanted to carry out.

But growth, while improving slightly in the most recent quarter, has not yet sufficed to cover the added expense the Exchequer is having to bear from rising interest rates, which are nearly 1% above where they were last year. There’s no sign of an imminent reduction in borrowing costs, either, with Britain’s inflation rate proving hard to bring down.

Her critics blame her tax measures for impeding economic growth — in particular, the inflationary impact and potential deterrent to hiring and investment she caused by raising employer National Insurance contributions in last year’s Budget. But it’s doubtful this is the problem. While investment and employment have both remained weak, it’s not obvious that Reeves’ tax measures caused it. The country’s tepid economic growth rate has to be set against a backdrop of a global economy that is weaker than before the pandemic, dragged down by sluggishness across all developed economies.

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This sluggishness, moreover, is deep-rooted and structural. Economic growth across the developed economies has been slowing for decades, the first signs of this deceleration appearing as early as the late Sixties and then really becoming apparent after the 2008 global financial crisis. Slower growth has then brought deeper downturns which, when they come, have led governments to medicate the pain with borrowing. As a result, fiscal deficits, which before the Seventies were rare outside of wartime, have become the norm, and an almost perfect mirror to growth: they have been rising steadily, with higher peaks and higher troughs, and rare surpluses.

So, Reeves can’t be reasonably blamed for slowing the country’s growth. However, a case can be made that she understated the scale of the challenge that lay ahead, and therefore has no viable solution to the problem. In keeping with a long line of politicians who promised to repair the economy and restore growth, with little to show for it, Reeves trumpeted her “securonomics” as a cure for what ails Britain. But talk is cheap, because even the recent US growth boom, which has been the envy of other G7 countries, was itself something of an illusion: the growth spurt was driven entirely by borrowing which, now removed from the picture as interest rates rise, has revealed an economy that is itself rapidly decelerating.

In short, Reeves’ growth panacea looks unlikely to materialise. If erring on the side of caution in preparing her Budget, she might go further and pencil in a possible downturn later this year, given that both the American and Chinese economies are presently slowing, which will further hinder the global economy. Yet given the stubbornness of inflation, which remains above the Bank of England’s target and is also now rising in the US, bond yields are unlikely to fall unless there’s a recession — which would in any event merely deplete tax revenues.

No matter how she cuts it, Reeves is facing either rising costs or declining revenues, and possibly a mix of both. As a result, the Government’s finances remained strained. That leaves her with only three options — bend her fiscal rules, cut spending or raise taxes. The first isn’t on the table, since it would risk raising interest costs further yet (for further reading, see “Liz Truss”). Meanwhile repeated backbench rebellions within her own party make spending cuts an unlikely recourse.

Thus, tax rises look inevitable. Therein lies her problem. When running for election last year, Reeves could have made a case that to re-start growth and repair public services, Britain needed to spend and invest more, which required more tax revenue. However, Keir Starmer had made winning the election the Labour Party’s highest priority. And to win the election, Starmer judged, the party needed to assemble a winning coalition with targeted, cost-free pledges.

This kind of short-term approach to politics, a method called the permanent campaign, stems from a theory of politics called the median-voter model. It became canonical in the late Nineties under leaders including Bill Clinton and Tony Blair and it was based on a simple logic: voters were self-interested and little moved by ideological visions. Thus, by targeting voters in the median of the political spectrum with pledges of increased benefits and reduced costs, a party could capture the largest coalition possible.

One upshot of this approach is that you concentrate the benefits on those inside your coalition and impose the costs on those outside. Hence we got “no taxes on working people” — a sleight of hand since almost everyone considers themselves workers and hardly anyone considers themselves to be rich. “Tax the rich” thereby became a coded phrase that amounted to “tax someone else”.

As an election strategy, Labour’s landslide spoke for itself. But as an economic one, it left Reeves with little room for manoeuvre, since in the eyes of almost all British voters, she has no mandate to raise their taxes. Thus, she’s constantly looking to squeeze more revenue from a small share of the base and raising taxes in small but repeated steps, or by stealth, generating funds inadequate for the economic task ahead but sufficient to make her increasingly unpopular.

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The Labour Party is now reviving the idea of a wealth tax, which would target accumulated wealth over income. But while such a tax would enable her to satisfy her pledge to not touch people’s incomes, it might provide only a temporary balm. That’s because while effective as a one-off fundraising measure, typically in response to a crisis that has blown the Budget, wealth taxes become less effective if made annual, given the costs involved in assessment. It could also take years to implement, given that the required administrative infrastructure is not currently in place.

Another possibility being mooted is a so-called mansion tax — applying capital gains tax, which currently only affects investment properties, to primary residences above a certain threshold. The obvious risk here is that the way to avoid paying tax in such cases is to not sell the property, which would reduce the volume of business in this segment of the market.

In other words, there are no easy solutions. Reeves is, in effect, stuck in what might be called the barn-raid trap, from the refrain of the old reggae tune: Nobody wants to plant the corn, everybody wants to raid the barn. This willingness of politicians to make ostensibly cost-free pledges hardly started with Labour. The Cameron-Osborne Tories hid the cost of their tax cuts in the gradual decline of public services. Boris Johnson told his compatriots that their vote for Brexit would not only be costless, but that their prosperity would immediately improve and the National Health Service would be flush with cash. Instead, Britain’s average annual economic growth rate, which had since the turn of the millennium tracked the European Union’s, fell by half while the NHS — well, enough said.

The fate of those previous politicians who succumbed to the barn-raid trap should give Reeves pause: once stuck in it, there seems to be no exit, save in the premature end to a political career. What the current moment requires is political leaders who don’t merely follow public opinion but instead mobilise support for the sort of bold changes Britain will require if it’s to tackle its structural decline once and for all. Leaders who lead.

Mind you, it may be that politicians keep telling us lies simply because they reckon we won’t hear the truth. Unless Reeves can overcome that resistance and declare bold action, she appears destined to become the next victim of the barn-raid trap. Thereafter, it will no doubt come for the next politician who wins power with cost-free pledges.

Such forecasts were hasty. So was much of the investment. The railway bubble burst, and speculators suffered bruising losses. Three decades later, a similar bubble arose in the US. This bubble, like the British one, was soon to burst. Around 18,000 businesses failed within two years.

As a share of American GDP, investment in artificial intelligence has surpassed the telecoms boom of the dotcom bubble. In its degree of concentration, it stands second only to the railroad boom of the late 19th century. AI, then, might be approaching a moment of truth. The technology was meant to speed up the economy; now, it appears to be slowing it. Unless the trend is soon reversed, the biggest tech companies might be in for a sharp revaluation.

In fact, if you remove those companies from the stock index, so-called American exceptionalism disappears. Outside the top 10 companies, the indices have been stagnating since the start of 2025. Similarly, minus that top 10, corporate earnings have been flat for the past three years — coincidentally, the period that followed the release of ChatGPT, the event that sent the AI boom into overdrive. With the sector’s capital expenditure having risen tenfold in just the past three years, the AI bubble is now sucking up more than half of America’s investment. So insatiable is this bubble that there may not even be enough cash in America to satisfy OpenAI. Sam Altman attempted to rustle up additional cash by going abroad, seeking to raise $7 trillion from the UAE and other investors.

That rush to the top doesn’t leave much for everyone else. With all that money pouring into AI, investment in the rest of the economy has begun to decline, slowing growth. That helps to explain the rapid deceleration in the US economy now underway, a marked contrast to the recent good fortune of the “Magnificent Seven” tech companies. With job growth flat, consumption now adds less to the economy than a handful of massive AI investments.

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And the gains made by AI are, for now at least, someone else’s loss. Not only is the industry sucking in capital, but it is ravenous for electricity. Data centers consume 10 times the power of traditional servers, and are helping raise American electricity prices — up some 6.5% over the past year. AI centers also consume huge volumes of water for cooling, leading to supply strains and increased prices in many areas. That keeps upward pressure on the inflation rate, raising costs to both consumers and businesses alike and slowing the interest-rate cuts that might facilitate investment in small and medium firms.

In short, the US is currently placing its money on one huge bet: that AI will unleash a productivity revolution so great it will ultimately re-start the economy it’s presently impeding. Americans are doing their bit to make it happen, with ordinary retail investors driving the stock market rally of the last few months and OpenAI, the makers of ChatGPT, reporting that Americans prompt their chatbot some 330 million times a day. 

Yet for all that, we’ve yet to see much evidence of a transformation in output. Over the same three years that the AI revolution has been in full swing, labor productivity has grown at barely 1% a year, maintaining a decades-long trend of declining growth across Western countries. And while some might retort that productivity revolutions unfold over many years — several decades passed between the invention of the steam engine and electricity and significant changes in labor productivity — the maths behind the AI boom make little sense. Unlike the railroads built in the late 19th-century US bubble, which are still around today, AI investment is going into data centers that are set to depreciate rapidly. Nvidia, for instance, warranties its GPUs for only five years. 

In short, this bet needs to pay off soon. And while the record profits at the tech giants leading the American AI boom might suggest that’s already happening — Nvidia’s earnings have quintupled and its share price increased tenfold in the last three years — those results don’t actually tell us much. Nvidia isn’t making money off AI so much as the AI mania, capitalizing on the sale of its chips — the “picks and shovels” of the new goldrush — to other companies that then use them to build AI. In a recent earnings statement, Meta said it did not expect the gains of its AI investment to materialize for another two years. Instead, it is still making money off advertisers on its Facebook and Instagram sites, just as Apple still makes its money from iPhone sales.

The record profits of the Magnificent Seven, therefore, do not support a narrative of economic transformation. Instead, we’re awaiting the breakthrough application that will lift economic productivity to a new plateau. Enthusiasts maintain that, once the technology spreads, AI will add one percent or more to America’s annual rate of economic growth. But there’s no shortage of skeptics who question the calculations behind that optimism.

Among them is Goldman Sachs’ Jim Covello, who says that for AI to justify the current wave of investment, it must solve a trillion-dollar problem. It’s hard to see that happening. Daron Acemoglu has argued that AI’s productivity impact will be negligible, because once it gets through the easy-to-learn tasks which are currently exciting everyone, like search tools, the returns will rapidly diminish. This contention is borne out by recent macroeconomic research from Japan. The neuroscientist Eric Hoel calls this the “supply paradox of AI”: “the easier it is to train an AI to do something, the less economically valuable that thing is. After all, the huge supply of the thing is how the AI got so good in the first place.” Take the example of copy-writers. Because so many of them produce so much material, they become easy to replace. Their knowledge is cheap. This phenomenon won’t carry over to fields where knowledge is expensive.

