Hosting a World Cup normally confers an enormous advantage. The bookmakers shorten the odds on Germany, Spain, Italy, or Brazil the moment they’re handed the world’s most popular sporting tournament. Yet America’s chances currently sit at 60-1, lagging behind both Japan and Morocco — nations that have never lifted the trophy, from continents that haven’t either. Thirty years after America first staged the event, the world’s richest country is still a long shot on its own turf.

For the diehard US soccer fan, it wasn’t supposed to go this way. In the late Eighties, when FIFA first awarded the tournament to the US, the sport was routinely degraded as “un-American” by the country’s sports media. For decades, commentators had mocked it as a “girl’s sport” played by “skinny boys” too timid for the nation’s manly and militaristic alternative. Meanwhile, the rest of the planet remained equally baffled by America’s ultra-violent, heavily padded “hand-egg” offshoot of rugby.

Until recently, indeed, this mutual incomprehension gave soccer a peculiar charge inside the US itself. For Gen Xers and Millennials, the game felt rebellious and punk precisely because mainstream America neither liked nor understood the allure of fútbol. As for the dullards — so the self-flattering story went — they liked helmet-ball for its very ferocity. Before there was MAGA, there were the Nascar fans who voted for George W. Bush and stuck Dallas Cowboys decals on their lift-kit pickup trucks. They listened to Rush Limbaugh and sports-talk radio and mocked the “snowflakes” who played soccer as they planned their next study abroad trip.

As with all stereotypes, there was indeed something to these narratives. In the early 2000s and 2010s, just watching the Premiership in an American bar felt somehow like flipping conservative voters the proverbial bird. We were a different kind of America, the kind that understood the world beyond our borders. Soccer fans were the hip, educated, urban men and women who appreciated craft beers and flew Real Madrid flags in their backyards. Soccer served as a class marker and culture-war indicator long before it became a national pastime for wine moms and heavily tattooed tech bros.

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As with most of the 20th century, there was a moment when liberal America imagined all this would resolve itself in their homeland’s favor. Shortly after the US reached the quarterfinals of the 2002 World Cup — dispatching not only Mexico but also Luís Figo’s Portugal — it became fashionable to call the country the sleeping giant of world football. Reporting on wannabe American soccer hooligans in the mid-2000s, as I did early in my career, the notion that the US would eventually reach the heights of Brazil and Germany was indeed seductive.

Give the West’s largest nation a sport that was rapidly becoming its most popular youth activity, fold in tens of millions of new Central and South American immigrants, then add the presumed superiority of African-American athletes, and the US was thought to command one of the deepest soccer talent pools on Earth. Once the Bo Jacksons and Deion Sanders of the next generation chose soccer over football and baseball or basketball, so the thinking went, American dominance was destined to follow.

Yet despite the fact that it’s easier than ever to watch the big European games on American TV, this just hasn’t happened. Forget the betting odds: only the most delusional members of the “American Outlaws” club, as Team USA fans style themselves, believe their boys can so much as reach another quarterfinal, let alone lift the World Cup trophy on 19 July. Some perspective is owed here. Only eight nations have ever held the World Cup trophy, so it’s not so surprising that America has failed to crash the party. There are other problems too. The Yanks, for all their wealth and new attention to the sport, still increasingly field a squad of questionable provenance: at least five regular starters were born and raised in Europe, hold EU citizenship or dual passports, and learned the sport at European academies. Major League Soccer, for its part, may have grown from a laughing stock into a genuine business. Yet in sporting terms it remains a fifth- or sixth-tier league — one that attracts the world’s best only as a lucrative retirement home.

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Unsurprisingly, as with everything in the States, these problems come down to money. To see how, it helps to revisit the most ambitious attempt to explain American soccer’s backwardness. Back in 2001, the scholars Andrei Markovits and Steven Hellerman published Offside: Soccer and American exceptionalism framed around Werner Sombart’s famous question: “Why is there no socialism in the United States?” They argued that the same cultural forces kept football marginal. Nativistic Americans, the authors found, prefer individualistic and militaristic games that mirror the country’s political culture. The premise was sharp even if the execution was not. The book often reads as verbose and sluggish where, given the topic, it should have been as brisk as an Mbappé run down the left flank. Who could make a topic like soccer practically unreadable? Academics, that’s who.

In the early 2000s, the scholars’ thesis at least matched the evidence. Now, though, football is popular from sea to shining sea, yet the national team still languishes. Landon Donovan — the finest player the country has produced — recently put the blame on American soccer’s youth system. His complaint centers on the win-at-all-costs mentality that seemingly grips the system. Parents and coaches, Donovan argues, “get obsessed with winning just as much as the coaches do because they’ve been told that’s what’s going to get their child to college and professional — and it’s all bullshit”. In truth, of course, children don’t need to be the next Pelé in kindergarten; they just need to develop a feel for the game that scoreboards can’t reward.

It’s here where the money comes in. Youth sports in America are now a $40 billion industry — and private equity has quietly captured a great deal of it. Firms such as Juggernaut Capital have rolled up hundreds of local clubs into national conglomerates; 3STEP Sports, backed by Juggernaut, controls more than 1,500 events serving more than two million athletes a year. The tactics are the familiar ones of private-equity extraction: junk fees, long contracts, mandatory and expensive travel circuits. What was once an affordable neighborhood activity has been re-engineered into a maximum-extraction machine, with elite youth club soccer now costing many families upwards of $5,000 a year per child.

The footballing consequences are precisely what one would expect. In nearly every successful footballing nation, the sport remains rooted in working-class life: children play informally and constantly, and the most gifted are then handed to expert coaches for technical training. But just as with the country’s dysfunctional healthcare and university systems, American youth soccer puts profits and protection for entrenched bureaucrats first, and outcomes a distant second. It filters for the affluent rather than those with the most ability — the cost of participating has climbed some 46% in just a few years, and lower-income children now play high-level youth soccer at roughly half the rate of their wealthier peers — and then hands the survivors off to mediocre coaches who are rewarded for winning under-12 tournaments rather than developing players to their full potential.

Markovits and Hellerman argued that American soccer developed along totally different lines from the country’s more mainstream sports. Given the tremendous strength of US nativism, early on soccer was seen as dubiously foreign: both in origin and application. (As late as 2014, Ann Coulter was arguing that the growing popularity of soccer reflected the moral decay of the country.) Yet as that early hipster fandom implies, the opposite ended up happening. Study-abroad trips are expensive, and far from becoming a blue-collar pastime like basketball, American soccer ultimately remained the purview of white suburbanites. Though the US has grown the technical capacity to compete at international soccer, those in charge of running our youth system have optimized the program to extract maximum revenue from bougie parents — hardly conducive to honing talent.

Altogether, then, out from the dugout the real American exceptionalism emerges — the nation’s perennial institutional corruption and un-abashed mammonism. The US didn’t fail to fall in love with soccer because Americans hate immigrant games. Over the past 30 years, it did indeed fall in love with fútbol, only to then do to the game what it does to almost everything else, turning a public good into a luxury for the wealthy alone. Soccer might be a sport that’s harder to make individualistic in the way Americans are accustomed to. But, given proper time and attention, the country’s notorious knack for enterprise has found a way of making it as money-grabbingly American as the Superbowl.

A nation that demonizes politicians who promise public childcare — and that financializes childhood itself at every turn — can’t be surprised when it struggles to manufacture world-class strikers. The raw athletic talent is almost certainly lurking out there, in the immigrant neighborhoods and the public parks. It’s just that we’ve built a machine to price those kids out. Then, we wonder, every four years, why the sleeping giant never wakes.

Andy Burnham, who might yet succeed Starmer, has issued his own diagnosis of Britain’s predicament: the “four horsemen” he proffers are deindustrialization, privatization, austerity and Brexit. The first two are simply shadows cast by the elephant trampling across the room; the latter are misguided reactions to the damage it left in its wake. The grey behemoth in question is finance.

Just how broken is Britain, then, and what role did finance play? The “too much finance” argument has fallen somewhat out of fashion since the crisis. But “financialization” — that is, the extent of the growth of the financial sector and financial asset accumulation — remains the central cause of the country’s malaise. It broke the link between corporate profits and productive investment, inflated asset prices and living costs, and hollowed out manufacturing and investment into research and development (R&D), thus leaving the economy structurally vulnerable to the policy disasters that followed the crisis. Now that geopolitics and trade fragmentation have exposed the vulnerability of lacking a domestic manufacturing base, it is worth re-considering finance as the main culprit.

***

The United Kingdom’s relative economic decline and its attendant political dysfunction can be understood as the outcome of several self-reinforcing trends — what economists might call a bad equilibrium — with finance at the center. Where underperformance has been starkest is in the growth of productivity and wages. Data from the Office for National Statistics reveals that, between March 2008 and June 2023, the United Kingdom saw zero growth in real average weekly earnings. By contrast, cumulative real wage growth in France and Germany registered 10% or more during the same period. This astonishing gap is partly the result of a similar trend in productivity growth, which has been poor in both historical and comparative terms. Among the UK’s larger peers, only Italy, bedeviled by deep structural problems and policy failures of its own, performed worse on these measures.

The primary driver of long-term growth is investment, specifically investment into productive assets as well as research and development. This is known as fixed capital formation and includes investment by businesses, households and government. The country’s economic future, principally its growth trajectory and the sustainability of its national debt, depends on present levels of investment being sufficient to drive productivity growth over the long run. And investment decisions depend principally on the expectation of profits. This profit-investment nexus — complemented by public investment in key areas like education, research and infrastructure — forms the beating heart of a healthy market economy. But in Britain, more than almost anywhere else, it appears to have broken down. 

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Since early 1989, private investment has declined dramatically. As a share of gross domestic product, private fixed capital formation and net investment (which accounts for depreciation) are down by 30% and 76% respectively. These are extraordinary figures. The more narrow measure of business investment (which excludes investment by financial corporations, non-profits and investment into housing) is down 51% as a share of GDP from its peak in mid 2000.  

Yet there was plenty to invest: the total surplus in the corporate sector (gross operating surplus, a broad measure of profits that includes the value added after compensating labor but before rent, taxes, dividends and depreciation) has increased fivefold since the mid-Eighties. Where did those surpluses go? The short answer is that finance absorbed them, channeling capital and resources away from productive investment and into financial asset accumulation, shareholder payouts and property speculation.

To understand how this process unfolded, it helps to trace two interconnected stories. The first concerns the deregulatory reforms of the Eighties that unleashed the financial sector. The second concerns the consequences of that expansion: how it distorted the relationship between profits and investment, contributed to the decline of British manufacturing, and left the economy vulnerable to the shocks that followed. Together, they provide a stylized account of how “too much finance” took its toll on the economy.

***

Starting in 1980, Margaret Thatcher and her cabinet enacted a series of deregulatory reforms, beginning with the removal of the credit-rationing “Corset” to allow banks to create credit freely. Other reforms such as the Housing Act 1980 (which included the infamous Right to Buy) and the Local Government, Planning and Land Act 1980 created a large surplus of public land that could be privatized and transformed into financial assets. If 1980 created the flow of money and assets, 1986 created the mechanism to intermediate it. The “Big Bang” in October of that year was the watershed moment: the reform of the London Stock Exchange resulted in the removal of fixed commissions, the introduction of electronic trading and the opening up to foreign banks. It also changed the nature of the domestic financial system in a way that would prove highly consequential. 