Instead, a closer look at Meta’s bottom line may reveal what’s really going on, and why the optimistic view of AI’s productivity impacts could rest on shaky foundations. The company credits its new AI for helping steer more customers to its products, thereby boosting sales and revenue. We see a similar trend at Google, whose searches previously led people to websites, but which now keep them on the Google site where they can read quick summaries of the linked content: more eyeballs on Google, more ad revenue to it, but less for all those sites.

In other words, the tech giants have been using AI to capture revenue that previously went elsewhere. On the face of it, that’s the market doing its thing, and it’s that very possibility which excites corporate executives. They believe AI will reduce their need for labor, allowing them to similarly suck up money that would have gone elsewhere — in this case, to their workers.

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This, arguably, has been the tale of the information age: new technology doesn’t necessarily raise economy-wide output that much. Instead, it replaces labor and directs the resulting cost-saving to owners, helping to worsen income and wealth inequality. Just as the websites that make those AI summaries possible are now being plundered to the benefit of the AI giants, the LLM chatbots they’re developing are trained using content whose creators receive no compensation. Without that motherlode of free inputs, involuntarily subsidized by their creators, AI might make no sense. As one investor put it in 2023, “imposing the cost of actual or potential copyright liability on the creators of AI models will either kill or significantly hamper their development.”

That route to higher profits raises two problems. The first is that the resulting inequality could stoke a political populism that makes the economy more fragile. We might never have got the volatile policy-making of this Trump administration were it not for the sense of malaise caused by globalization’s decimation of industrial towns and industrial jobs. If AI really displaces workers, one can’t rule out a radically redistributive politics of the Right or Left. If anything, current trends favor it.

But in addition to the possibility that the AI revolution could end up eating itself, this type of job destruction can produce an economic paradox. While professionals might lose jobs to AI, not everyone will. Microsoft recently commissioned a study estimating which jobs will be most affected by AI and least; not surprisingly, those most insulated from its effects are manual laborers and personal-care workers (including health care), with knowledge-workers taking the biggest hit.

In other words, the jobs AI will disrupt least lie in those sectors of the economy where labor productivity tends not only to be lowest, but most resistant to transformation. This gives rise to what’s known as the Baumol-Bowen effect. As workers displaced by AI are forced to take new jobs in lower-skilled occupations, their productivity will decline. In consequence, the needle on economy-wide productivity may budge little.

It may yet be that someone will invent an application for AI that transforms productivity across the economy and lifts everyone’s output and income to a new plane. But time may be running short, because right now, the boom is becoming a bust for many.

So: are we facing another railroad episode? It’s certainly true that AI is starting to resemble a speculative bubble, not unlike the dot-com boom. Although the Magnificent Seven are making profits that justify their valuations, their future growth depends on the AI revolution continuing for years at its current rate or greater.

But that growth depends on AI being deployed in revolutionary new ways. If that doesn’t happen, then those growth prospects will change, and the markets could tumble. Given the weighting of the big tech companies in the US stock market — Nvidia alone is worth nearly a tenth of the market’s total value — a fall in share prices could not only hurt all those retail investors who rode the wave, but ricochet through the financial system.

In the long term, it might be good for America if the market goes back to investing in all the other sectors of the economy. In the short term, if this bubble bursts, it will be very painful. Both investors and the Trump administration are going all-in on their AI bet. If it succeeds, they’ll parade like champions. But if it fails, they’ll be running for the exits. And given last week’s lackluster response to ChatGPT’s newest update, investor patience may be wearing thin.

But what a difference a half-century makes. After Israel launched its attack on Iran last week, the oil price rose sharply, but only back to the level at which it spent most of the last three years, merely reclaiming recent lost ground. As for fears of a global recession, stocks briefly fell before regaining most of their ground too. At least initially, the world’s investors regarded this war as an irritant rather than a catastrophe.

It’s a bit surprising, not least because the war lands at a delicate time for the world economy. In the last couple of weeks, both the OECD and World Bank issued their updated economic forecasts for the world economy. Neither is optimistic: global growth is expected to stay below 3% this year. Leading the way downwards are the developed economies, all of which are growing slowly if at all.

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So, despite the serene sense in markets amid a major war, the risks to the global economy remain high. The tenuous balance of the moment may not last. For now, the world’s major powers are standing by while Israel and Iran slug it out. When US President Donald Trump suddenly left this week’s G7 Summit and tweeted that Tehran should evacuate, speculation was rife that Americans were about to join Israel’s fight. But when the night passed without further incident and Trump subsequently said he was looking for a “real end” to the war, its future course remained as unclear as ever. While Israel enjoys the upper hand, having apparently established complete air dominance, the conventional wisdom is that it does not have the ordnance or air power needed to deliver a decisive blow. To completely destroy Iran’s nuclear facilities, Israel would therefore need the Americans to join their mission. But a rift has opened in the administration between those who want to back Israel’s war, like the US ambassador Mike Huckabee, and those who want to continue the pivot towards containment of China.

This raises the possibility that Israel will be left to continue this war alone and, unable to bring it to a resolution, will succeed mainly in motivating the Iranian leadership to double down on the creation of a nuclear bomb. It’s a safe bet that if the Iranians do that, the Saudis will move to do so quickly as well. The insecurity in the region will then only worsen.

Yet accurate predictions would require knowing the President’s mind, and it’s not clear if anyone does. Although American presidents have enjoyed a great deal of discretion in foreign affairs, there has always been a general predictability to the behavior of American presidents. Trump’s predecessor Joe Biden, for instance, could be counted upon to grumble incessantly about Netanyahu but always give him what he wanted, in light of his ideological commitment to Zionism. But with Trump, it seems to come down largely to who he is listening to on any given day.

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During his second presidency he has indicated quite unambiguously that the United States is tired of playing the role of hegemon in global affairs and will thus base its future decisions on its own priorities, as expressed by the President himself. He apparently believes that nimbleness allows him the freedom to do deals and rework the rules of international economics in a way that maximizes American interests.

But if the renunciation of long-standing commitments and alliances gives the President the freedom of maneuver he apparently envies in leaders like Vladimir Putin and Xi Jinping, Trump’s approach differs in one crucial respect. Whereas Xi and Putin — and even North Korea’s Kim Jong Un for that matter — root their decisions in strategies and ideological visions that are identifiable and consistent, Trump’s America First vision remains inchoate and unclear. One day tariffs are on because they’ll restore American manufacturing, the next they’re off because they were only ever intended as bargaining chips in trade negotiations. One day mass deportations are on to protect American jobs, the next they’re off because they’re hurting American farmers and hoteliers. And on it goes.

Amid this uncertainty, long-term planning has become challenging. So far, most American business managers haven’t changed their investment plans for this year, although early signs of an increase in the number of firms aiming to scale back investment amid rising uncertainty are starting to emerge. But more tellingly, the evidence that foreigners are starting to lose faith in America, and are consequently pulling their money out, continues to accumulate.

In this light, the most significant development of this Middle East war is that a decades-old rule of the global economy — that in a geopolitical storm, everyone heads to the safe bastion of the US — appears now to be broken. In the past, amid increased tensions in the region, the oil price rose, the dollar strengthened and US bond yields fell, as global investors rushed to park their money in the safe haven of the US. This time around, the opposite has happened. The oil price has remained in its recent range, the dollar has continued sliding and bond yields haven’t fallen. In the meantime, gold continues its relentless upwards march as the world retreats from the dollar and returns to the ancient metal as a favored reserve currency.

What appears to be unfolding, therefore, is a global economy that resembles that of the period between the last century’s two world wars — a time when a declining empire, the UK, lost its hegemonic role but the rising power, the US, wasn’t ready to replace it. Britain had ceded its place as the world’s biggest economy to the US, but the Americans weren’t yet ready to build a military force to match their status as an economic superpower: on the eve of the Second World War, Douglas MacArthur lamented that the entire US army, which was smaller than Portugal’s, could have fit into Yankee stadium to watch a baseball game. Britain, meanwhile, was desperately trying to avoid conflict at all cost, and could not play the role of world policeman. Equally the pound sterling was gradually weakening, but the US dollar didn’t yet replace it as the world’s reserve currency. Amid that de-centered world economy, there followed an era of volatility — financial crises which were poorly managed, trade relations which worsened — and which climaxed in the Great Depression and the onset of war.

The world economy today may be moving into a similar interregnum. That would make it vulnerable to any kind of major economic shock, of the sort seen in the 2008 global financial crisis or again in the 2020 Covid crash. But those crises occurred at a time when there still existed a broad political consensus among G7 states about the global order, one based on open markets and relatively unhindered flows of money, goods and services. As a result, financial and political leaders were able to manage those crises swiftly and effectively with a high degree of coordination, involving such measures as central bank swap lines, and a widely shared consensus on the basic contours of policy: a blend of loose fiscal and monetary policies and a commitment to keeping global trade flowing.

Faced with a similar economic shock today, it’s possible such harmony will prove elusive. And while the Middle East war may not provide the shock, other tensions are building in the global financial system. Some see private equity headed for a moment of crisis, while the formal financial system’s recent embrace of crypto, despite still not being able to make a use-case for it, has strong late-bubble vibes to it — the sort of vibes which become contagious shortly before a fall.

Barring a dramatic escalation — say a mass casualty event that takes the war into an entirely new phase, the closure of oil shipping lanes, attacks on Western or other regional forces — this Middle East war may not pose a 1973-style shock to the world economy. But it has uncovered the looming problems in the Western economies, and highlighted the growing risks to future growth. The longer the war continues, the worse that will get, so the US — which will ultimately be decisive — will have an interest in bringing the conflict to a rapid conclusion. Whether or not Trump proves able to do that, though, will reveal how far the hegemon has fallen.

That turn inward sealed its fate. By the time of the first Opium War (1839-42), China was sinking into its “century of humiliation” just as a forward-looking America was beginning its ascent. A century later, China had been reduced to an impoverished agrarian economy. American domination had been firmly established.

But could history now be repeating itself, this time in reverse? Today, just as an ascendant China is spreading its global influence, the US seemingly repeats China’s ancient error. Is America setting itself up for a fall as spectacular as China’s back then?

China’s decline has few parallels in history. Although the global periphery fell backwards relative to the West in the 19th century, most European colonies saw their economies develop. But China suffered the ignominy of seeing its economy actually contract, until the Empire collapsed and the country suffered a decades-long civil war.