By the late Eighties, London had already become the center of the global “offshore” dollar market, acting as the neutral and lightly regulated clearing house for international capital. This sat at odds with its hamstrung banks and exchange: Japanese or American banks in London couldn’t trade equities with the same ease with which they could trade currencies. This was despite the fact that there was no formal separation of commercial banking and merchant banking as there was in the United States. Previously, British banks were prevented from acting in both capacities by tradition, the Bank of England’s “eyebrow” — and by the very rules that were amended in 1986. The liberalization of the domestic market allowed banks to act in “single capacity” and enabled the City to accommodate and integrate the rapidly expanding presence of global finance. The decades after 1986 would see foreign owners continue to pour into UK financial assets: above all, housing.

The reforms were enacted to arrest the City’s declining competitiveness relative to Wall Street. But they were also, implicitly, a bet on a particular model of growth: one that prioritized financial services over the country’s traditional strengths in manufacturing, which was already under severe pressure from global competition and the recession of the early Eighties. The reforms’ architects, chief among them Nigel Lawson, chancellor between 1983 and 1989, expected that a larger and more dynamic financial sector would reinvigorate the British economy. Indeed, the reforms turned out to be highly consequential — just not in the way Lawson expected. “I didn’t give it a great deal of thought at that time,” he would later say about 1986 and its consequences. 

Whatever was left of manufacturing at this point was walloped by the subsequent exchange rate consequences: the capital inflows into sterling assets strengthened the currency, making sterling-denominated goods exports uncompetitive. The other immediate consequence was a build of catastrophic financial risk, resulting in the aptly-named “Lawson Boom” later that same decade, and, ultimately, the 2008 crisis. More consequentially for the real economy, however, the reforms produced a set of incentives that made holding and trading financial assets consistently more profitable than investing in productive capacity. In a financialized economy, simply sitting on assets, such as property, equities or financial instruments, could generate higher returns than expanding production lines or product innovation. The result was a stagnation of the productive sector. 

***

In the years leading up to the 2008 crisis, the financialization of the British economy had a direct and measurable impact on the relationship between corporate surpluses and investment. That is: when companies made a profit, much of that profit went straight into finance. The share of the private sector’s surplus that accrued to financial corporations grew from 7.7% in 1986 to 16.9% in 2007. This change in the sectoral composition of the economy reflected an enormous misdirection of resources and misallocation of capital. Since British equities were volatile during the period, property became the favored asset class from the mid-Nineties onward. The financial sector itself facilitated this process. The composition of bank lending shifted dramatically: the mortgage share of total lending rose from around 30% to 65%. Instead of supporting productive investment, credit growth largely financed the acquisition of property assets.

How did this process unfold over time? In the early Nineties, the returns gap between financial assets and productive capital was reinforced by the poor economic conditions that followed the Lawson housing bubble and the European Exchange Rate Mechanism crisis. Household demand was crushed and unemployment climbed to over 10%. Real wage growth across the decade slowed to 1.6% annually, from 4.4% in the Eighties. With domestic demand and therefore profits weak, the incentive for productive investment was further diminished. At length, the recovery of both property prices and real wages after 1997 started to close this returns gap. Nonetheless, the profit-investment relationship did not reassert itself. The gap had been large enough for long enough to cause a structural break, permanently altering the incentive structure of the British economy. So, even when conditions improved, the structural malincentives created by financialization remained. As a result, the economy-wide share of private net investment continued to fall. 

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It was not just financial asset substitution. Firms increasingly used profits for share buybacks, to pay out dividends and to hoard cash — extracting value from the productive economy rather than reinvesting in it. The extent of shareholder value extraction is remarkable: dividend payout ratios (the share of net income distributed to shareholders) rose from 30-40% in the Seventies to 60-70% by the 2000s. This was devastating for precisely the kinds of long-term spending on which future growth depends. R&D is the easiest budget item to cut when shareholders demand short-term returns, and Britain’s R&D intensity suffered accordingly. Masking the underlying weakness were “wealth effects” — rising property prices made households feel richer — and an expansion of household debt to sustain consumption. This mask of credit-fueled growth slipped off in 2008. After the crisis, the financial sector’s size and returns on financial assets more or less flatlined.

But the damage had been done — and the underlying problems persisted. Financialization had shifted the composition of total surplus towards finance, a sector with inherently low capital investment needs compared to manufacturing. In relative terms, this reduced both the overall level of fixed capital formation and R&D spending, which is overwhelmingly concentrated in the manufacturing sector. The result is that Britain lags relative to peers like Germany, where manufacturing still comprises just under 20% of economic value creation. Every year of stagnant R&D spending makes this gap wider and harder to close; the cumulative damage to the country’s future potential to innovate is enormous. Britain’s financialized economy also misallocates human capital: financial workers capture 60% of top income decile gains while comprising just 5% of the workforce, drawing talented individuals away from engineering, research, medicine, education and public service. 

***

In this way, the economy’s resources — capital, labor and institutional attention — have been directed away from productive activity. This redirection explains the long-term structural trends in the British economy. But to account for the drastic worsening of the productivity and wage growth trends after the crisis, we have to look at policy. Burnham was correct to identify austerity and Brexit as two of the apocalyptic horsemen. But the reasons they belong on the list have to do with how they worsened the structural obstacles to investment created during the financialization era. Whatever industrial growth might have been possible after the eclipse of finance’s dominance was wrecked on the shores of these grand and unforced policy errors.

The fiscal consolidation program of the Cameron-Osborne era consisted almost entirely (80-85%) of spending cuts, and disproportionately hit public investment, infrastructure and R&D-enabling spending. In the first three years, capital spending was cut by nearly a third in real terms and public investment was pushed down to its lowest levels since the Sixties. By any measure, this was one of the most sustained, and in its cumulative effects severe, austerity programs in modern history. What sets it apart is that it was voluntary: the UK had its own currency, its own central bank, ultra-low borrowing costs throughout and faced no market pressure whatsoever to consolidate at this pace. Yet it did so in a front-loaded fashion between 2010 and 2013, just when public spending was most needed and cheapest to finance.

This matters not just for demand. Public investment is not a substitute for private investment but complementary to it: spending on infrastructure, education and research all raise the expected returns to productive investment in the corporate sector. At the same time, average real wages experienced their longest sustained fall since at least the Victorian era. Why would firms expand if there is not much growth in demand from consumers? And why should they invest in labor-saving (that is, productivity enhancing) processes and technologies in the absence of sustained wage growth? The broken profit-investment nexus, already weakened by decades of financialization, was now further undermined by deliberate policy choices.

The pressure on both real wages and investment started to ease in 2013 and 2014: austerity tapered off while a lower oil price and a stronger pound lifted some of the cost pressures. Brexit snuffed out this nascent recovery halfway through 2016. Since then, the net investment share of GDP reversed course and has not found its way back. It remains well below its 2007/08 levels. By some estimates, Brexit accounts for something like a third of the total growth shortfall that has accumulated since 2016, with the investment channel accounting for the largest single component. Real wages recovered only during the pandemic, when labor shortages and a churn in hiring restored the long-term trend.

The answer to “who broke Britain” must therefore include the governments between 2010 and 2016. Austerity seems to have been informed by the notion that the drag on competitiveness and productivity was the size of the welfare state, whereas Brexit assumed the panacea was remaking Britain’s trade and regulatory relationship with Europe. What these policies reflected was a failure to diagnose what was actually ailing the British economy and a thoughtless, almost frantic administration of the wrong treatments. This is strangely reminiscent of actions of Britain’s elite in the Eighties: overreacting to their own post-imperial decline by defenestrating industrial production, betting the house on finance — and losing.

***

The extent of the mess is such that Britain will likely not be restored to the ranks of the world’s great industrial countries. That privilege belongs now to the late industrializers in East Asia, all of which kept finance in check. But a plan to fix Britain does not require reindustrialization to that extent. Manufacturing’s share of economic output has declined across all advanced economies, who also underwent varying degrees of financialization. What distinguishes them from the UK is the extent to which this process has taken hold and to which it has created a reliance on financial services. Apart from gradually cutting this sector to size, it is not clear how this process can be reversed without a large public concerted investment program: in infrastructure, in education, in the energy transition — all designed to raise aggregate demand and the expected returns to private capital formation. 

But given the British economy’s unusual tendency to generate inflation, as well as the sensitivity of sterling and government borrowing costs to fiscal signals, any sizable public investment program would require a more accommodative central bank, one willing to support larger fiscal commitments rather than reflexively tightening against them. The Bank of England, however, seems more concerned with the interests of the financial sector, which favors stable prices and fiscal prudence. The policies of successive British governments too have reflected these priorities: the financial sector’s weight in the British economy is not just an economic but a political fact. It shapes the incentives of policymakers, the structure of the tax base, and the terms on which Britain engages with the rest of the world. 

It won’t be easy to eradicate the pro-finance bias. But starting with the right diagnosis is crucial. The intensity of Britain’s economic malady relative to that of its peer countries is not about trade relationships or welfare spending or European regulations. It is a particularly unfortunate child of the neoliberal turn, whose main macroeconomic legacy has been the rise of finance and the steady erosion of productive investment despite burgeoning profits. It would be politically expedient to point out that countries who have been able to insulate themselves from the worst effects of this era, chief among them China, are in a position to determine their external affairs autonomously. In the “post-neoliberal” era, then, the first step to “fixing” Britain should involve accepting that the City of London’s status as a global financial center, far from being the crown jewel of the British economy, has come at an enormous cost to the country’s productive capacity and, ultimately, to its sovereignty. 

It’s the kind of bet that Nathan Detroit might call “very big potatoes”. But for the tech barons, it’s nowhere near big enough. Meta, Alphabet and Amazon announced earlier this month that they needed to raise more than $600 billion this year to fund spending on AI data centers. And although Elon Musk’s xAI raised $20 billion in December, he’ll need far more if he wants to remain competitive. Hence his proposed IPO this summer, when he’ll invite millions of ordinary people to finance the “Muskverse”.  

Much of this money is being spent on building vast, energy-guzzling data centers to power the smarter-than-human machines. Such infrastructure will be vital for any tech oligarchs hoping to win the war for AI dominance. “We have decided,” said OpenAI boss Sam Altman in October, “that it is time to go make a very aggressive infrastructure bet … But to make the bet at this scale, we kind of need the whole industry, or a big chunk of the industry, to support it.”  

Now that tech giants are raising and spending other people’s money, how confident can investors be of getting repaid? The truth is companies such as OpenAI are likely to run out of cash before their tantalizing new technology produces profits. That is why, having used up their own voluminous supplies of cash, AI companies are now being forced to borrow, or go public — with no certainty that the billions of dollars invested will generate revenues sufficient to compensate millions of small-time investors. Last November, Big Tech stocks sold off sharply as shareholders balked at what the Financial Times called “the gargantuan capex plans” of Silicon Valley tech bros, and worried that their investments were unlikely to generate a return.