Imperial China’s isolationism had begun early: it scrapped what was then the world’s biggest navy around the turn of the 16th century. Although the Chinese governing class, having long shown interest in foreign technology, was not averse to learning from others, foreign observers frequently noted an air of superiority in official thought. As one 18th-century British observer noted, the Chinese tended to believe “everything is excellent and that proposals for improvement would be superfluous if not blameworthy”. Moreover, the regime wanted to monopolize the movement of trade and culture, bringing it into conflict with then-free trading and ravenous Westerners, while its examination system for entry to the bureaucracy tended to steer ambitious intellectuals towards mastery of the classics over the search for new ideas.

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Above all, given the sheer size of China’s internal market — comprising nearly a third of humanity — the Chinese elite felt no pressing need for foreign trade and exchange, let alone overseas colonies. When the Empire dissolved its navy, one senior official noted that overseas exploration had “wasted tens of myriads of money and grain” in a search for “wonderful things” that however brought no material benefit to the state.

This ability to tune out the world set China apart from smaller European states that were engaged in an almost permanent arms race with one another. To expand economically, European countries and their colonial offshoots needed markets abroad. China didn’t. So it could afford to turn inward.

Yet while the Empire wanted only to limit rather than eliminate access of the outside world to China, its tendency to isolation blinded it to some of the implications of Western technological innovations — particularly naval, military and bureaucratic technologies. As a result it underestimated just how these were going to transform the world, with the result being that it fell irretrievably behind the technological frontier at a time Western countries were quickly pushing it forward.

It seems implausible that the US, as globally dominant today as China was then, could retrace such an arc of absolute decline. Nevertheless, Donald Trump is arguably repeating the same mistakes that China’s emperors once did, and for much the same reasons — a conviction of natural superiority, a sense the country can stand alone and thus dictate its terms of engagement with the outside world, and an underestimation of the transformative impacts of foreign technologies.

As China’s imperial rulers did, the US is presuming a false asymmetry between it and the rest of the world, having decided it needs the world less than the world needs it — its markets, its know-how, its protection and above all its dollar. This confidence, manifest in the administration’s declarations that it “holds all the cards”, has led it to launch a trade war on all its trading partners simultaneously, apparently in the expectation of rapid surrenders. The fact that hasn’t happened reveals the flawed reasoning behind “Liberation Day”, and we’re now into a period of standoffs and stand-downs which have left a vacuum in global governance.

China is rushing to try to fill it. Beijing has begun pitching itself as the defender of the global trading system, Xi Jinping recently telling a gathering of global CEOs that “we must jointly maintain the multilateral trading system, jointly maintain the stability of the global industrial chain”. Although the US is turning inwards, the rest of the world is moving the other way, shoring up their ties in new trading blocs and agreements. China is taking advantage of this to raise food imports from Latin America and Africa, with Brazil quickly sliding in to replace American exports of soybeans.

Playing into Beijing’s hands is Trump’s tactic of accompanying tariffs with isolationist measures, such as withdrawing from multilateral institutions or shutting down USAID. While the President may feel that such measures free up resources and give him more tactical flexibility, they substantially relinquish the diplomatic battlefield to China. Dollar for dollar, China couldn’t match the previous US aid budget. But now the latter has dropped to zero, the bar is easily crossed.

Most significantly, Trump is apparently so convinced America has nothing to learn from anyone that he is overlooking how Chinese technology is already changing the world. Typical of this is his stance on “energy dominance”, the idea that the US should forgo the energy transition to exploit its abundant and cheap fossil-fuel ecosystem. Aside from doubts about the feasibility of this approach, what is inescapable is that in pursuing this policy, the US is forfeiting a rapidly emerging subsector to China.

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No countries feel the need for a strong international order and an acceleration of the energy transition more than developing ones. This is where China has advanced furthest in recent years. Chinese FDI has been expanding aggressively in the developing world, whose share of total Chinese trade is consequently rising. In Africa, for instance, Chinese firms are creating power plants that then reduce electricity costs for, among other things, their mining operations.

Strategically, this advance into the soft underbelly of the world economy matters. While the world’s biggest markets are still in the developed world, the fastest-growing ones are in the developing world. Notwithstanding the claim of Trump’s energy secretary that “there is no climate crisis and we are not in the midst of an energy transition”, EV sales in developing countries are exploding, especially in some of the fastest-growing economies — up 70% last year in India, 200% in Malaysia, and over 300% in Thailand and Vietnam. So too is renewable energy, not only because it has become so inexpensive, but because it reduces the exposure of hitherto energy-importing countries to the vagaries of world markets, since no outsider can control their supply of renewable-energy inputs. Even petrostates like Saudi Arabia are moving aggressively towards decarbonization, which is drawing them ever further out of the American and into the Chinese orbit.

When a state finds itself the center of the world, as China once did and the US has more recently, it’s tempting for it to see its place as natural and eternal. But such hubris often amounts to pride before the fall. The relative decline of the American-led empire has been underway for some time, but Trump’s erratic and idiosyncratic policymaking may usher in a period of absolute decline, starting with a recession.

Given its democratic system, America’s governing class will probably respond and change course more quickly than the Chinese imperial elite did, making a full century of humiliation unlikely. Still, by the time the US does change course, China may have moved closer to its long-standing goal of retaking its place at the center of the world. That alone will feel to America like humiliation.

On Wednesday, Trump put a 90-day pause on tariffs above 10%. There was one major exception: China, with whom the president has started a perilous game of chicken. After his administration imposed a further 34% surcharge to the earlier set of tariffs it had slapped on China, the Chinese leadership reciprocated, applying the same 34% right back. Even as he paused tariffs for the rest of the world, Trump announced he would put China’s tariff up to 125%.

The markets rallied in response to the 90-day pause. But in the four days that followed Liberation Day, Americans saw more than $6 trillion of their wealth evaporate in the stock market, and they’re still sitting on losses. Their interest rates spiked as investors dumped US Treasuries they no longer regarded as safe, and the purchasing power of their dollars fell as foreigners pulled up stakes and retreated back home. If this is the outcome of the so-called Thucydides Trap, the idea that a declining empire ends up at war with a rising one, the early betting by investors seems to be against an American victory. Trump, reluctantly, may have been forced to confront that reality.

Not that anyone stands to gain from a trade war. If the initial, aggressive global tariff program is resumed, the whole world economy will suffer, with estimates of the cumulative reduction in global economic growth in coming years having rising above 2%. In the short term, smaller economies that depend heavily on trade with the US — Mexico, Canada, Vietnam, and let’s not forget poor little Lesotho — would be hit the hardest, but everyone will come off worse. As the old African proverb has it, when two elephants fight, only the grass suffers.

But once the dust has settled, it may well be that the winner, in relative terms, is China. The country may bounce back harder than its rival because Trump appears to have succumbed to the fatal flaw of many an empire in decline: hubris. He has overestimated his strength and underestimated his foe’s.

In this cavalier frame of mind, Trump launched his trade war with no clear strategy, probably assuming everyone would quickly surrender. His end-game is little more than a vaguely operationalized goal of stopping the world from ripping off or plundering the States, however one measures that. This has left America ill-prepared for a possibly drawn-out trade conflict with China, in which it could be at a disadvantage. By opening up a couple of hundred trade-war fronts at once, Trump endangered just over a tenth of the American economy. And in doing so, he has made enemies everywhere. China, by contrast, has focused its new trade barriers only on the United States, which accounts for about 2.5% of its GDP — or closer to 4%, if one includes “connector” countries like Vietnam.

In other words, having declared it will “fight to the end if the US side is bent on going down the wrong path”, Beijing is prepared to take the hit, no doubt secure in the knowledge that it is taking a far smaller economic risk than the United States.

China’s deftness results from what is, in contrast to the US, a clear strategy. Its aim is to maintain an open world trading order that has served it well, and use this as a market to develop the high-value export industries it believes will define the future, like renewable energy, EVs, robotics and artificial intelligence. It will happily exploit the United States’ newly fraught relations with other countries: positioning itself as the new guarantor of the world trading order the US has renounced, China is securing growing markets in the developing world while managing relations with Europe.

In addition, China enjoys an advantage over the US in political and economic firepower. That might seem a strange thing to say, given that the US economy is bigger than China’s, with a much higher per capita income, and is much less exposed to trade with China than China is to the US. But that simple arithmetic is misleading. The question is not just how much punishment each country can apply, but how much pain it can absorb.

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Whereas the Chinese leadership can justify its action to its people by saying it didn’t pick this war, it seems unlikely the average American whose cost of living shoots up will celebrate simply because he or she hears someone in China has it worse. Politically, the US administration has not prepared the nation for anything more than a brief skirmish, with Trump bragging that trade wars are easy to win. The President came to office on a pledge to bring down inflation and boost the economy — now, financial meltdown has driven a precipitous drop in his approval rating.

Nor does insisting that this is short-term pain for long-term gain help Trump’s cause much. It may keep his base on board for now, but swing voters have been abandoning Republicans, as recent special elections have shown. The longer this conflict drags out, the worse that will get. Peter Navarro said this week that the stock market is now bottoming and the Dow Jones Industrial Average will soon go to 50,000, but if instead it keeps plummeting, or if inflation spins out of control, the administration’s soft treatment by Right-wing cheerleaders may soon wear out. One study estimated that a wider tariff war would knock nearly 2% off America’s economic growth and raise prices by as much as 7%. Unlike the Chinese leadership, the US faces mid-term elections next year, and if the price of eggs keeps on rising, Trump could lose his foot soldiers.

Meanwhile, China has a lot of what can be called economic strategic depth. The basic tension in the US/China trade relationship is that the US has been living beyond its means, whereas China has been living well beneath them, repressing wages to keep export prices competitive. Faced with the loss of external markets, the Chinese leadership is now re-orienting the economy towards domestic consumption to pick up the slack, which will lessen the impact of the trade war on ordinary citizens. It thereby has a lot of capacity to absorb lost American sales.

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Unlike the US, China has kept a lot of its powder dry. It could, for instance, still restrict exports of critical minerals to the US or target US multinationals with operations in China. And with its very high domestic savings rate, Beijing has a lot of fiscal space to cushion the blow of a prolonged war. The US, in contrast, depends for its deficit-financing on creditors who, to judge from the plunge in US bond prices this week, are already losing patience with Trump.

Taking all that into account, Beijing’s defiant and resolute tone shouldn’t surprise us. Before Trump’s announcement of the 125% tariff, it responded to Trump’s previous upping of the ante by again reciprocating, leaving US exports to China facing an 84% tariff. Whereas the US leadership is at war with itself, with Elon Musk openly calling Navarro, the suspected architect of the tariff schedule, a “moron”, “dumber than a sack of bricks”, and “Peter Retarrdo”, and with various members of the administration publicly telling audiences they’re not responsible for the policy, the Chinese leadership remains unified.