Big tech gamblers have deceived us before. After all, it was not long ago that we, the trusting public, were offered an equally enticing product: the internet. The original internet wasn’t just a network. It was meant to be a nervous system for humanity. A decentralized oracle. A library of Alexandria that no empire could burn. “Information wants to be free,” we were told. “No one owns the net — it belongs to us all,” we believed. 

Their promises turned out to be false. Instead, the internet has become utterly enshittified. There are few platforms or devices whose user experience has not degraded.  

Nor was it long ago that Mark Zuckerberg made a bet of more than $100 billion on the “metaverse” — a virtual-reality world to which he was so committed he changed Facebook’s branding to Meta. Yet now it seems that bet is off. As financial journalist Robin Wigglesworth noted: “The whole metaverse thing now seems to be completely memory-holed by everyone — including Zuckerberg himself.” As of the end of 2024, the cumulative losses suffered by Meta’s Reality Labs division stood at $68.9 billion. Big potatoes indeed. 

It seems that AI, too, is on the path to enshittification. Last October, Altman announced that, as part of OpenAI’s “treat adult users like adults” principle, the company would be allowing erotica on the platform. Now, he’s gone further. Because AI is expensive to run, OpenAI has started testing advertising on ChatGPT. Zoë Hitzig, a former researcher at the company, resigned over the issue last week. In a New York Times article, she warned that: “For several years, ChatGPT users have generated an archive of human candor that has no precedent, in part because people believed they were talking to something that had no ulterior agenda … People tell chatbots about their medical fears, their relationship problems and their beliefs about God and the afterlife. Advertising built on that archive creates a potential for manipulating users in ways we don’t have the tools to understand, let alone prevent.” 

The extraterritorial, largely unregulated space in which tech billionaires wheel, deal and speculate is defined by economists as the “international financial and monetary system”. I, however, in the spirit of J.M. Keynes, would call it the “Global Casino”. Tech titans are joined in this space by big corporate and individual speculators in the Casino’s markets for money, food, energy and pensions, and by an unregulated shadow banking system that spews out easy, if shady, money.  

Though the Casino operates in an unregulated sphere, it remains tethered to the real bailout economy that the rest of us — the “little people” — live and work in. If the Casino goes down, central banks will have to bail it out. The gamblers know, as we do, that they are too big to fail, and too big to jail. 

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Of course, capitalism has always produced daring, creative risk-takers — those who dreamed of, invested in and built the railways, computers and the internet. What’s different today is that unlike railways, computers and the internet, AGI doesn’t exist. The AGI bubble may just be a vast techno-dystopian power play designed to put Silicon Valley bosses in political and financial control over a weakened global labor force. This is class war at its most brutal.

The Casino’s activities have already had a damaging impact on the real economy, and ignited a global political backlash. To my mind, it is the volatility, instability and imbalances of the Global Casino, rather than wages or the pandemic or even Big Tech, that is largely to blame for the ongoing cost-of-living crisis endured by most of the world’s economies since 2020. It is the Casino’s speculative global markets for agricultural goods and energy that have led to volatility in the prices of key commodities, and that in turn has driven up the cost of living. That has led to a worldwide clamor for protection from markets that deny consumers affordable food and energy, and in some countries affordable housing, health and education. Voters are increasingly turning to authoritarian leaders who promise to protect the public from the out-of-control Global Casino and the system’s attacks on living standards. 

To restore stability to the global economy, and protect consumers from Big Tech, we must bring the Casino back down to earth and comprehensively transform the international financial architecture. This may be a grand ambition, but in the event of another global financial crisis, or even a catastrophic world war, it will be a necessary one. 

In the meantime, we must address the problem of speculation. It’s hardly a new phenomenon. For centuries people have gambled on future outcomes. For much of that time, the most honorable purpose of speculation was “hedging” — a form of insurance to deal with the uncertainty of the future. Judges, courts and the law have long recognized that there is a difference between hedging that serves a social purpose and hedging that is mere speculation. Speculation increases risk, leading to price bubbles, volatility, manipulation schemes and inflation — all characteristics of the AI bubble. In its worst form, it must be understood as rent-seeking: the attempt to acquire wealth not by creating it but by effortlessly extracting wealth from another.

Harvard Professor Lynn Stout suggests that we return to an older system. “The old common law rule against difference contracts was a simple, elegant legal sieve that separated useful hedging contracts from purely speculative wagers,” she argues. Under this system, the law would no longer be used to enforce the terms of a speculative contract if it were broken. 

This reform would bring speculators — and tech billionaires — back to reality and force them to think carefully before making bets at scale by inflating bubbles and encouraging speculation that cannot be honored by reference to real-world conditions and law.

While markets appeared to shrug off Sunday’s events quickly, a surprising number of people came out in support of Powell. Central bankers across the world rallied behind the Fed Chair, but even fervent critics of the notion of central bank independence, an ideological cornerstone of neoliberalism, made their case. “I’m seeing actual communists on my timeline backing this,” one Harvard student commented, “this might be the most unified the online left-of-center has ever been.”

Such a reaction is at odds with the widespread populist anxieties about technocratic overreach that marked the 2010s, when independent central banks, already far outside the purview of democratic control, were gradually expanding their originally narrow remits into highly political territory without further accountability or oversight. But now the renewed tension between Trump and the Fed has rekindled debates about the unelected power of monetary policy makers in democratic societies. In this context, it is worth recalling how central bank power evolved — and that formal “independence” may not be that important.

Half a century ago, central banks had a relatively limited role: they supported government policies and acted as a “lenders-of-last-resort” to banks. This changed drastically at the dawn of the neoliberal era in the late Seventies, when high inflation prompted a sea change in monetary policy. The subsequent decades saw the financial sector grow to envelop the world economy, greatly expanding the scope of central bank responsibilities and the importance of targeting inflation (a euphemism for preserving the value of financial assets). Full “operational independence” is a product of the Nineties, but even then central banks required cooperation from their respective states. And in the relative stability in the world before the financial crisis, this arrangement suited both.

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After 2008, two things happened that spelled the end of this compromise. Firstly, governments reneged on their end of the bargain and ceased cooperation by conducting long grinding austerity regimes, putting the onus of stimulating the economy on central bankers. Secondly, and most importantly, large parts of the financial sector not only grew and consolidated but became dependent on low interest rates and regular liquidity injections through central bank asset purchasing programs such as quantitative easing (QE). As a result, the central banks became “lonely stewards” of the economy: using elaborate means to fend off deflation while incurring blame for stagnant growth, increasingly forced to overstep their mandates while provoking political backlash for doing so.

Populist critiques of neoliberal technocracy flourished in the post-2008 era. But when it comes to central bank policies, most of the objections have been rather baseless. Across the new Right — from the AfD to Curtis Yarvin — there is a stubborn notion that central banks have debased currencies and created inflation, with some vague gestures towards the money supply and low interest rates. Some of these critiques are hard to take seriously, given how the same MAGA types stand firmly behind Trump as he hectors Powell to lower rates. The view on the populist Left, perhaps most competently expounded by Yanis Varoufakis, is that independence is a pretense and somehow both “an antidemocratic travesty”, placing political decisions beyond democratic accountability, and at the same time “entirely at the mercy” of governments wishing to impose deflationary policies.

Not only was inflation persistently low throughout the 2010s (frustratingly, given inflation would have rendered the repayment of large stocks of public debt cheaper in real terms), but QE and other unconventional monetary policies”, almost certainly didn’t inflate asset prices, even if they kept them from falling. The impact of these policies on bank lending and investment ultimately proved negligible. And while it is undeniable that low interest rates produced redistributive effects favoring the wealthy, in lieu of sufficient government stimulus programs, this was the price of preventing a new financial crisis and of the persistent decline in unemployment rates all the way to the pandemic. What is more, the “normalized” interest rates after the 2021-2023 inflation surge have hardly put a stop to runaway asset prices and epic financial grift.

What really happened during these years has little to do with the autonomy of central bank technocrats. In fact it was a grand failure of fiscal policy and permanently depressed investment, exacerbated by steady worsening of inequality and affordability crises on the back of asset price growth. The attendant economic stagnation bred the economic populist backlash that made the confrontation between elected leaders and technocrats inevitable.

This political dynamic seems to have led us to overstate the relevance of formal independence. If the last decades have shown anything it is that independence has always been a convenient political construct, not a subordination of sovereign decision-making. What matters is everything around it: accountability, transparency, operational quality (staff and research), coordination with the fiscal authorities, etc. It is tempting to think of central banks as the guardians of a room which contains the levers of the economy which can be yanked by politicians in the service of short-term electoral gain. There is, however, no strong established relationship between a central bank’s formal status and the soundness of its monetary policy choices, nor, as it happens, between monetary policy and inflation outcomes in general. Jerome Powell himself has conceded that over the last decades the Fed’s monetary policy was too restrictive on balance.

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The developmental miracles in East Asia provide another example of why independence is not the key variable. During their main growth periods, Japan, Korea, Taiwan and of course China all completely subjugated their central banks — while experiencing modest inflation and historically unprecedented and lasting growth. In all cases, it was domestic banks and the mobility of inbound capital that were strongly curtailed. It turns out that what mattered was boxing in finance. Those who departed from this arrangement, such as Japan in the Eighties, collapsed into financial turmoil. And the reason why Japan has maintained some of the highest living standards in the world is largely due to the innovative and now fully independent Bank of Japan supporting the government’s fiscal policy.

When it comes to autonomy from political influence, then, thinking about central banks may not be fundamentally different from thinking about other government agencies. The incompetence of a central bank no more invalidates the concept of statutory independence (with appropriate oversight) than the repeated fiscal policy failures of elected governments invalidate the concept of electoral democracy.

What matters is not independence but power. We tend to think about power in the context of competing strength. But the relationship between central banks, states and financial markets has shown that, in a crisis, strength can derive from weakness and vice versa. As political economist Cornelia Woll has argued, the apparent “weakness” of financial markets and states (their dependency on central banks) is their strength in that it allows them to force the central bankers’ hands.

Discussion of Powell’s clash with Trump misses the mark in another way too: the Federal Reserve is not just any central bank. To call it such is like calling Citizen Kane a film about a newspaper owner. As the sole issuer of dollar reserves, the Fed sits at the apex of a global economy in which the dollar is the main currency for trade invoicing and funding. Almost everyone transacts and borrows in a currency they neither earn nor issue. In times of crisis, they fully depend on dollar liquidity extended by the Fed to their respective central banks. During the financial upheavals of 2008, and particularly 2020, the so-called “dollar swap lines” were part of how the Fed averted total disaster.

This status quo greatly augments the power of the Fed, and, with it, the geopolitical leverage of the American government. This very much implies that Trump’s desire to replace Powell could be about more than accommodating the effects of his domestic policies. As economist Mona Ali has pointed out, the stakes of the Powell–Trump clash may be less about domestic rule-of-law versus presidential mobsterism than it is about executive control over the levers of global financial hegemony. Of course, it could be argued that US financial coercion isn’t what it used to be; the relatively ineffective sanctions regime directed against Russia over the last years showed as much. Then again, the beneficiaries of the standing and unlimited dollar credit lines from the Fed are America’s partners in Europe and Asia-Pacific, as well as Canada, Mexico and Brazil. Thus, there is a direct link between Trump’s desire to take over the Fed and his tendency to browbeat and coerce US allies, a tendency growing more pronounced in light of China’s apparent victory in the trade war.