That’s to be expected, given the country’s authoritarian model, but what’s more noteworthy is the relative unity, so far, across China’s corporate elite as well. Unlike in the United States, where CEOs and fund managers have been screaming for a change in direction, China’s major companies are telling their clients they should be able to manage the challenge. Whereas US grocery bills are expected to leap, Chinese food producers are saying they should be able to keep price increases limited. The confidence index among chief economists remains positive, the government is bolstering stock prices and improving liquidity in the banking system, and the rapidly-rising new energy sector expects to be largely immune from the impact of the American salvo. This isn’t surprising, given since so much of China’s export market for this sector’s products lies in the developing world. While Tesla’s share price has fallen by half, its Chinese rival BYD’s is up 20% this year.

No doubt there is an element of bravado in the tough talk from China. But all the signs are that the country is up for this fight. It remains to be seen whether Trump’s 90-day suspension is a ceasefire or a surrender. But either way, it doesn’t look like an early show of strength.

Whether or not US trade policy is now being designed by White House interns who left their assignment to the last minute, Britain’s comparatively lenient treatment — if that’s what you can call a blanket 10% tariff — probably owes little to Prime Minister Keir Starmer’s “calm-headed” approach. It’s really thanks to Britain’s trade deficit in goods with the US that it got off relatively lightly.

That’s little reason to celebrate. For one thing, sooner or later someone will explain service trade to Trump, whereupon Britain will get that furrowed-brow look, given the large surplus it runs with the US. But until then, Britain might persist in the hope that Starmer and Trump will reach a trade deal that will protect it from the President’s caprices.

They’d be unwise to bank on it, though. It’s true that Trump loves striking a deal. After some impressive diplomacy by the Mexican president, as well as some assiduous ring-kissing by a couple of Canadian provincial premiers, both Mexico and Canada were granted a slight reprieve from their assigned tariffs. In a moment of generosity, Trump decided to impose only the earlier tariffs he had put on them, rather than raising their rates further.

But that itself is reason to worry. As both the Mexicans and Canadians will tell you, Trump is perfectly capable of negotiating an agreement only to tear it up shortly after. So if he wakes up in a bad mood tomorrow, who’s to say what he’ll do. Plus he has indicated that if any country retaliates with tariffs of their own, he will ratchet up their rate, depending on how irritated he is feeling.

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You’d be hard-pressed to find an economist anywhere who can discern any logic or strategy behind this approach. Using a tariff as a bargaining chip, or to exert pressure, is arbitrary and fickle, and doesn’t serve any obvious vision for building the country’s export capacity. Thanks to Trump’s tariffs, US coffee-drinkers will have to shell out more for their morning java. So too will chocoholics. And of course, it won’t lead to coffee or cocoa production coming to America, because America can’t grow tropical crops. The same goes for bananas and a host of other products whose Stateside prices will now shoot up. There was a time when Latin American tourists would fly to America with empty suitcases just to stock up on all the cheap clothes and groceries there. Now the direction of travel will reverse.

But while analysts scramble to find method in this apparent madness, they are probably missing the point. Madness may itself be the method. By constantly keeping his negotiating partners on the backfoot, Trump appears to believe he maximizes his leverage in negotiations. It’s not clear whether this is true. After all, trade negotiations aren’t real-estate deals: they are vastly complicated, and tend to take place over many years and involve a fine-grained understanding of the sectors that will most benefit. In the trade negotiations Trump has carried out so far, the US has generally come off the worse, which is no doubt why he often renounces his own deals.

Worse, this keep-’em-guessing method is terrible for business. Thanks to his cryptic policy by tweet, the Economic Policy Uncertainty Index is now at levels only ever seen once before in the US: during the early-pandemic panic when stocks were crashing and the economy was collapsing. When the index reaches such levels, investment and spending tends to fall, which slows the economy. Given that the US economy is already decelerating, the double whammy of higher prices from tariffs and slower growth is going to create a vicious cycle in which those who can will put their money aside for a rainy day. It’s no surprise, then, that US stock markets tanked yesterday. Moreover, given how heavily invested ordinary Americans are in the stock market, this will further worsen the gloom.

What is equally significant, though, is that the Uncertainty Indices for major Asian economies — China, India, and Japan — aren’t showing similar levels of panic. Unlike the supplicants lining up outside the White House to beg clemency, the response of some Asian countries to the Trump tariffs appears to be neither to fight nor beg, but to ignore. China seems set to use its immense reserves of savings to stimulate local consumption while Malaysia says it will seek to diversify its trade away from the US. Growth in China, India, and the dynamo southeast Asian countries will take a hit, but it will continue.

Instead, the losers will be America’s erstwhile friends, in Europe and North America. The East will inevitably beckon, as Western countries look to reduce their dependence on the United States. Assuming China does engage in a program of fiscal stimulus to boost domestic consumption, its trading partners will be keen to strike new deals to replace lost sales to America.

The bonds with America that are weakened today may never recover their intensity. The faith that neoliberal internationalists had after 2020 that Trump might only be an unpleasant interlude before a return to normality was this week proven wrong. If current polling trends continue, he may well leave office a reviled president. But he came to power off the back of the popular vote, and there will likely be future presidents who will uphold his legacy. For Trump speaks for a new America — one that appears to be here to stay.

No longer willing to play the part of the global policeman, the US is turning its back on the world and the world is reciprocating. Nations which fail to do so will live at Washington’s mercy. This mass pivot risks harming America’s economy long-term, while weakening its global heft. Already, we see the dollar plunging in value, as global investors realize the US is no longer the safe haven it once was. And if foreign investors no longer underwrite America’s debt, the damage to its economy will be deep and permanent.

In the end, then, the biggest victim of Trump’s attack on free trade will probably be America itself. This year, and possibly for several years to come, its economy will underperform compared to its recent rate, and the country will gradually lose influence over others as they diversify away from it. Meanwhile, the “exorbitant privilege” of the dollar’s status as a reserve currency may in time be lost, which will hurt the living standards of ordinary Americans. Unable to live off the world’s credit, they’ll need to cut their spending and pay higher prices.

All told, this will probably accelerate the transition to a post-American age, particularly as other countries are already starting to regard China as a more predictable partner. The tragic irony is that although Trump pledged to make America great again, he may end up making China great instead. As for Britain, it would probably be best not to hope for salvation in some kind of trade deal. The Atlantic Age died on Wednesday, and whatever “special relationship” might have existed will, to paraphrase a former vice president, be worth a bucket of warm spit.

But there are some economists who see things differently. A few of them have found their way into Trump’s orbit. Economists of this kind argue that tariffs can be effectively employed in a strategy to build a country’s industrial base. The classic examples of this are postwar Japan and then South Korea, each of which rebuilt their war-ravaged economies using a combination of state nurturing and protectionism. As a result, they became global manufacturing champions. (South Korea started practically from scratch.)

The origins of this approach might be unexpected. When Japanese bureaucrats first looked around for examples of such “infant industry models”, they found inspiration in 19th-century America’s industrialization. Contrary to its more recent policies, the US has some history of using protectionism to make itself great.

Neoliberal economists therefore stand accused of neglecting the examples of history. Another blind spot might be political. Neoliberal mathematical models anticipate the effects of tariffs, but they lack a theory of the state and of political economy. In their focus on the aggregate impacts of free trade, the neoliberals have too often neglected the differential impacts of opening western manufacturing to imports.

Yes, output and efficiency rose in America when it opened up to China in the Nineties. But the gains were largely captured by large owners of capital, whereas small businesses and workers didn’t do so well. There resulted what the economist Branko Milanović dubbed the “elephant curve” of income distribution, in which a global middle class of owners and professionals grew rich while workers in Western countries fell behind. In America, where Democratic elites once represented working-class interests, the neoliberal turn initiated by Bill Clinton left them largely abandoned, and they ended up turning to Donald Trump.

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Thus there is both an economic and political rationale for Trump to use tariffs to rebuild American manufacturing and restore the working class to its former glory. As Treasury Secretary Scott Bessent, “Wall Street’s done great… but this administration is about Main Street.”

The problem is that it’s hard to detect much evidence of strategy in the way Trump is going about it. First, he’s going after countries like Canada that aren’t the source of the US’s problem. The US runs a much bigger trade deficit with China than with Canada but has imposed the heavier tariffs on its neighbor. Worse, hefty tariffs on Canadian cars won’t actually benefit American carmakers. They’re highly integrated with Canadian firms, moving parts back and forth in cross-border supply chains. So American carmakers will pay the tariffs, making their products more expensive than imported models from elsewhere.

Trump’s tariffs also lack precision. The Koreans and the Japanese ensured that their tariffs supported the development of strategic industries while enabling imports in industries in which their countries were not competitive. Trump, in contrast, is slapping on tariffs indiscriminately. It’s hard to see what advantage the US would gain from raising prices on Colombian coffee, for instance, because the US has no capacity to build its own coffee industry.

Note the apparent incoherence of the tariffs on Canada. Trump has variously said that his tariffs are intended to protect American jobs, stop fentanyl trafficking, improve border security and make Canada the 51st state. Which of these, if any, is his actual goal is anybody’s guess. When asked how he’d describe the “psychodrama” of Trump’s on-again-off-again tariff announcements, the Prime Minister of Canada, Justin Trudeau, sighed and said wearily: “Thursday”.

Worst of all, Trump fiddles with the tariffs constantly, imposing then suspending them, or announcing carve-outs. His recent pivot to reciprocal tariffs goes even further, essentially outsourcing the US’s trade policy to other countries. Rather than set an economic plan and stick to it, he’s entrenched a reactive policy in which the US will play tariff whack-a-mole with trading partners.

If Trump’s idea of generalship is to tell his troops to advance, retreat, turn right then left all in a matter of hours, sooner or later they’ll give up from exhaustion. That’s already begun. Rather than respond to his tariffs by altering their production plans, businesses are starting to stand back, waiting for the fog of war to lift so they can plan better for the future. They’re postponing investment and holding off on new purchases, with the recent survey from the Institute for Supply Management revealing orders to be dropping so sharply the sector will soon be contracting. One recent business survey estimated that the manufacturing sector in the first quarter may therefore contract by as much as 3%.

This reveals another apparent flaw in Trump’s approach to this war. Like many declining empires, America is both overestimating its strength and underestimating that of its opponents. The American exceptionalism of recent years, in which its economy has grown strongly while other developed countries have stagnated, was always something of a debt-fueled illusion. American borrowing has grown at twice the pace of GDP over the last few years. If the US had lived within its means, its economy would be as moribund as its G7 peers.

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The evident limits to a debt-fueled model started becoming apparent last year, when bond investors started driving up interest rates and thereby crimping demand. Trump took office at a time when the US economy was soaring high above its peers and its stock market was sucking capital in from all over the world, but the tide had already begun to turn. The economy was weakening, and money had begun quietly leaving the US. As America turned inward, foreign investors began to return home to Europe and Asia. Since the start of the year, the US stock market has gone negative, whereas those in Europe and Asia have been rising. Not surprisingly, Friday’s jobs report revealed an employment market that is losing steam.

And where America has been profligate, its trading partners have often been prudent. This has left many of them with ample fiscal firepower to respond to Trump’s provocations. Germany, China and the EU have all announced major increases in spending to stimulate their economies. This will help soften the impact of tariffs and further encourage investors to return home and chase the higher returns on offer. Three years ago, Liz Truss’s attempt at fiscal largesse provoked major ructions in bond markets, but no such turmoil has occurred in this new era of tariffs. It seems that investors are happy to continue lending to what have been comparatively tight-fisted money-managers.

Europe’s sudden largesse also poses a potential threat to one of the key pillars of the US’s postwar global dominance: the dollar’s role as the world’s reserve currency. Contrary to what conventional economic theory would predict, US tariffs have been accompanied by a weakening of the dollar in favor of other currencies and gold.

The dollar has on its side the depth, liquidity and openness of America’s capital markets, as well as the dependability of its regime. No currency has ever come close to rivaling the dollar as a reserve currency. But Europe’s bond market is likely to expand substantially, just as the US has started to look less safe for foreign investors. (Trump has even hinted that the government could default on some debt.) As a result, the impossible is becoming at least conceivable.

One storyline currently doing the rounds in Trumpland is that this is all part of a plan — that Trump is deliberately engineering a downturn to squeeze excesses out of the economy before teeing up a strong rebound once his tax cuts and deregulation kick off. It would be a pugnacious approach to economic revitalization, especially since he didn’t ask for a mandate from voters to do this. But it is at least plausible, since that’s essentially what Margaret Thatcher and Ronald Reagan once did. Still, it’s hard to square this fine-tuned strategy with the volatility of Trumpian policy-making. Besides, the tax cuts being proposed are largely baked in, being not new but an extension of the 2017 tax cuts. It’s not clear how much added stimulus they’d bring.

One can make a case that a trade war would be a just one. But Donald Trump isn’t fighting that war. In fact, other than the approval of his followers, it’s hard to tell what he’s fighting for.

Then, in 2020, everything changed. The outspoken CEO criticized aspects of the Chinese Communist Party’s policy during a speech in Shanghai. Soon after, he disappeared from public view, in the 21st-century equivalent of the Cultural Revolution’s practice of sending big-headed officials to farms in remote provinces. It was all part of Xi Jinping’s “Common Prosperity” drive, which was intended to check the mushrooming powers of China’s tech oligarchs.

But last week, to the surprise of many, Jack Ma re-surfaced at a business summit hosted by Xi. There he was, clapping away, after five years of exile. The summit itself was the first of its kind in six years, and included more tech entrepreneurs than the previous one. Although the star of the show was DeepSeek founder Liang Wenfeng, Ma’s reappearance seemed to indicate that the chill was over, and that the Party was willing to play with the oligarchs once more. After Xi reminded them that they were to “actively fulfill social responsibilities” and “promote common prosperity”, reports in official media suggested that the government wanted to support the private sector’s expansion.

For years China has been in a slump. Ever since the government-engineered deflation of the real estate sector hit households hard, most Chinese have reined in their spending. This has slowed down its rapid convergence with the US economy, with some suggesting that the country may never catch up. Western analysts tend to conclude that the Chinese economy is saddled with structural deficiencies that may block it from ever becoming a global powerhouse.

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But perhaps they’ve misjudged the CCP’s motives, failing to see that the setbacks may not result from policy errors but from deliberate plans. Puncturing the real estate bubble — painful though that has proven to be, since property remains the main savings vehicle for Chinese households — formed part of Xi’s strategy to reallocate resources towards “high-quality” growth, in particular in emerging tech sectors like AI and renewable energy. The Chinese leadership appears to have traded quantity of economic output for quality, with the idea that re-orienting resources to emerging sectors will serve the country better in the long run.

Judging from recent activity in the markets, the strategy may well be working. Although structural problems continue to beset the Chinese economy — including a deflated property market, weak consumption and an excessive reliance on manufactured exports — reports suggest that it may now be turning a corner. Over the New Year holiday, train travel and movie attendance set new records. And while real estate prices are still stagnating well below their 2020 peaks, the market may now have bottomed with activity in Shanghai starting to heat up again.

Meanwhile, the global winds may now be blowing in China’s favor. Since the DeepSeek breakthrough, money has begun flowing out of the US. The Magnificent Seven, which had previously powered the US stock market to a record share of total capitalization, have now started to slide, and the US market as a whole has hit a plateau. In place of the Magnificent Seven are China’s “Terrific Ten” tech stocks, which since DeepSeek’s “Sputnik moment” have powered the Hang Seng index to a double-digit surge. If this continues, Chinese households may soon feel they can afford to finally loosen their purse strings.

Arguably, Donald Trump’s policy turns are inadvertently strengthening China’s momentum. Having abandoned Joe Biden’s plans for a renewable energy transition, Trump’s administration has left one of the world’s fastest-growing sectors to Chinese producers. Its renewable energy and EV companies are aggressively expanding sales in almost all markets, most significantly in rapidly growing developing-country markets, and the effect is already showing in their share prices.

With sales slumping, Tesla had pinned all its hopes on its forthcoming automated driving feature. Then, out of the blue, China’s BYD introduced its ‘’God’s Eye” driver-assistance feature for free in all its cars. If the competition between these two auto giants is anything to go by, the global center of technological dynamism appears to be shifting. Whereas Tesla’s stock is down some 16% in the last month, BYD’s has risen by more than 40%.

It appears the Chinese leadership is now trying to sail into these tailwinds, with the rehabilitation of Jack Ma being a powerful symbol of its new openness to business, and particularly to tech entrepreneurs. Following last week’s summit, the central bank announced it would be implementing measures to make it easier for Chinese firms to obtain capital. And China has for months been talking of some major stimulus for the economy. But while there have been some tentative steps in this direction, we’re still awaiting a big announcement.

A key moment will probably come next week, when China holds its “Two Sessions” meeting of both the National People’s Congress and the Chinese People’s Consultative Congress, at which the government is expected to elaborate on the stimulus measures it announced late last year. If the Communist leadership is serious about supporting business, this would be the obvious moment to make it clear.

While China is aggressively expanding its trade ties and diplomatic presence around the world, the US is pulling up the drawbridge. Crucially, America is aping the old Chinese model in a manner that could prove self-destructive. Traditionally, China has been considered less investable than the US because it’s run by a party that can clamp down on business at any moment, unlike the free-market and institutionally stable West. However, the US is now run by a fickle oligarch who changes policy on a dime. At least in China one can discern a strategy — namely, the survival of the Communist regime — whereas in the US, it’s unclear whether Trump has an actual plan, or whether he’s motivated entirely by whims and Tweets.

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The apparent Chinese approach of engineering a downturn to weed out low-quality activity and then re-orient resources to dynamic sectors is hardly groundbreaking. Although the dominant neoclassical theory of economics generally regards any fall in output as a sign of economic ill-health, less orthodox schools such as the Austrians have always seen recessions as necessary to the process of renewal – a moment of creative destruction. In fact, one could argue that’s precisely what Elon Musk is trying to do with his DOGE experiment: induce a recession by dramatically cutting government demand, in the hope a more innovative private sector will then be free to pick up the slack.

Yet the similarities between the Chinese and American approaches probably end there. The Trump and Musk approach, which focuses on deregulation and tax cuts, will probably lead to greater capital concentration. Already, it’s entrenching the power of oligarchs, particularly those from the tech sector. China, by contrast, has reminded its oligarchs who is boss.

In the Seventies, there was an arcane Marxist debate about the character of the state in capitalist societies. The instrumentalists believed the state was controlled by the capitalist class which used it to advance its business interests, while the structuralists argued the state ruled in the best interests of the class when it had the relative autonomy to implement policies which, if harmful to individual businesses, were good for the economy. China might just be the archetypal autonomous state presiding over a pastiche capitalist economy, whereas the US is now run by businessmen using the state as an instrument to advance their version of capitalism. Which model is superior remains to be seen. But investors, previously all in on America, are now hedging their bets.

Reversing this trend will require money. Unfortunately, that situation may also be worse than we thought. We already know the Treasury is empty but what is only now becoming clear is the number of unfunded spending commitments which, while having been kept off the books by the previous government, will soon come due. In her speech today, Rachel Reeves is expected to hit this point home, announcing that the previous Conservative government left a black hole in the public finances. She estimates that the bills for compensation to tainted-blood and post office victims, promises to boost defence spending, public-sector pay awards, and other such invoices inherited by Labour amount to around £20 billion — though they could run as high as £50 billion.

However, the new Labour Party came into office having promised not to raise taxes nor alter the outgoing government’s borrowing limits. Instead, it hopes to generate the revenue needed to revive public services by raising the growth rate of the economy. Hope is the key word here. The cyclical recovery of the British economy, along with the positive mood music associated with the incoming government, will probably lift economic activity somewhat this year, affording the government a bit more breathing room. Reflecting this optimism, the IMF recently upgraded its forecast for the British economy this year, with private forecasters similarly more upbeat.

Still, it’s not much to get excited about. The IMF upgrade is in the order of a mere 0.2% of GDP, which works out to a few billion pounds of added output, some of which will make it into the state’s coffers in the form of tax. That won’t do much to improve the government’s fiscal position. If it’s to give a substantial lift to the country’s economic growth rate, the Government will need to find a way to raise the economy’s level of investment, which is the lowest in the G7 (a group whose investment performance has itself been declining for decades). Foreign direct investment in the UK is currently sitting at a 12-year low.

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There are some measures the Government can take to stimulate investment without much spending, much of which it’s already committed to: tax reform, encouraging private-pension consolidation to make it easier for funds to invest in a wider range of assets, changes to the planning system, and improving its trade relations with Europe. The return of policy predictability and political stability after the chaos of the last eight years should also go a long way towards encouraging businesses to start looking to the long term again.