American financial power, though, depends on a constant need for dollar assets: not just by the global monied elite but also by banks, firms and other entities that have dollar liabilities. The most obvious way to get dollar liquidity when you need it is to sell off your dollar assets: stocks, bonds, etc. Such runs on the dollar have become more frequent in Trump’s second term, as we saw after his Liberation Day in April (when he first announced his tariff system) and, a month later, after the US credit rating was downgraded. Over the last year, the United States has looked less like a hegemon and more like an emerging market, facing persistent capital flight and a dollar that is losing ground to virtually all major currencies. The primary purpose of the Fed’s swap lines is not charity but to de-risk the US financial system by preventing exactly such sell-offs of dollar assets and the spillover of financial risk from abroad.

The irony is that Trump risks undermining the very power he seeks. Perhaps because he misidentifies its source. Anyone who professes to care about unelected power, should be struck not just by the Fed’s untenable influence over the fate of billions, but by the fact that it is itself ultimately shaped by its deep structural dependence on the global financial system. In a pinch, the interests of banks win out over those of the public.

In view of all this, fears over central bank independence and technocratic overreach seem awfully misplaced. If discretionary economic policy-making is central to how we think of democracy and national sovereignty, then what raises concern is the aggrandizement of unaccountable power by an authoritarian executive and by international finance. These should be the focus of populist ire. Everything else is a distraction.

In real life, though, it was so much worse. The highly leveraged bets placed were in the billions, not millions, and the banks turned them into products which they would then sell on to naive investors. From the outside, these products looked just like a safe government bond. But, in reality, they were toxic — just like the three-day-old seafood stew metaphor that Anthony Bourdain cooks up in another scene from the movie.

If there is one thing that everybody should remember about the global financial crisis, it is this: complex financial products, especially the three-letter acronym ones, serve one purpose — to defraud. The only financial advice I ever dished out during my previous career as a financial journalist was that when you meet a three-letter acronym, run fast.

You might have thought that the calamity of that relatively recent crisis would have put an end to these scams. And in one respect it did: banks no longer use them. The problem is, governments do. And the three-letter acronyms are back. We saw this only last week, in Brussels, where EU leaders were on the brink of agreeing on a €150bn loan to Ukraine. That the plan fell through was because Bart De Wever, the Belgian Prime Minister, looked at the small print of the agreement. When he discovered that his country would be most exposed by the loan, he asked the others to share the risk. They said “No”. So he said “No”.

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I am sure the EU will find a way to change De Wever’s mind. And if it is good at one thing, it is at getting people to agree to something they don’t want to agree to. Certain readers might think this would be a good outcome: Ukraine needs the money to defend itself against an evil aggressor. But let’s first take a closer look at the small print of this special purpose vehicle — also known by the three-letter acronym SPV — or “reparations loan”.

After Russia’s invasion of Ukraine, the EU froze some €200bn worth of its assets. Most of that money is sitting in Belgium, with a financial company called Euroclear. This is not an ordinary bank, but a depository, where governments and central banks around the world hold their assets.

Originally, some member states wanted the EU to sequester the Russian money outright — to literary take the money and give it to Ukraine. But this would have been a big legal and financial risk. Foreign courts would have declared the confiscation illegal and forced Euroclear, which has offices around the world, to compensate Russia. And since Euroclear is headquartered in Belgium, the Belgian government would have been the ultimate guarantor. So the EU devised a scheme very similar to the subprime scam 20 years ago — a scheme with the sole purpose of hiding the risk, to make it impossible for foreign law courts to get their fingers on the money. No wonder De Weever was antsy.

Here’s the small print. Step one, the EU creates an SPV — a special purpose vehicle — essentially a reparations loan to Ukraine based on the Russian assets. This means that the frozen Russian money is not physically moved; it stays in the frozen bank account at Euroclear. But the SPV holds a claim on those funds. In step two, the European Commission would issue the debt, which would be guaranteed by the member states. This money is then put into the SPV. In step three, the SPV then gives out a loan with this European money to Ukraine.

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Ukraine gets the money. But can’t afford to pay it back. Everyone knows this. A bank would call this bad-faith lending. It is exactly what happened during the subprime crisis, which started with teaser rates on mortgages. The banks knew that once those rates reset, people could no longer afford them. Under the cover of the SPV, the idea is that Ukraine would repay the loan after receiving war reparations from Russia, which, as we know, is never going to happen.

Let’s return to our movie scene and consider the people in the audience who placed their side bets on Gomez winning her game of Blackjack. In the jargon of finance, their side bets would be called a derivative — something which derives its value from an underlying bet — in this case a Blackjack game. Back in the real world, Europe’s gamble with the Ukraine loan is just as risky. Essentially, the success of the EU’s bet lies on the outcome of a future legal case — that an international court will commit Russia to war reparations, while also declaring our SPV scheme to be legal. So we are betting on the outcome of a legally unprecedented case at an uncertain point in the future. It’s no different from placing money on the outcome of a Blackjack game. Remember all these expert opinions that told us the subprime mortgages were safe? Beware!

But in many respects, this is much worse than the subprime crisis. When Lehman Brothers collapsed in 2008, governments bailed out the banking system, and central banks printed vast quantities of money to keep the world economy afloat. This time, though, it’s the governments themselves who are engaging in these dodgy transactions. They want to dish out a loan of some €150 billion without having to get approval from anybody. And if it fails, who is going to bail them out?

Inevitably, if the EU loses the legal bet, they will have to pay out themselves — with member states first in line. They are the guarantors of the loan. As a result, when the Russians “default” and fail to pay war damages, the losses will fall to the European taxpayer — another parallel with the subprime crisis. But back then, the banks concealed the risk from the investors. Here, the politicians are attempting to conceal the risk from the voters.

They are doing so because they have run out of political support at home. The former German Chancellor Olaf Scholz said German voters would never finance Ukraine if it meant they had to sacrifice domestic spending. I think this is probably true of France and the UK as well — not that they would admit it.

France, hovering on the verge of a debt crisis, spends almost nothing on Ukraine. The UK and Germany are the biggest contributors, but even together they can’t begin to fill the gap left by Donald Trump’s decision to cut America’s support for Ukraine to the minimum. Trump will supply weapons only for as long as the cash-strapped Europeans pay for it. But as the latest statistics from the Kiel Institute Ukraine Support Tracker attest, there has been a sharp fall in Western military support for Ukraine. It has fallen from an average monthly spend of just under €4 billion in the first half of the year to a little over €2 billion in July and August. This is entirely due to lower spending by Europe. Essentially, to keep the war going, the Europeans need to implement their dodgy scheme. Their €150 billion loan to Ukraine should keep the show on the road for another year.

But then what?

The Europeans still have no strategy for ending the war, yet Vladimir Putin has good reason to believe he can achieve his military goal of occupying the entirety of the Donbas region. He outspends the West, he has a lot more troops, and he has made some progress recently. Given Ukraine’s formidable defenses, it might still take him another year or two, but the odds are in his favor.

If, then, Putin prevails, the peace talks will not only be about the land and the post-war security arrangements. The Russians will want their confiscated assets back. I don’t think for a moment that the Europeans would blow a peace deal by refusing them. So Putin will get his money. And the European taxpayer, who never approved these loans in the first place, will have to pay out.

The EU’s too-clever-by-half scheme will end up like all those other dodgy three-letter financial schemes — with voters being forced to eat Brussels’ toxic seafood stew.

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.

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.

Stablecoins are the bastard child of parents seemingly at permanent odds with each other: the libertarian crypto community and statist dollar worshippers. Built on the blockchain technology that was meant to dismantle the financial oligarchy (Wall Street and the Fed), stablecoins are nevertheless fastened by a 1:1 exchange rate to that same oligarchy’s greatest totem: the US dollar. The result is a purportedly apolitical money joined at the hip with the most politically dominant form of money.

Stablecoins were conceived as the best of both worlds. While devoid of Bitcoin’s hideous volatility, they nonetheless preserved the freedom to transact anonymously and globally — unseen by any government. Setting aside their utility for mafia types, who naturally crave any means of payment that lubricates their trade, stablecoins have been a godsend for people in countries with fragile monetary systems, especially in Africa. Besides providing those without a bank with ready access to a proxy for the American dollar, stablecoins offer a way to wire money abroad that is immune to US sanctions and more reliable than rickety inter-bank messaging systems (e.g. SWIFT).

In short, for as long as governments ignored stablecoins, they did considerable good and could not do much harm. However, now that the Trump administration is weaponizing them for its own purposes, their potential for serious damage has risen exponentially. The combination of two executive orders that President Trump issued (one on 23 January 2025 and another on 6 March 2025) and now the Genius Act is turning stablecoins into a massive time bomb deep in the foundations of the global economy.

Today, the dollar value of circulating stablecoins is around $250 billion. For that sum to be backed with sufficient reserves, it is estimated that last year issuers purchased $40 billion of US Treasury bills, more than any foreign buyer of Treasuries during 2024. In the same year, the stablecoin issuer Tether alone reported annual pre-tax profits of $13 billion — not bad for an offshore company employing around 100 people.

As for the number of crypto wallets with stablecoins, last year there was a jump from 27 million to 46 million while transactions climbed 84%, from $752 billion to $409 billion. Already, stablecoins account for around 80% of all crypto transactions.

Such rapid growth could only encourage the very financial establishment that crypto was originally meant to disrupt. Behemoths like Visa and Stripe are jumping on the bandwagon, and Big Tech is set to follow, seeking revenge for how Wall Street elbowed it out of payment systems. Even Uber, eager to keep more money currently seeping from its ride-hailing platform to the financiers, is developing a fully-owned cross-border stablecoin.

Well before the Trump administration had stepped into the fray to boost them with the Genius Act, Standard Chartered estimated that stablecoins in circulation would increase eight-fold, topping $2 trillion by 2028. The question then is why are Donald Trump, JD Vance and their MAGA brethren hellbent on boosting stablecoins further?

Besides the obvious self-enrichment motive, the more interesting explanation is that stablecoins fit in nicely with the Trump administration’s goal of shrinking global trade imbalances to “Make America Great Again”. Nothing motivates these people more than the idea that what is good for their bank account is good for America.

Team Trump has made its intentions clear: to devalue the dollar and shrink America’s trade deficit, while preserving its dominance by using the threat of tariffs. Stablecoins have a key role in this plan. Suppose, for instance, Japan were to be bullied into using a considerable portion of its $1.2 trillion holdings to buy dollar-denominated stablecoins. The dollar’s aggregate supply would rise, devaluing the dollar. The stablecoin issuers would use the dollars it receives to buy Treasury bills, thus reducing the US government’s borrowing costs and, in the process, bolstering dollar supremacy. In the words of JD Vance, a greater stablecoin uptake will be “a force multiplier of our economic might”.