Nevertheless, for private investment to take off, there will almost certainly need to be more public investment in the infrastructure which facilitates economic activity — everything from roads and railways to research and development. Because if the state’s current account looks bad, its capital stock is even worse.

Politicians love to say that the government should run the country the way a household manages its finances. It’s a silly analogy since households bear no resemblance to countries — they can’t issue currencies or contract eternal loans, among other things. However, even if we took the idea at face value, governments haven’t been up-front with how they’ve been managing the kitty. What they’ve done would be similar to your partner saying the accounts were all in balance while neglecting to add he’d cashed in the kids’ college fund to settle some gambling debts. The fact is, the country’s public endowment, once rich, is now threadbare.

If we look at what amounts to the public savings account, the figures are eye-watering. The government’s net worth — the value of public assets minus debts — now stands more than £700 billion in the red, making it one of the very worst in the developed world. Governments have been raiding Britain’s jewellery cabinet, privatising state assets or putting off maintenance work on deteriorating infrastructure, then distributing the revenues or savings in the form of tax cuts. Although this has been going on for decades, the fall into negative territory happened under George Osborne. The former chancellor used to justify his austerity programme by saying he was repairing the roof while the sun shone. In truth, he was actually dismantling the roof and selling the tiles.

Now the rain has come, and we all know the result. Trains that are slow or run late, if at all; backlogs at ports; leaky school buildings and ill-equipped hospitals; building permits which are delayed by a lack of planning officials or inspectors; workers whose productivity is hurt by long-term illnesses, due to their inability to get timely treatment in an overcrowded health care system; employers who can’t find workers with requisite skills due to under-investment in the school system.

All this is unpleasant enough on its own, but it also discourages private investment, by raising costs and lowering returns. So Britons don’t just suffer as consumers from the collapse of the public sector. They also suffer as producers, hindered as they are from realising their economic potential. But even if the Labour government were to eschew the ambition of leading an investment revival, merely rebuilding the roof on the public sector will require more money than it is likely to have at its disposal. So unless the Chancellor is willing to deepen the austerity against which the electorate rebelled at the election, she’ll have to either raise borrowing or taxes, or both.

If Reeves is willing to be bold, and if she’s prepared to absorb the battering she’ll get over having misled the electorate, there is scope for her to do both. On debt, the Chancellor has pledged to abide by the fiscal rule the previous government imposed on itself, namely that the ratio of the national debt to GDP should fall within five years, while the ratio of the fiscal deficit to GDP, which currently stands at more than 4%, should come down to 3% within that same time-period.

While such targets have the virtue of communicating stability and predictability to investors, ensuring against the panic of “Liz Truss moments” — a term which has forevermore entered the economics lexicon — they can also lead to perverse outcomes. Germany’s rigid adherence to its debt brake has, amid recessions of the sort it’s currently experiencing, forced the government into pro-cyclical measures that deepen recession: with the economy contracting, the government must cut spending, and with the government cutting spending, overall demand drops and the recession gets worse.

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Contrast that with the US, where the Biden administration’s experiment with industrial policy has shown how effectively government investment can crowd in private investment. The Infrastructure Act, CHIPS Act and Inflation Reduction Act have together ushered in a period in which private investment has risen by nearly a trillion dollars a year, helping to power an economy that is out-performing all its G7 partners by some distance.

Labour would thus do well to consider various ways it could tailor the fiscal rule without raising alarm in markets. There are book-keeping measures it could use to, for instance, transfer Bank of England losses off the government’s ledger so as to give it some respite. Equally, it could begin to incorporate the government’s net worth into its budget statements, giving a truer picture of the nation’s finances and thereby enabling investment that raises the value of public assets to offset the debt incurred to expand them (much as a mortgage loan is offset by the value of the property). Bond investors would be unlikely to look unkindly on such measures, because they’d rest on the foundations of asset-values, and not the ethereal promise Truss offered that her tax cuts would somehow pay for themselves through future growth.

Similarly, when it comes to taxes, the British public have for years been telling pollsters they’d be willing to pay more to restore public services to their former glory. Just how much more is another matter, but what is undeniable is that, despite all the furore about Britain’s tax burden reaching levels not seen in decades, the country has a relatively light burden compared to most other developed economies. Were the Chancellor to break her pledge not to raise taxes, she would undoubtedly get some blow-back. But if she did it early in her tenure, and were the condition of Britain’s neighbourhoods and public services to improve noticeably as a result, it seems doubtful her compatriots would punish her and demand for sewage to be put back in water. By the same token, were taxes rising and economic growth accelerating thanks in part to public investment, people might not feel a rising proportionate tax take to be burdensome.

When Labour left office in 2010, the chief secretary to the Treasury scribbled a note to his Tory successors: “I’m afraid there is no money.” It sullied the party’s reputation for fiscal responsibility for years afterwards. Rachel Reeves, wisely, wants to rebuild public trust. But to do this she must be honest about Britain’s economic situation. The Chancellor should take this moment to capitalise on the public’s good will, make unpopular but needed decisions — and rebuild Britain’s roof.

France has come late to the party. Until about 15 years ago, the world economy had for decades been steadily liberalising as a so-called Washington Consensus encouraged countries across the world to open their borders to trade, investment and labour migration. As a result, throughout the neoliberal age, which peaked with China’s re-entry to the global trading system after the death of Mao Zedong, trade rose even faster than global GDP and drove economic growth everywhere. Meanwhile, the ageing of Western countries made immigrants ever more vital to Western labour markets.

This all came to a halt with the 2008 financial crisis. While the leaders of Western countries initially tried to restore the primacy of neoliberal globalisation, a growing populist revolt against it had begun. The twin shocks of the 2016 Brexit referendum and Donald Trump’s victory in the US presidential election appeared to symbolise the start of a great reversal.

In the face of this onslaught, Emmanuel Macron launched a rearguard attack in France’s 2017 presidential election, beating the National Front’s Marine Le Pen with an unabashedly liberal and pro-European agenda. Yet his triumph would prove short-lived. Along with growing anxiety about immigration, public sentiment continued to turn against economic liberalism, multilateralism, open borders and, in Europe, continental integration. Today, France joins a lengthening list of European countries where Right-wing populists, some with roots in fascist-era movements, are in power or steadily rising. The far-Right is already in government in Italy, the Netherlands, Finland, Croatia, Hungary, Slovakia and Czechia, while it is still rising in France, Germany, Austria, Belgium and the UK, where Nigel Farage’s Reform Party finally secured a toehold in parliament from which he aims to take over the British Right.

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This mood-swing has drifted far beyond Europe. Throughout the West, the open door for trade, investment and immigration is narrowing. While America has not gone so far as to pay neighbouring countries to apprehend migrants, as is the case in Europe, the Biden administration has recognised how potent an issue the border has become in a volatile election year, and has been cutting back sharply on the numbers allowed to enter. In Canada, traditionally a country friendly to newcomers, the government has been pressured to respond to a housing shortage by temporarily capping immigration.

Meanwhile, President Biden has taken to imposing tariffs on imports of Chinese products, and has been casting a more wary eye on investment in industries he considers strategic. Similar protectionist tactics are emerging elsewhere: between 2018 and 2022, the number of restrictive measures across the world increased sixfold. Furthermore, de-risking and friend-shoring became all the rage in the wake of the Covid pandemic, which exposed the fragility of global supply chains. As a result, the common indicators of globalisation have now reversed themselves: after decades of growing faster than the world economy, international trade and foreign direct investment are both now in relative retreat.

Obituaries for the era of neoliberal globalisation are now pretty common. The basic problem neoliberal globalisation always had was that even though it undeniably raised the incomes of Western countries, those gains were unequally spread. Urban professionals gained a lot, whereas unskilled workers were hammered, their industrial towns often turning into wastelands of boarded-up shops and abandoned mills. Meanwhile the urban booms drove up property prices and enriched owners, sucking more and more money out of the pockets of working folk, forcing many to move far out of town where they often suffered from inadequate services. One of the most reliable predictors of support for France’s National Rally is the distance one lives from a train station: the further away, the more likely a vote for the RN.

In the short term, de-globalisation seems full of promise. Cutting immigration and making it harder for firms to out-source production will provide relief to the hard-hit workers who have borne the brunt of globalisation’s costs. As we began to see during the Trump presidency, reducing immigration appears to boost the wages of unskilled workers. Yet such policies will further hinder the long-term economic growth of Western countries, already slowing to a crawl. If they curtail immigration, Western countries will soon be unable to keep their ageing population — particularly their retired citizens or those needing health care — in the style to which they’ve grown accustomed. Meanwhile, higher import costs due to the fragmentation of supply chains and rising tariffs will further entrench inflation, which will keep interest rates elevated and crimp investment. Short-term gain will eventually cause long-term pain.

More significantly, these developments will further accelerate the relative decline of the West. That’s because the de-globalisation wave is largely confined to developed countries; in much of the developing world, globalisation remains alive and well. Most notably, China is using its Belt and Road Initiative to deepen its links across the global south, exploiting the gaps left by the retrenchment in Western aid and diplomacy to widen its economic and political space. And whereas Europe is moving towards increasing fragmentation, Africa’s continental free trade agreement is finally finding its feet and boosting trade within the continent, which is expected to raise incomes there.

That said, we are still in the very early stages of this transformation, and the turn against globalisation across the West may yet get reversed. So far, global trade has recovered from the pandemic and doesn’t yet show signs of a sharp reversal. Yet the West’s policy changes will probably start to bite before too long. Already, the trends in foreign direct investment are suggestive of a confident and rising erstwhile periphery: while Western countries are pulling back as a source of outward investment, China is rising.

In fact, Chinese businesses have found a way to get around the walls being thrown up in Western countries. They simply out-source production to countries such as Mexico and Hungary, which enjoy freer access to the markets they wish to penetrate. This can also reduce China’s labour costs since Chinese wages have risen so fast. The impact of China’s mercantilism on the developing world is not yet clear. On one hand, by exporting its industrial capacity, China may snuff out industrial development in recipient societies that are trying to develop their own manufacturing industries. This explains why some developing countries, including Indonesia, Brazil and India, have imposed trade restrictions on China. On the other hand, the scale of Chinese investment is also raising incomes and creating jobs in some countries, which would ultimately expand the market for Chinese exports.

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It may be that China’s form of globalisation is a classic imperialist strategy that will enrich the Chinese core at the expense of its new periphery in Africa, Asia and Latin America. Yet it could also be that the Belt and Road Initiative turns into a Chinese version of the Marshall Plan — the post-war American strategy to build a cohesive Western empire by ensuring the recovery and subsequent enrichment of all its closest partners. While China rankles Western countries for running large trade surpluses with them, it notably tends to run deficits with developing countries, meaning that it buys more from them than it sells.