But stablecoins pose systemic risks that Team Trump would be wise to not ignore. Stablecoin issuers stand to profit from issuing more tokens than the dollars they collect or from purchasing relatively illiquid (but higher interest rate yielding) securities. When stablecoins were small fry (e.g., when in 2021 New York regulators fined Tether $21 million for undisclosed irregularities regarding its reserves), the threat of dodgy reserves was too small to lose much sleep over. However, as stablecoins exceed the $2 trillion mark, the risks could become greater than those posed by subprime mortgages in 2007.

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As dollars migrate from US domestic bank accounts to stablecoins, demand for Treasury bills rises and their yields fall. Banks must raise their interest rates to stem this outflow while the Treasury must issue more Treasury bills to satiate the greater demand for them. A wedge suddenly appears between different types of interest rates: bank and long-term Treasuries’ rates rise while short-term Treasury bill rates fall causing the so-called yield curve to become steeper — a sure sign of financial instability.

In 2023, Circle — the issuer of USDC, the second largest stablecoin — had entrusted $3.3 billion of its reserves to the Silicon Valley Bank (SVB). When the latter tanked, a run on USDC began severing its dollar peg. Had the Fed not stepped in to bail out SVB, Circle would have been toast. That little incident now seems like a walk in the park given the US Treasury’s prediction that, in the new climate shaped by the Trump administration’s crypto peans, and the Genius Act, $6.6 trillion of US bank deposits are in the process of migrating into stablecoins.

Wall Street is keen to use blockchain-based technologies for speeding up, securing and reducing the cost of trading securities — to disrupt the traditional rickety system of trading securities in the same way that stablecoins are disrupting SWIFT. But, to shift the trading of shares, bonds, derivatives and assorted exotic financial contracts onto a blockchain, the contracts and the tokens must be inserted into the same blockchain. This means that an arms race is now on to determine which dollar-backed stablecoin dominates the securities’ trades. Once the answer is in, its usage is bound to go through the roof. But the moment the private company that issues this stablecoin gets into hot water, the entire stock market along with the $29 trillion Treasuries market is in peril.

What happens if a stablecoin issued outside the United States crashes? Non-US institutions, including European ones, lack access to Fed rescue mechanisms. Will the Trump administration offer them the Fed swap lines that kept European banks alive in 2008? It is doubtful. Thus, dollar-backed stablecoins issued in Europe, Asia, Africa or Latin America risk exporting financial fragility globally. Even the European Central Bank is panicking at the prospect of having to find dollars to bail out European holders of dollar-denominated stablecoins.

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In the meantime, developing countries face a trilemma: ban stablecoins (forfeiting its substantial benefits), create sovereign alternatives, or accept deeper dollarization. China, armed with its digital yuan, sensibly opted to ban stablecoins outright, shielding its financial system. Yet its $4.5 trillion in dollar reserves poses a dilemma — dumping them aids Trump’s dollar devaluation, while holding them risks exposure to US-driven volatility. The Brics’ preparedness, nevertheless, contrasts with most economies, trapped between dollar dependence and destabilizing crypto experiments.

And so the Genius Act is hard to fault — if the intention is to maximize the threat of a financial meltdown. Essentially, it weaponizes stablecoins to privatize money and effectively outsource dollar dominance to Trump-friendly tech lords.

Proving their endless inanity, many Democrats supported this legislation, lured by two promises. First, the Act will protect their chums in Wall Street with a preposterous ban on stablecoins that pay interest. Second, the Act will supposedly regulate Trump’s new digital Wild West. How? Issuers of stablecoins worth less than $50 billion will be subject to state regulation, allowing for a thousand lesser stablecoins to bloom across America. As for the systemically significant ones, including issuers domiciled outside the United States (like El Salvador-based Tether), they will be required to submit to an “independent” audit of the quality of their dollar reserve assets.

The Genius Act paves the way to a massive crash. The authors of the bill have not clearly defined how the reserves will be regulated and they have inexcusably neglected the risk of doom loops. But there is a much, much worse aspect of the Act. It emasculates the Federal Reserve by banning it from issuing its own stablecoin, a digital dollar by which to counter the up-and-running digital yuan of the People’s Bank of China. And, deprived of the necessary tools like the equivalent of the Federal Deposit Insurance Corporation, the Fed will be tasked with cleaning up the mess private stablecoin issuers are bound to create.

To err in the world of financial innovation is human. But to cock things up big time all you need is the US government to promote private stablecoins, to cloak them in the legitimacy that a little regulation-lite can provide, to ban the Fed from deploying the same technology, and to deprive it of the means to clean up the inevitable mess. With the Genius Act we are almost there. The time to oppose it, frustrate it, rescind it, is now.

It’s probably apocryphal. Lewis writes that he “heard many versions of this vignette”, which was “all over Cambridge in a week, Oxford in two”. But it has a deeper kind of truth: one society’s elite, wearing a grin that might be a grimace, bowing to another’s. Because when the City of London was deregulated in the Eighties, culminating in the “Big Bang” of 27 October 1986, when a whole load of trading restrictions were wiped away at once, Britain’s brightest (or at least, most prestigiously educated) graduates put their noses in the air, and sniffed.

They followed the smell of money to the City, which was soaking up both the investment and the working culture of American firms. In-person trading and a clubby, old-school-tie vibe were replaced with walls of computer screens and punishing office hours. Britain’s elite sloughed off its ambivalence to moneymaking and paternalistic sense of public service, and joined a carnival of pinstripes, braces, champagne and mobile phones as big as bricks.

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Neither of those qualities have grown back. Banks, consultancies and corporate law firms still take a heavy tithe of Oxbridge graduates, even the airy-fairy humanities ones. But we’re not in the Eighties and Nineties anymore, when finance’s power to shape the world eclipsed that of democratic politics. Rather than being high-rolling, cork-popping masters of the universe, the modern banker is a sober, industrious creature. Money is not their liberator; it is something they need in abundance just to keep their head above water in London’s property market. The glamour has died but the drudgery of the day-to-day work remains. As once-solid upper-middle-class professions (teachers, doctors, etc) are being pushed into precarity, finance is in turn becoming a solid, even stolid, upper-middle-class profession. Banking is boring now.

When Donald Trump returned to the White House this year, much was made of a “vibe shift” in American finance back to old-school, red-blooded capitalism and its attendant cultural values. A bull market bellowed, and fig leaves of progressivism were blithely abandoned. JP Morgan swapped DEI (“diversity, equity and inclusion”) for DOI (“diversity, opportunity and inclusion”). Deloitte told staff working on US government contracts to remove their pronouns from their email bios. “I feel liberated,” one “top banker” told the FT. “We can say ‘retard’ and ‘pussy’ without the fear of getting cancelled.”

To be a fly on the wall of that banker’s office during Trump’s tariff shenanigans. Was the freedom to shout slurs across the trading floor worth the biggest stock market fall since Covid? Though the bond market might have disciplined the President into putting a 90-day freeze on most of his tariffs, he still freestyles market-upending proposals in public: a 25% duty on iPhones and 50% on all EU goods, at time of writing, but there’ll be a new batch by the time of your reading. The business world is locked in a perpetual frenzy of second-guessing. These days, “finance is obviously subordinate to politics”, says James*, a finance worker around 30, who I meet in a west London pub one listless Sunday afternoon to get a sense of the modern reality of things.

Our cultural conception of finance is a bit out of date, partly thanks to Industry, the TV series that follows a bunch of young finance guys and gals as they drink, snort, fuck and occasionally trade their way through London. The series’ creators, Mickey Down and Konrad Kay, both worked in finance in the early 2010s and have always maintained that the on-screen hedonism they cook up is generally accurate. But James says that in four years in banking, he has “never, ever heard [of] or seen anyone doing drugs in the office”. Even putting aside the fact you’d get “absolutely fucked up” by HR if you were caught, “no amount of coke can make you feel better” if you’re working 100 hours a week, as young finance foot soldiers typically are.

Which is probably just as well: he says that colleagues around 50, who very much lived by the “work hard, play hard” principle in the first decades of their careers, have noticeably more chronic health conditions (diabetes, high blood pressure, etc) than other professionals their age. Instead, finance’s ultra-competitive ethos has made it the ideal host for infection by the wellness craze. People run half-marathons at the weekend, and wear smart watches that track their health data rather than Rolexes.

This is a world almost entirely alien to the one that Jacob Phillips entered in 2000, aged 21. He hadn’t gone to university, and fell into one of the City’s “parasitic” ancillary industries, media monitoring for financial PR firms. It had a “rough-edged, Thatcherite kind of mindset”, he says. There were no meaningful HR processes. It was difficult to fit in without drinking at lunchtime. On Fridays, “it’d be pretty normal for people to be passing a wrap around and popping into the toilet towards the end of the day”. His bosses “were completely open about the fact that they only wanted to employ young people, because you can push them around”.

Finance is still powered by young people pouring their evenings and nights into numbing, repetitive work, but they are not quite as docile about the arrangement as before. In 2021, junior Goldman Sachs employees launched a high-profile campaign to carve out a sliver of guaranteed free time away from the lair of the vampire squid. James, similarly, says that Gen Z staff are “a lot more open to complain to seniors than we ever were”, which helps keep upper management in check even if it does mean his direct underlings are “very whiny” at times. Sarah*, another banker a few years into her career, sees a distinct culture shift with new Gen Z recruits. “They are very good at their jobs,” she says, “but don’t sign up to the narrative that you need to get in before the boss does and leave after.” This, she thinks, is down to there being “less scope to make lots of money over the next 20 years”. If you can get less out, you’ll put less in — it’s not an equation you need a quant for.

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This is the latest chapter in what’s been a deeply generational story. Along with wider cultural shifts, there’s an underappreciated and very specific factor driving finance’s death of largesse: banks, private equity houses and the rest becoming publicly listed companies. Goldman and BlackRock in 1999; Lazard in 2005; Evercore in 2006; Blackstone in 2007; KKR in 2010; Carlyle in 2012; TPG in 2022; CVC in 2024. These listings made a small group of senior partners fantastically wealthy, but invited in far more scrutiny from shareholders and the wider public. Salaries and bonuses have to be justified to outsiders; tightening expense accounts bounce employees from business-class flights to economy.

Essentially, boomers who had their fun in the buoyant Eighties, Nineties and early 2000s decided to cash out at the expense of their juniors. Where have we heard that one before? It’s a mirror of the generational distribution of wealth in society at large — in fact, the dynamics are even more distorted, thanks to the 2008 financial crisis. Those who started work by about 2000, and so achieved a degree of seniority before the 2008 crash, are rich rich. Anyone younger is merely very wealthy. The guys in their 50s and 60s “come from a very different world”, says James, and the best anecdotes, like buying more than one Ferrari in a single year, are usually theirs. So why wouldn’t their Zoomer juniors quiet quit? The sadomasochistic contract written down the spine of the industry — work like a dog for me, and one day you’ll be as rich as me — is provably false.