It shouldn’t surprise us if globalisation proves more popular in the developed world. Not only were the benefits of globalisation unevenly spread in Western countries, they were also unevenly spread between developed and developing countries. While Western countries were admittedly the biggest absolute gainers from globalisation, measured in increased income, in relative terms developing countries saw their incomes rise more. So while Western citizens would have probably ended up worse off without globalisation, they wouldn’t have known this; the annual rate of growth they experienced in their incomes didn’t exceed that of the previous decades, and was lower than the “golden age” that followed the Second World War. By contrast, citizens in the developing world, especially in Asia, experienced noticeable improvements to their standards of living.

Now, the West runs the risk of falling further behind in relative terms, and being alienated from a new age of globalisation that will undergird the growing power of China, India and other emerging powers of the former global periphery. Time may reveal that the failure of Western elites to engineer a globalisation that benefited everyone, rather than disproportionately themselves, ultimately ensured the decline of the Western age.

And yet, gold’s enduring appeal may be less practical than mystical, something economists struggle to explain. Although in fairness to Keynes he was referring to the gold standard and not gold itself, there’s no shortage of sceptics who are bemused by gold’s popularity, since the metal is worthless as an asset. It produces nothing and unlike other precious metals, such as silver, it has virtually no industrial applications. Instead, its value derives from a tautology: we want gold because we want it, which is to say that because everyone wants it, we know it has value and therefore we want it.

Warren Buffett concluded that a Martian would be left scratching his head: humans will pay an army of people to dig up gold from beneath the earth and, after they resurface with the shiny ore, pay another army to dig a hole in the ground to bury it, whereupon we pay yet another army to stand guard over it and protect it. It’s as if, in a “disenchanted” world meant to have replaced mystery with reason, we still cling to irrational or romantic notions of beauty and value.

Certainly, our love of it has deep roots. Ancient civilisations from Asia to the Americas all held it in awe, a fascination that carried into the early modern age, the search for gold being a motivating factor in the age of exploration that opened the world to Europe’s empires. Equally, the flood of precious metals from the empires helped bring about the end of European feudalism and the rise of capitalism, since the resulting inflation both diminished land values — the basis of the nobility’s power — and drove up demand for industrial manufactures.

So it made sense that when modern monetary regimes emerged alongside the rise in global trade, the states of Europe would often underpin their currencies with precious metals. By holding them in their treasuries, central banks could then issue promissory notes that could be redeemed for the specified weight of gold or silver — the name “pound sterling” betraying its origins as a currency that was originally backed by silver (to be later replaced by gold). The comparative ease of moving paper as opposed to gold or silver facilitated trade on a vast scale and gave governments flexibility in issuing currency, since redemptions in exchange for the metal were relatively rare.

In fact, the more modern the world became, the more gold’s importance grew. It provided the undergirding of the world economy in the post-Second World War period, when the gold-backed dollar system created what amounted to a virtual global currency. In June 1944, as the war entered its final stages and delegates from the allied powers assembled in a small New Hampshire town to map out the post-war system, front of their minds was the way the collapse of international trade in the Thirties had deepened the Great Depression, enabling the rise of Nazism. Determined that it should never happen again, they set out to create a system in which trade would always flow freely. A key element of this would be a universally accepted currency.

After some bickering, they agreed that the US dollar would play that linchpin role in the Bretton Woods system, backed as it was by the vast store of gold the US had accumulated. In theory, any government holding a surplus of dollars from its international trade could, if it wished, exchange its dollars for gold held in the vaults of the Federal Reserve, cashing in at the fixed rate of $35 to the ounce. In practice, given that it was much easier for governments conducting business with one another to transfer dollar payments across the bank accounts they held in New York, hardly anyone ever bothered.

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As a result, not only trade with the United States but virtually all international exchange was conducted in dollars. Since the greenback was universally accepted — even communist countries liked to hold dollars for their trade outside the Soviet bloc — everyone was willing to use it. As they piled them up for future use, the dollar at its peak accounted for nearly nine-tenths of all the foreign reserves held by the world’s central banks. Hardly any of them bothered holding much gold anymore.

But there was an obvious problem with this arrangement. It meant that the US could pay for all its imports simply by printing more dollars, which it did. Initially, this situation suited everyone since those dollars were buying their goods, keeping their economies growing. But by the late Sixties, when the volume of dollars in global circulation exceeded the gold available for redemption, the “dollar overhang” was becoming increasingly hard to ignore. To get ahead of the looming crisis, President Nixon abandoned the gold standard, and said the US dollar would henceforth trade freely on global currency markets.

This in turn shattered the social compact on which the Bretton Woods system was founded. And implicitly asked people to henceforth trust humans rather than nature to preserve the value of their money by containing its supply. In the short term, they didn’t. Currency volatility returned, and people turned to gold. The surge of inflation in the Seventies meant the value of currencies was falling. Gold became a popular safe haven not just for central banks but for ordinary folk, who could buy small amounts of it and stuff it in safe-deposit boxes or under their beds. In the course of the decade its price shot up to more than $800, as people sought to preserve what wealth they could amid the plunging power of their money.

In 1979, Paul Volcker took the helm of the US Federal Reserve with a determination to lance inflation and preserve the dollar’s value. He set out to underpin the currency by aligning the growth of money supply more closely with that of the economy, thereby ensuring it would be backed by new output. The strategy succeeded. By raising interest rates sharply he choked off borrowing, thereby reducing the money supply and creating a relative scarcity of money. As dollar stability returned, inflation came down. Other central banks followed suit and tightened their monetary policies. The next three decades would then become the era of “monetary dominance”, as central banks asserted their independence and used it to discipline governments that were too loose with their fiscal policies. Low inflation meant that money held its value, and gold diminished in popularity, its price steadily falling. In 2000, it finally bottomed out below $300.

But just as the US government had once abused the confidence the world placed in the dollar to print too many of them, central banks now did likewise. In particular, the “Fed put” provided an implicit guarantee to markets that should asset prices fall, they’d always print more money to juice them back up. With the assurance that asset prices would only ever rise, investors were thus free to inflate bubble after bubble, safe in the knowledge that when each one burst, the central bank would come to the rescue.

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As the money supply mushroomed, the allure of gold returned once more. At first driven by sceptics who doubted this state of affairs could last, the barbarous relic entered its latest golden age. Since the turn of the millennium its value has marched steadily upwards, recently reaching new highs above $2,000 an ounce.

This state of affairs doesn’t look like it will end anytime soon. With the world entering an era of what the political economist Adam Tooze has called the “polycrisis”, geopolitical rivalry is fragmenting global supply chains and throwing up new barriers to trade. As the spectre of war looms once again over Europe and East Asia, China and Russia are drawing closer together and the US is withdrawing from the wider world into a circle of its closest allies. As it does so, it’s also using the ubiquity of the dollar to go after its foes, seizing their accounts and sanctioning their use of the currency. Meanwhile, despite inflation’s return, central banks are suggesting they’ll soon ease money again. The dollar no longer looks quite the safe haven it once did.

Amid all this uncertainty, central banks are joining their citizenries in accumulating larger stockpiles of gold. As trust among countries once more weakens, and as faith in our governments and central banks to preserve the value of our money diminishes, the timeless appeal of a shiny rock seems unlikely to dim. Unlike the “digital gold” some proponents of cryptocurrency claimed could rival it as an inflation hedge, supply of the real thing can’t be manipulated by humans: Bitcoin, with its fixed supply, was meant to prevent that, but the subsequent invention of all manner of other cryptocurrencies inflated the supply immensely. Besides, for those looking for solidity amid volatility, crypto’s ethereality doesn’t offer the same reassurance as a piece of metal from the earth. In uncertain times, it would appear, we will always cling to the same certainties our ancestors did long ago.

The Biden campaign constantly reminds Americans that the economy is on a tear, with inflation falling, unemployment near record lows and GDP expanding faster than any other advanced economy. But when economists and politicians cite such figures or talk up soaring stock indices as indicators of economic health, it hardly registers with the average person. Only about a tenth of Americans read a daily newspaper, and nearly half never read one at all. Fewer than a quarter watch television news.

As a result, most citizens judge the state of the nation and the economy from what they observe in their own daily lives: how much they pay to refuel their car; what their grocery bill comes to; whether their credit balances rise or fall at the end of each month; how often they can afford to dine out or go to concerts. They also take into account the number of boarded-up shops or alternatively, new restaurants in their community — and consider how far they need to drive to reach the nearest bank or post office.

Herein lies Biden’s problem. The average American feels worse off today than they did on the eve of the 2020 election, with polls showing that nearly twice as many people think Donald Trump did a good job on the economy than Biden. They’re not imagining it, either. Gas prices, which never broke above $3 per gallon during the Trump years, are now approaching $4 per gallon. Average take-home pay rose nearly twice as fast as the cost of food away from home under Trump, enabling Americans to dine out more often. But since Biden took office, Americans have had to tighten their belts, with their wages failing to match the sharply rising cost of eating out. In fact, for most of Donald Trump’s presidency, inflation was dormant and real wages were rising. Had it not been for the pandemic, which tanked the economy and unleashed some of Trump’s worst buffoonery, Trump might have won the 2020 election.

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While the headlines speak of an American economic renaissance, the stories that people tell one another have a very different tone. Yes, the economy is outperforming all its peers, a revolution is underway in high tech, and a huge rollout of renewable energy is creating loads of jobs. But, in the bitterest of ironies, the boom skews towards Republican states, which already dislike Biden, and favours big cities over smaller towns. If your bank branch has closed or your favourite diner has gone out of business, hearing things are roaring in Austin won’t matter much to you. To use the starkest current example, when the Fed and White House talk of inflation falling back down, they simply mean prices are rising at a more measured pace. But for most people, falling inflation means falling prices — sales and discounts. And prices aren’t falling. So what is there to celebrate?

That said, real wages are rising, which will enable workers to gradually claw back their lost buying power. But that won’t happen soon. Using the Fed’s current measure of inflation, a dollar today buys 20% less than it did in 2020, so it would take years of real wage gains of 2%, which is about where they are now, to make back that lost ground. In any event, the Fed has changed the way it measures inflation. Had it still been using the method it used in the early Eighties, during the last big surge in prices, inflation today would be nearly triple what is currently being reported.