Let’s get this in proportion: no one here is on less than six figures, and if you do well, your salary will probably start with a 2 or 3 by the time you’re 30. But the cost of London property, plus the sky-high cost of everything else, leave psychological scars that embed an “upper middle-class mindset where you are very rational with the money”, says James. “I know people who take home over a million pounds a year and absolutely stress over the temperature at which their flat is set up. If I earned a million this year, my lifestyle wouldn’t change at all.” People, in general, aren’t flashy — what’s the finance bro obsession with outdoorsy brands like Patagonia and Arc’teryx if not a performative disavowal of finery and frippery? And there’s always the axe hanging overhead. “Banking workforces are constantly getting squeezed,” says Sarah, “so there’s concern the money train won’t last forever, which holds people back from spending.”

When Phillips was in the City, he says there was a pervading, “subtle sense that markets rule everything”. He left after five years, in 2006, and has since become a writer and academic. But when he first read the accelerationist writer Nick Land, his mind was taken back to his old career. “It really rang true with this sense there that the market was this strange, complicated, sinister, untameable beast which could ravage anything in its way. You either rode the tiger or you’d be destroyed by the tiger.”

Now, “governments matter”, says James. “What we had in the Nineties and 2000s was an anomaly.” In a funny way, we’ve gone full circle. Before the Thatcherite revolution, finance was a stable, comfortable career. In Liar’s Poker, his book about his years at Salomon Brothers, Lewis meets a minor City grandee who tells him he disapproves of workdays longer than eight hours, because “you then arrive at the office in the morning with the same thoughts you left with late the night before”.

Work patterns are now very different, but finance is, once again, an industry where the overriding attraction is stability rather than possibility. You’ve heard the stats, or a variation on them, before: in 2002, the house price to median earnings ratio in London was 6.9; in 2023 it was 11.9. For day pupils, average private school fees as a percentage of the median national salary have increased from 30.6% in 1999 to 48.2% in 2024. If you want an upper-middle-class life, can you afford not to go into banking, or similar industries like corporate law and consulting? This leads to a vicious cycle — prices go up as London becomes more and more globalized and financialized — and a brain drain, as all the pin-sharp Oxbridge STEM graduates are tempted away from the laboratory. If the government can make a meaningful dent in the housing crisis, and build the Oxford-Cambridge Arc to let loose Britain’s life-science capabilities, maybe there’s hope of all this human capital flowing elsewhere. But as many politicians have found, breaking the tight, wrinkly grip of boomer “stakeholders” is no light task.

James, as we reach the dregs of our Morettis, is candid. “If I was born in our parent’s generation, I would have probably not worked in finance. I enjoy being quite comfortable, having a fat savings buffer, but back then, if a London Zone One flat was £300,000, £200,000, I would’ve happily worked in a general corporate job — maybe even marketing [or] journalism. But because we are where we are today, and how uncertain the next 10, 20 years look like, I want to absolutely max out on income.” It’s hard to blame him, or all the other bright young things in their down-padded gilets streaming through the grey dawn into central London every morning.

*Names have been changed

Imagine how useful it would be for a President to have the power to open the credit tap and ease economic conditions by lowering interest rates. Now imagine how useful it would be to have these powers if you were a President who had just kicked off a tariff war that was going to be very painful for consumers. Trump wants that power, but Powell doesn’t want to give it to him.

The current bout of financial chaos is particularly interesting (if you’re a social scientist) or disturbing (if you’re almost anyone) because it has been brought about intentionally by an elected official. This puts the Fed in unusual territory. The central bank is meant to be apolitical, not passing judgment on the choices of the elected branches. However, it is also, at least in one prominent view, meant to secure the stability of the financial system. What, then, is the central bank meant to do when the political branches are intentionally exploding the stability of the financial system?

To answer, we have to go back to the roots of the Fed, for ambiguity has been baked into the institution from the start. Founded in 1913 in response to a series of financial panics and charged with furnishing an “elastic currency” necessary to underpin a stable financial system, the central bank was a compromise on all fronts. It was decentralized with a centralized capstone body; it was privately owned but had public powers. The Federal Reserve System is made up of 12 reserve banks placed around the country with one capstone body located in Washington, D.C. Each reserve bank was, and still is, owned by the private banks in the region and is run by a board made up partly of local bankers and their appointees. The Board of Governors in D.C. is appointed by the President and confirmed by the Senate.

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Founded in this convoluted way, both endowed with the public power to govern the creation of money and established to underpin the efficiency and effectiveness of the private financial system, the Fed was born with a central tension that it has never resolved: is it an independent arm of the state acting in the public interest or a private organization seeking to advance the interests of the financial system?

In 1927, when the Fed’s charter was extended in perpetuity, one Senator from Iowa protested:

“I concede to the commercial interest the right to have their own competitive banking system with reserve banks and all under their own control; but I demand on behalf of the farms and the people who labor with hand or brain the same right under the law to organize a cooperative system with cooperative reserve and all under their own control.”

In other words, if the Fed serves Wall Street, what about the interests of farmers or teachers? One clear implication being, the central bank was not designed to act in the public interest broadly construed.

This tension inherent in the Fed’s formation, between its role as a public institution and its aim to support the financial system, later emerged as friction between the Fed’s role in domestic policy and its role in the international financial system. Not long after the Fed opened its doors, the central bank was thrust onto the international financial scene. With the First World War came financial disruption, not least with the effective abandonment of the international gold standard. As a consequence, the President of the New York Fed, Benjamin Strong, and the Governor of the Bank of England, Montagu Norman, struck up a friendship. After the war, the two men worked hard to re-establish the gold standard on the belief that it was required for a healthy capitalist economy. Later, in 1930, they collaborated in founding the Bank for International Settlements (BIS), an international body established to coordinate German reparation payments and to act as the central node in what would become a global system of financial governance. Put simply, Strong was more interested in coordinating Fed policy with Norman than with any US Treasury Secretary.

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The Fed’s ambiguous relationship to its international and domestic policy responsibilities would rear its head as the century progressed. In the Sixties, the Fed actively cultivated the birth of the Eurodollar market — the offshore currency that now acts effectively as an international currency. And only a decade later, it declared its intention, via the BIS, to informally backstop the Eurodollar market, which by then had effectively become too big to fail. Here was the monetary authority for the United States supporting the growth of an offshore market in its own currency. From the perspective of the Fed as a domestic policy institution this is hard to understand — it was promoting and supporting the expansion of an unregulated market in US dollars. From the perspective of the Fed as an international financial actor, however, it made more sense: Eurodollars had become a de facto international currency after the gold standard, and someone needed to backstop the market’s liquidity.

By the time the Great Financial Crisis arrived the Fed was comfortably established as the de facto central bank to the world, not least because of its role in backstopping the Eurodollar market. The Fed’s extension of international swap lines during the crisis and its high-profile bailouts of foreign banks, such as RBS (something that Andrew Jackson had worried about, and which motivated his veto of the second bank of the US), revealed how far the Fed was willing to go in its role of providing international financial support. But its justification was this: given the deep integration of the US financial sector with global finance (cultivated in part by the Fed itself), the Fed must seek the stability of the international financial system (or more precisely, some parts of it, just ask those nations which didn’t receive swap lines in the wake of 2008).

This sort of justification, and consequent action, stems from a particular understanding of the role of the central bank: that it has a public-spirited aim, dedicated to the stability of the domestic, and by proxy global, financial system. According to this view, a powerful international financial system is in the public interest.

This is quite different from the alternative view which sees the central bank as an independent agency of the state — like the EPA, the FTC, or the SEC — with the aim of executing monetary policy in the public interest. In this view, what is in the public interest, who is the public, and who gets to articulate its interests are all relevant questions. In other words, this alternative conception of the Fed puts it firmly in the context of domestic politics, and much less clearly in the position of backstopping international finance.

The tension at the heart of the Federal Reserve, then, is all about the public interest. What is it? Or more precisely, who gets to define it? One view of the Fed takes as given that the stability of the international financial system is in the interest of the American public. The other view sees defining the public interest as a matter of domestic politics.

With this historical context in hand, we can see today’s battle over the Fed in a new light. Trump’s actions, not least in their undermining of Fed independence, have begun to upset the global financial governance arrangement. For the first time since at least the Sixties we are seeing cracks in the dominant view that the central bank should seek to preserve the effectiveness and efficiency of the domestic financial system and thus underpin the functioning of the international financial system. But if Trump’s actions are pushing the Fed away from the previous consensus, what are they pushing the central bank towards?

There are reasonable arguments for changing the contemporary structures of the Federal Reserve, and in particular its relationship to the international financial system. An international financial system based on the creation of unregulated domestic currency doesn’t seem sensible, and there have been many proposals over the years to change it. Furthermore, the shifting of financial global powers has led some to believe it may change anyway, even if not by design. But what about making the Fed into an agency concerned with the pursuit of monetary policy in the public interest as articulated by domestic politics? Arguments in favor tend to emphasize that any such monetary policy will have to be rooted in the policies of the nation state. But they clearly point toward more congressional, not presidential, control of the central bank. If the President’s actions elsewhere (crypto in particular) are any guide, Trump will seek to use the state’s capacity to create money and regulate the private creation thereof to fill his own coffers at the expense of everyone else. This was precisely the worry of the American founders, who explicitly put the power to regulate the value of money in the hands of Congress, not the President, as they worried that in such a case, he might fancy himself a king.

And Trump undoubtedly does. The question is, will this wannabe King prevail in a battle with the global financial system? The stakes are unquestionably high. But what lurks behind this battle is that longstanding, deeper question: who should define the public interest? The current debate pits Trump, the wannabe King, against Powell, the sensible preserver of international financial stability. There is no voice here for domestic, democratic politics in articulating the public interest, and that may be the most worrying thing of all.

The United States government sensibly stockpiles a number of materials in case of an emergency, including oil, military gear, medical supplies and gold. But what is the point of hoarding cryptocurrencies which lack any intrinsic utility? Especially if you have constrained yourself, as Trump has done, never to sell the crypto you stashed away? The logic of strong-arming the Federal Reserve into creating a crypto stash is one part self-serving bluster, one part trolling, but also one part strategy.

The self-serving bluster part was made painfully obvious as Donald and Melania Trump pocketed tens of millions of dollars from the otherwise pointless meme coins they issued three days before his inauguration. The trolling part was also on display as he signed the executive order. While ceremoniously putting his exuberant signature on the order’s dotted line, he beamed with the grin of a cheeky peasant who, having just broken into the baron’s pristine drawing room, spoils the splendor of its Persian rugs with his muddied boots. That’s how Democrats and mainstream Republicans felt as they watched Trump elevate the cryptocurrencies favored by libertarians, cranks and criminals to the lofty status previously reserved for solid gold and US Treasury bills.

However, amid this cacophony of creepy profiteering, triumph and despair, it is easy to lose sight of the interesting role that Trump’s strategic crypto reserve plays in his broader economic masterplan. And that would be our mistake.

To recast the global economic order in America’s long-term interest, Trump has a two-pronged, seemingly contradictory, strategy: to devalue the dollar while maintaining its global dominance. By boosting US exports (as the dollar becomes cheaper) while pushing down the US government’s borrowing costs (as foreign wealth piles into US long-term debt), the President seeks to increase US hegemony while also bringing back manufacturing to America. Tariffs, in this context, are the country’s chief weapon, pressuring friends and foes to unload their dollar holdings and buy more long-dated bonds (exceeding 10 years).