Despite all their talk about the booming economy, America’s leaders can’t deny that their compatriots feel noticeably poorer today than they did four years ago. If the November election comes down to a referendum on the economy, Biden looks sunk. His only hope is to tell a story persuading people that while the present is difficult, the future under him will get brighter: not an impossible task, but a tough one.

But perhaps the economy has lost its political significance. There is, in fact, growing evidence that the rules of American politics are changing, and that if economics was ever the dominant mover of voting behaviour, it may not be now. Instead, cultural and existential matters have risen to the fore. The straight economic division that once seemed to prevail in America — that owners vote Republican and workers vote Democrat — has waned.

In its place, new alignments are emerging. As a starting point, one can use the rough rule of thumb that the cities lean Democrat, towns and rural areas vote Republican, and the suburbs remain up for grabs. But within that framework, old loyalties are shifting. African Americans once voted overwhelmingly for Democrats, providing a third of the party’s total support. Hispanic Americans, if less monolithically, did likewise. But in both groups Republicans have been making inroads, particularly among men.

Women, on the other hand, who were once a strong conservative force, have grown more liberal. But perhaps the biggest flipped script of all is the working class. Once a reliable pool of votes for the Democrats, the white working class in particular has broken increasingly Republican — not because Republicans speak to their economic concerns, but because socially conservative workers find the Democratic party increasingly too “woke”.

More than 40 years ago, Ronald Inglehart argued that Western societies were becoming so prosperous that bread-and-butter issues would dominate politics less, as people began orienting their politics around what he called post-materialist values. Perhaps he was right, as Americans turn their attention from pocketbook issues to forms of self-actualisation, focusing on what kind of country they want to live in. In this universe, what Trump and Biden represent could end up mattering more than their economic policies.

However, something a little darker may be going on. It may be that Americans see their country’s current moment in the sun as fleeting, dependent on a mortgaged future — and so have concluded that what is at stake is the remains of a declining empire. In that case, the fight may be over what is left after the tide goes out. Politics, formerly a positive-sum game in which everybody got a bit of something, has now turned into a zero-sum game, in which every group believes its gains must come at the expense of another. Thus, with battle lines drawn, the middle ground withers into a no-man’s land.

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In this battlefield, Biden has planted his flag as a friend of the working man against corporate power. For years, Democrats have attracted growing scorn over their elitism and dismissive attitudes to common folk. However, Biden has made it his mission to restore the party’s working-class traditions. The unions seem willing to campaign for him with a vigour they perhaps haven’t shown in a good while. If Biden can stem even some of the party’s working-class erosion, he could make an important dent in the Republican constituency: in 2020, he lost the working-class vote to Trump by a margin of 8%, and the white working class by 32%. Assuming he can hold his core constituency among university-educated Americans, and especially among educated women fired up by Republican campaigns against abortion rights, Biden would only need to claw back a small share of this bloc to retain the White House.

Trump, by contrast, isn’t trying to win over fresh pastures. As the November doomsday approaches, he is increasingly making the election not about his followers or the economy — but about himself. Railing against his enemies, vowing revenge, he speaks less about how he will rebuild their communities and restore their pride than he does about his victimhood. No matter how much his followers might sympathise with him, they may not see how any of this will affect their own lives. Perhaps for that reason, if reports from his rallies are to be believed, the enthusiasm he evoked eight years ago appears to be waning.

It’s early days, but a harbinger of what is to come may lie in the polls and betting markets. Before the campaign became a two-man race last month, both showed Biden’s outlook to be grim. But since the two men locked down their nominations, they have begun narrowing sharply. Trump is still in the lead — but it’s just possible that Biden turns out to be a better finisher. To do that, however, he will need to scrap grand rhetoric to tap into the bread-and-butter concerns of ordinary Americans worried about the cost of living, the security of their jobs, and their opportunities for advancement. He must show how he can improve their lives at the most visceral level. As an indifferent communicator, that won’t be easy for him, though what he may have over Trump is an ability to convey empathy. Compassion may turn out to be his strongest asset.

Faced with the cyclical nature of capitalism, and its tendency to boom and bust, market crashes are now quickly mitigated. After the 1929 crash, it took stocks 30 years to recover; come the 2008 crash, this was down to about six years; the 2020 crash — mere months. In this context, this week’s news of a UK recession might seem less troubling.

We no longer fear busts as the big bad wolves that once threatened to wipe out our life savings. On the face of it, that’s a tremendous achievement. Not only are crashes deeply painful for the people who lose their livelihoods, but with Western countries ageing, an ever-larger share of the population now lives off accumulated wealth, most notably their pensions. A collapse in its value would sharply reduce the living standards of many voters. So it stands to reason that our economic policy-makers would determine above all to preserve what we have before turning their attention to generating yet more of it.

But that achievement may come at a cost — namely, to our future growth. Market crashes don’t just destroy wealth, they create opportunities. As marginal or inefficient firms go to the wall, their customers move to healthier survivors, which can also buy their assets at a discount, expanding rapidly. Or if rents fall, new firms can enter the market more easily.

Softening crashes may dampen such renewal. By preventing firms from going out of business, government bailouts and cheap-credit policies keep “zombie” companies alive, all while maintaining high costs and preventing new competitors from entering the market. The overall productivity of the economy is thus hobbled, which may help explain the long decline in the growth of labour productivity that has characterised developed economies over the last half century. Moreover, with weakening labour productivity diminishing returns on capital, investment in new capital formation has trended downwards, slowing the creation of new wealth.

That creates a challenge. One of the benefits of being rich, both individually and socially, is that people live longer, thanks to better lifestyles and nutrition, improved hygiene and more richly endowed healthcare systems. But longer lives require wealth to keep growing. If new wealth doesn’t suffice, other ways must be found to increase its value. This combination of factors creates an incentive for investors to pivot away from new production and towards assets whose supply can be limited, thereby creating scarcity. One consequence is that anti-competitive practices, which juice profits and inflate asset values but also slow innovation, have become more widespread.

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China's economic plan is bankrupt

By John Rapley

No sector lends itself more readily to anti-competitive behaviour than real estate, where blocking new development is celebrated as a triumph of local democracy. Given the political strength of the property-owning constituency, as well as the importance of real estate to the financial system, governments and central banks can seldom resist further boosting property values, such as through incentives to buy — but not build — real estate. As a result, the share of total wealth accounted for by real estate has risen in Western countries.

Not only has that drawn capital away from more productive activities, but property itself — which, unlike factories or intellectual property, creates nothing — contributes little to raising output. So acute has this syndrome become that several Western countries are now grappling with housing crises amid moribund economies. Whereas in a functioning market, supply would rise to meet demand, that natural flow has been impeded.

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This has dragged down the overall growth rate of the economy, which in Western societies has been trending downwards for decades and is now approaching zero. Here lies a curious inversion. Whereas wealth previously resulted from the accumulation of surplus income in growing economies, and so followed income upwards, today the rule has been flipped. In Western societies, wealth is now growing faster than income, driven not by new production but by policies that inflate it.

But with the growth of income insufficient to preserve wealth amid busts, it falls on governments to save the day. As a result, since the Eighties, the amount that Western governments have spent on fiscal and monetary stimulus during recessions has risen from an average 1% of GDP to 12% at the time of the 2008 financial crisis, and an astounding 35% during the pandemic. Yet while these rapid responses have made recessions less frequent, and less deep, they’ve done nothing to restore the health of the economies. On the contrary, the trend growth rate of Western economies has continued remorselessly downwards all the while.

This raises an interesting possibility. Could we ultimately reach a point where to stay rich, we actually have to block future growth and run down our wealth? Some Western countries have arguably already crossed that threshold. By selling off state assets, or letting them degrade, and then transferring resources to the private sector (largely by restraining taxes), almost all Western governments have been depleting their stocks of public wealth. In Britain, since the 2008 financial crisis, the government’s net worth has sunken steadily deeper into negative territory.

Although the preservation of wealth at the expense of its creation may be an unavoidable consequence of a society that has grown rich, it may also be that the opponents of growth have been abetted by mainstream economic theory. For all the intellectual ferment in the discipline in recent years, economic theory remains dominated by the neoclassical model, so named because of its formalisation — via applied mathematics — of the classical political economy of Adam Smith’s Wealth of Nations.

In the late 19th century, this neoclassical theory modelled itself on theoretical physics and took an atomistic view of the economy as being an aggregation of autonomous, self-interested individuals. Befitting this approach, its Holy Grail became equilibrium, towards which markets moved in small steps at the microeconomic level. The English economist Alfred Marshall declared: “Nature makes no sudden leaps… economic evolution is gradual.” Progressive, incremental and teleological, it followed that this approach would regard the destruction of wealth as a backwards step.

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Since then, neoclassical theory has evolved with an admixture of other influences, and today it applies what’s called the New Keynesian economics. This approach favours targeted, temporary stimulus programmes to smooth out downturns, and celebrates as a great achievement that the 2008 crash ended up having none of the long-lasting impacts of its 1929 predecessor.

But suppose we’d let all those banks crash in 2008. And that instead of rescuing them and re-booting the stock market, the government had nationalised the failed banks and re-distributed their assets to the stronger survivors. Might a period of renewal have then followed? Because there is, in fact, a theoretical school that advocates just that sort of approach.

When economics took shape as a discipline in the 19th century, the neoclassical school was far from the universal position. Although Marshall was clearly aware of the work of his contemporary Charles Darwin, he took little interest in it and rejected biology as a basis for economic theory. But the Marxist school of thought, which Marshall saw as his chief rival, claimed economic progress did not happen in small steps but in historical crises, namely revolutions. Not the search for equilibrium, but conflict, crisis and overthrow led to economic progress.

This tradition of thought, rooted in German idealism, historicism and political economy, was shaped by the dialectic of G.W.F. Hegel and paralleled Romanticism, which itself influenced Marx’s early thought. Possibly influenced by Asian classical thought, which was then working its way into Europe, bringing with it concepts such as the duality of creation and destruction, this approach drew closer to biology than physics. By envisioning societies as living organisms, comprehensible only as wholes, it came to see cycles of death and rebirth as inherent to progress.

This idea continued to inspire economic thought in the 20th century, when Marxism was inverted by the Austrian economist, Joseph Schumpeter. He argued that the resilience of capitalism owed to its ability to create new wealth, a process which nevertheless first required the destruction of old wealth in endless cycles. But this model of economic reincarnation has since dwindled in influence. We do not live now in a world shaped by this worldview, and probably wouldn’t want to. A benefit of our prosperity is that we no longer need to live by the laws of nature. But by interrupting the natural rhythms in the economy, we may have opted for a slow death.