But what does crypto have to do with any of this? To get a whiff of the answer, take the case of Japanese banks which hold more than $1 trillion, the result of decades of exports to the United States. Trump wants to bully Tokyo into either investing in the US or dumping most of their dollars into the money markets (thus driving the dollar down) while also not converting them into euros or renminbi (which would risk strengthening the reserve status of rival currencies). What could do the trick? How about convincing, or strong-arming, the Japanese to swap their dollars for crypto? That would work, especially if the Federal Reserve dominated the crypto scene. What else could Trump have meant when asserting in this executive order that the US “has not maximized its strategic position as a unique store of value in the global financial system”?

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More intriguingly, four days after the executive order, Trump endorsed stablecoins. In so doing, he added a fascinating new dimension to the idea of forcing non-American institutional investors into moves that serve his economic masterplan.

What are these stablecoins and why are they particularly promising tools for Trump’s twin strategy? Marketed as crypto versions of the dollar, stablecoins such as Tether, USD Coin and Binance are, by design, a contradiction in terms. The whole point of Bitcoin, the first cryptocurrency, was to stick it to the man — to central bankers and their fiat currencies, the dollar chiefly. But stablecoins, which are mainly used for cross-border payments, are dollar-denominated crypto-currencies that offer you the anonymity, versatility and universality of Bitcoin — while also claiming to guarantee full convertibility to the dollar on a one-for-one exchange rate. Indeed, some of the world’s largest banks and financial institutions are keen to issue stablecoins which are popular in emerging markets. Last month, the CEO of Bank of America suggested it might launch its own, following the examples of PayPal, Revolut, Stripe and many others.

But how can stablecoins promise to keep their value tethered to the dollar, and is this promise credible? In theory, this promise can be met if the stablecoin issuer holds, in some vault, one dollar for every token issued. But, of course, holding zero-interest-bearing dollars in a vault would be anathema to any self-respecting financier. So, even if the stablecoin issuer truly owns an equal amount of dollars to the tokens it has issued, it will immediately trade these dollars for some safe, interest-bearing, dollar-denominated asset — like 10-year US Treasury Bills. This way the issuer is true to their word of backstopping their tokens with real bucks while, at the same time, earning interest. It is an arrangement after Donald Trump’s heart and, I believe, at the center of the idea of his strategic crypto reserve.

By setting up a crypto reserve containing dollar-backed stablecoins, the US authorities are signaling to foreign dollar holders that the US government endorses their ownership of these cryptocurrencies. During upcoming negotiations with various governments, with tariffs dangling like the sword of Damocles above their head, the President will drop subtle hints about how pleased he will be if foreign investors buy these stablecoins using their own dollars. If they do buy them, the dollar supply will increase, the dollar exchange rate will dip, no other fiat currency will emerge as a potential suitor to the dollar’s reserve currency status, and dollar-denominated stablecoins will rise in value. As these tokens will now be worth more than a dollar, their issuer will have an incentive to issue more tokens to restore the one-to-one exchange rate with the dollar. In the process, they will buy, with proceeds from the additional tokens they issue and sell, more long-dated US Treasuries to backstop their increased token supply. Bingo! Trump’s twin strategy is fulfilled: the dollar is devalued while demand for long-term US government debt rises, thus pushing down US Treasury yields and his government’s debt servicing costs.

Upon hearing this, deafening alarm bells should sound in our heads. For if this strategy works, and stablecoins become a pillar of American hegemony, Trump will have planted a time bomb within the foundations of the global monetary system. Monetary history is littered with the corpses of schemes guaranteeing the convertibility of some new-fangled currency with a time-honored store of value. The Gold Standard itself was such a scheme, the post-war Bretton Woods system another.

Take the latter as an example, which coincided with capitalism’s Golden Age — the Fifties and Sixties. The idea behind Bretton Woods was that the West’s currencies would be tethered to the dollar with fixed exchange rates. Moreover, the dollar itself would be anchored to gold at a fixed conversion rate of $35 to an ounce of the magic metal. As long as the US remained a surplus economy, exporting to Europe and Japan goods and services of great dollar value than that of its imports, the system worked fine. America’s surplus dollars were sent to Europe and Japan (in the form of loans, aid or direct investments) and then were recycled back to the US with every Boeing jet or Westinghouse refrigerator that European and Japanese customers purchased.

Alas, by the late Sixties, this recycling system broke down irreparably. The US had turned into a deficit economy, flooding Europe and Japan (later China too) with more and more dollars to finance US net imports. Provided that non-Americans were happy to hoard their dollars, there was no problem. But, the more dollars they had, the more skeptical they were that the US government would honor its promise to hand over an ounce of gold to anyone with $35. Indeed, when several “runs” of America’s gold took place, President Nixon tore up the Bretton Woods agreement, ended the dollar’s convertibility to US government gold, and messaged the Europeans in Trumpian style: “the dollar is our currency but it is your problem.”

So, here is the point: if the mighty US Empire, at the height of its world hegemony, could not honor the anchor of the feted postwar financial system, that is the fixed conversion rate, what gives us the confidence to imagine that a private outfit, such as Tether or Binance, can do it sustainably? Nothing! Indeed, logic dictates the opposite because of the structure of the incentives built into Trump’s strategic crypto reserve. Think about it: as more dollars go into stablecoins, US Treasury yields are lowered and the issuers of stablecoins have a stronger incentive to invest in less stable assets. Indeed, they may even risk issuing additional tokens without backing them with additional dollar-denominated safe assets. The more this goes on, the greater the reliance of the US government, and of the global monetary system, on privateers whose incentives are to act less responsibly. Does this classic case of moral hazard remind you of anything? If not, I would recommend watching The Big Short again.

It is hard to exaggerate the role of the dollar in the global economy. It is the currency that holds the financial world together “in its inmost folds”, as Goethe put it in Faust. Since the Forties, the US has been the anchor of the global financial and monetary system. It’s a set-up that made sense at the time. It did so all the way up until the collapse of communism. But this millennium, it has become more like a Faustian bargain. It has allowed Europe and Asia to specialize in industrial production and dump their trade surpluses onto the US, and to a lesser extent the UK and Australia. America, meanwhile, has been only too happy to play along, running large trade deficits against the rest of the world. But this came at the cost of de-industrialization — arguably the very reason Trump was first elected.

Economists mostly do not care about such imbalances. David Ricardo’s theory of comparative advantage suggests that everybody is better off when they specialize and open the borders to trade, and let the deficits and surpluses fall wherever they may. This Faustian bargain works until it hits big political obstacles. Obstacles like Trump.

The irony, then, is that even as it created the conditions for his election, the continued success of the global free trade system depended critically on Trump not getting elected. It depended on him not imposing tariffs on steel and aluminum, for example, or on threatening retaliatory tariffs over 200% on French wine and champagne. Now that part of the bargain is crumbling.

Trump is clearly not worried about global imbalances, or the sustainability of the global economic order. He thinks of trade balances like business deals. The country with the surplus is the winner. This is without a doubt the wrong way to think about, but Trump’s crude trade policies may be the only thing that spurs change. There is no way that China or Germany would ever voluntarily refrain from running export surpluses. They, like Trump, define their economic models in terms of trade balances. It will take a political sledgehammer to force them to change, which is what is happening right now.

The tariffs, though, are only one part of the story — the visible part of the bargain and the one that is receiving most of the media attention. But there is another, more important side to it, the financial side, in which the dollar underwrites the entire global economy. The current system means that when, say, Porsche exports a car to the US, two things are happening. The car moves from Germany to the US; the dollars move in the opposite direction. You could think of the transaction in a different way: Porsche is buying US dollars, and pays for the dollars by delivering cars. So when countries dump their exports on the US, they are buying US dollars. Accordingly, when a lot of foreign companies do this, the value of the dollar goes up. The dollar accounts for almost 60% of central bank reserves, but the US only accounts for 14% of the world’s economic output, if measured in purchasing power. But the dollar is not only the biggest currency. It is also one of the most overvalued. The two concepts, the global role of the dollar, and its relative value, are not the same, but they are linked. And this is where Team Trump sees an opportunity.

If the dollar is devalued, Porsche, in our example, would still get the same amount of dollars, but these dollars would be worth less. And Porsche would be powerless to do anything about it. This makes devaluation far more effective than tariffs from the US perspective. Tariffs are legally and procedurally complicated. Countries can, and do, retaliate. It is much harder to retaliate against a devaluation.

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When I first heard that Trump’s finance team, led by Scott Bessent, the treasury secretary, was trying to devalue the dollar, it seemed that they had not thought this through. I thought this was the Achilles heel of Trump’s economic agenda because it seemed to have conflicting goals — to keep the dollar’s global predominance and reduce its value at the same time. How on earth could they do both? I put this down as an unresolved contradiction in Trump’s head. Like the English cake aphorism, you could describe it as having your dollar and selling it — something only Trump would do.

The reason Trump cares about having his dollars is not to support the global economy, but because of its geopolitical power. There is no other currency that could take its role. The second largest currency in the world is the euro. It accounts for some 20% of global reserves. But the Europeans are not equipped to play the role the US is now leaving vacant.

I hear a lot of nonsense about the EU as the new leader of the Western world. But Europe has aging populations, and its economy is much less innovative than those of the US and China. The EU depends on other countries to buy its exports. It does not suck in foreign capital as the US has done. Unlike the US, the EU does not have the equivalent of US treasury securities, government bonds with a reputation of being the safest assets on earth. The EU has a monetary union, but it lacks a political union. Nor does it have a large capital market. It lacks the infrastructure of a global economic power.

Given Europe’s weakness, Trump’s goal to devalue the dollar and to maintain the dollar’s global role might not be as contradictory as at first seems. It does beg the question though, if the world diversifies away from the dollar, and if the euro cannot absorb this, who else will?

Enter crypto-currencies. Is this perhaps why Trump has just signed an executive order to create a strategic crypto reserve, very much like the strategic petroleum reserve which the US set up in the Seventies after the oil crisis? Crypto is purely ethereal, not backed by any assets. Fiat money, like the US dollar, is also not backed by assets. Our currencies are issued by governments. Money, whether fiat or crypto, relies on trust. The French philosopher Jean-Jacques Rousseau talked about money as a social contract. I always thought of this as a more useful definition than the much narrower point of view of economics, which defines money as providing three services: to act as a medium of exchange, a store of value and a unit of account. This does not capture the bigger picture: if we lose trust in our own money, we use someone else’s. Given the central banks’ failings since the crash, it is perfectly reasonable for people to be skeptical about money. It is also rational for people to be skeptical about crypto currencies like Bitcoin. They are highly volatile, so they are not really a store of value. They are definitely not a unit of account. And you cannot go to most shops and pay in crypto.

But crypto currencies have one killer feature: their supply is fixed by algorithm. People still dig for gold and find some. They might even find some on Mars, if they started digging there. But they are not going to find any Bitcoin. There is no central bank in the crypto universe. There are no economists involved — perhaps one of the reasons economists hate crypto with such a passion.

Crypto, then, is well placed to play an important part in the global dollar detox story, as we move towards a different monetary system. Apart from setting up a strategic crypto reserve, the US administration and Congress are about to implement a regime of ultra-light crypto regulation. This may be the answer to how Team Trump is going to address the dollar-cakeism problem. If foreigners diversify away from the dollar and move towards crypto, then the US would stay in control: the dollar remains the number one fiat currency, and the global crypto market is also concentrated on the US. Either way, Trump wins.

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Such tactics are borne out by the emergence of what is sometimes referred to as the Mar-a-Lago accord, whereby the US will no longer play the anchor of the global monetary and financial system. Europeans will not only have to wean themselves off the US for defense, but also for finance and trade. It would be the biggest shift in the global economy since the 1944 Bretton Woods accord. That system went through various mutations, originally based on gold, but throughout this entire period, the dollar was the lynchpin. Before the Americans, the pound was the global reserve currency. But before that, there were no backstops. From the Greek empire all the way to Napoleon, European rulers issued coins made from precious metals, mostly gold and silver. With the US no longer willing to shoulder the responsibility of keeping the system going, we may well be returning to that world, except in today’s world, crypto is the new gold.

The brains behind this transition is Bessent. He is the guy who did the critical analytic work that allowed George Soros to carry out his infamous assault on the pound in 1992 — one of the most devastating acts of financial speculation of all time. Earlier this month, he stated clearly that “international economic relations that do not work for the American people must be re-examined”.

It’s a realignment that carries serious risks. It reminds me of that point in Christopher Nolan’s Oppenheimer when a scientist asked whether a nuclear bomb could unleash an atmospheric chain reaction that could destroy the world. The answer he gave was: possibly, but unlikely. Similarly, here, nobody can rule out the possibility that the sudden withdrawal of the US as the global financial anchor could lead to a catastrophic financial meltdown. It might be possible. It might be unlikely. But what is significant is that for the first time in 80 years, someone is seriously trying to make it happen.

How can humans possibly keep up with all this new information? How can we make sense of the world if the volume of data exceeds our ability to process it? Humanity is drowning in an ever-widening galaxy of data — I for one am definitely experiencing cognitive glitching as I try to comprehend what is happening in the world. But being clever creatures, we have invented exascale computers and Artificial Intelligence to help manage the problem of cognitive overload.

One company offering a remedy is C-10 Labs, an AI venture studio based in the MIT Media Lab. It recognises that our ability to collect data about the human body is rising exponentially, thanks to the increasing sophistication of MRI scans and nano-robots. And yet a radiologist’s workload is so high she can’t possibly interpret all that data. In many cases, she has roughly 10 seconds to interpret as many as 11 images to judge if a patient has a deadly condition. It’s far quicker and more reliable to use AI which, in combination with superfast computing, can scan the images and find hints of a problem that a human’s weary eyes and overloaded mind might miss. This will save lives.

Yet AI is a greedy creature: it feeds on power. Last year, the New York Times wrote that AI will need more power to run than entire countries. By 2027, AI servers alone could use between 85 to 134 terawatt hours (TWH) annually. That’s similar to what Argentina, the Netherlands and Sweden each use in a year. Sam Altman, CEO of OpenAI, realised AI and supercomputers could not process all this data unless we find a cheaper and more prolific energy source, so he backed Helion, a nuclear fusion start-up. But even if we can power the data, can we store or process it at this pace?

One answer to the storage problem is to make machines more like humans. As Erik Brynjolfsson says, “Instead of racing against the machine, we need to race with the machine. That is our grand challenge.” How will we do this? With honey and salt. Earlier this year, engineers at Washington State University demonstrated how to turn solid honey into a memristor: a type of transistor that can process, store and manage data. If you put a bunch of these hair-sized honey memristors together, they will mimic the neurons and synapses found in the human brain. The result is a “neuromorphic” computer chip that functions much like a human brain. It’s a model that some hope will displace the current generation of silicon computer chips.

This project is one part of a wider “wetware” movement, which works to unite biological assets with inanimate physical ones; organisms and machines. Yet the wetware movement sees DNA, not honey, as the ultimate computer chip: salted DNA, to be precise. The salt allows DNA to remain stable for decades at room temperature. Even better, DNA doesn’t require maintenance, and files stored in DNA are cheaply and easily copied.

What makes DNA so special is that it can hold an immense amount of information within a miniscule volume. “Humanity will generate an estimated 33 zettabytes of data by 2025 — that’s 33 followed by 22 zeroes,” says the Scientific American. “DNA storage can squeeze all that information into a ping-pong ball, with room to spare. The 74 million million bytes of information in the Library of Congress could be crammed into a DNA archive the size of a poppy seed — 6,000 times over. Split the seed in half, and you could store all of Facebook’s data.”

Yet even if — thanks to honey and salt — we can capture, store and process this fast-growing galaxy of data, what will humans do with it? Will we actually make sense of it? Put another way, does the human brain have a Shannon limit? The American mathematician Claude Shannon clocked that there’s a “maximum rate at which error-free data can be transmitted over a communication channel with a specific noise level and bandwidth”. Traditionally, the Shannon theory is applied to technology: a telephone line, a radio band, a fiber-optic cable. But Brian Roemmele argues that the human brain, too, has a Shannon limit — and that it is 41 bits per second, or 3m bits per second if it’s visual input. With the breadth, depth and speed of new information doubling all the time, can the human mind keep up?

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Probably not. The weight of all this knowledge is crashing against the limits of the human mind. We may be able to compress the whole of Facebook’s information to half a poppy seed, but can the human mind survive contact with that poppy seed? Perhaps not. Something’s got to give. It will be us.

The Canadian philosopher Marshall McLuhan suggested this years ago. He thought that information overload changes how we think and act. When there is too much news to process, we stop assessing individual news stories and start analysing the source: I don’t trust it if it came from CNN; I trust it if it came from Fox News. Too much information makes us more tribal and less analytical.

Just as political tribalism is a human response to knowledge overload, so, according to Princeton’s Julian Jaynes, is consciousness itself. Jaynes argued that consciousness is simply a coping mechanism humans developed once we started living cheek by jowl in ancient cities in the 2nd millennium BC. The stress of managing interactions between strangers with very diverse cultural backgrounds, languages, and behaviours was so great that the human brain increasingly split the work into two hemispheres, the left and right lobes, and began to analyse and absorb. This was the beginning of consciousness: of listening to the voices in our heads, turning to metaphor to explain reality and developing the skill of introspection.

Later, Renée Descartes proposed another split. This time, humans would split the head from the body. The Cartesian Revolution ruled that the left side of the brain handles the serious stuff: logic, rationality and the scientific method. These endeavours were deemed worthy of our time and energy. The right-brain — which includes emotions, anything mystical or inexplicable or unprovable — was cast aside along with the body. The State got the decapitated head, and the Church got the body.

Now, AI is using its God-like powers to reunite them. With the development of AI and wetware, we are witnessing the beginning of the end of the Cartesian era of human history. The split between the mind and the body no longer makes scientific or practical sense: humanity is increasingly knitting the two back together again and approaching reality more holistically (not that they were ever actually separate — we humans have always been wetware).

This realignment is changing the way we manage risk and uncertainty, for instance in financial markets. David Dredge, a former colleague of mine and the founder of Convex Strategies, argues that it’s not only the end of the Cartesian era, but also the end of the Sharpe World. For a long time, financial markets have relied on the Sharpe Ratio, which compares the return of an investment with its risk. But, in this new post-AI environment, that old measuring stick no longer works. Dredge refers to the concept of “Wittgenstein’s ruler: Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table, you may also be using the table to measure the ruler.”

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In the post-AI world, it may be that all the data starts to fall into patterns, perhaps fractal-like repeating patterns. Our job won’t be to guess the price of the S&P or the Yen anymore but to rely on AI and supercomputing to tell us how all financial instruments are moving in repeated patterns over the course of time. We’ll stop focusing on price moves and start looking at the movement of the financial system as a whole. As Dredge says: “It is the divergence that matters and ever more so the greater the scale of the variation.” In other words, volatility at the global financial systems level is very different from volatility at the level of the US bond market. Perhaps this means in the future we won’t have specialists in US government bonds or British government bonds. Maybe we won’t even have bond specialists. Instead, we’ll have people who are reading the patterns of all financial instruments in all markets at once. This brings a whole new meaning to what we call global macro.

So, wetware-powered AI isn’t just about processing more information faster: it is about reducing uncertainty. Its rise will also profoundly change how humans think about the nature of reality — both in finance, and more generally. It will require humanity to delve into the subject of consciousness that hasn’t been considered worthy of study in the Cartesian era. The thinking nature of AI presents uncomfortable questions: is it sentient, or will it be? Will its decision-making supersede human decision-making? Will the volume of data overload mean that human minds can’t make sense of things that machines can understand perfectly? Will we eventually outsource decision-making to AI powered by neuromorphic chips that form a brain that is vastly better informed and more conscious and conscientious than any one human brain? This means letting go of the details and getting into the flow of this new emergent superhuman consciousness that moves faster than our minds.

Can we handle this reduction of uncertainty? Humans are upping their game all the time: we went from storing and sending data on megalithic stone carvings to computer chips with silicon substrates, glass substrates and now honey and salted DNA substrates. Accepting the gift of this emergent consciousness will change humanity. It will remind us that we humans are a fluid and emergent phenomenon ourselves. We won’t be specialists surfing within the web anymore, we’ll be polymaths surfing the whole of the web. This is more than a Renaissance. It is something new — and we are present at the creation. It’s a bittersweet moment: but change is happening, like it or not. AI demands not only nuclear fusion but a fusion of all our cognitive capabilities and consciousness, whether human or human-made. Only by improving the quality of our emerging consciousness, and the conscious qualities of our machines, can we hope to stay afloat in that ever-swelling ocean of knowledge.

Critics, not unreasonably, said crypto had failed to offer compelling use-cases, beyond speculation. They said it was a cesspit of money laundering and terrorism (its involvement in the latter tends to be vastly overstated). They said it was dangerous for the environment. They said it could never become part of the financial system, because key financial players on Wall Street would never accept it. Some even dared to bid a valedictory “Sayonara”, as they have hundreds of times before now.

Yet today, Bitcoin is trading at around $70,000, above its previous all-time-high of about $69,000. The world’s premier cryptocurrency now has a market cap greater than silver, and many expect it to reach parity with gold within a few months. Meanwhile, the rest of the crypto market, which slumped along lifelessly for much of 2023, isn’t far behind.

So, what’s going on here? What sparked Bitcoin’s resurrection? The truth is there are five principal reasons behind its revival, the first of which may seem rather obvious…

1. You can’t kill Bitcoin

It’s awfully difficult to eradicate something like Bitcoin. Its network is peer-to-peer and decentralised, with roughly 18,000 public nodes working to validate and maintain the network daily, and they work independently. There isn’t a central point of failure or vulnerability for someone or something to stop. It’s a self-perpetuating system. And, more importantly, Bitcoin has tremendous latent support in the world: there are more than 100 million Bitcoin holders globally and, characteristically, they do not respond to political pressure. Since its emergence 13 years ago, Bitcoin has purred along efficiently, steadily growing, even in the face of massive competition and numerous hacks (particularly to exchanges and individual wallets).

This resilience isn’t directly connected to price; Bitcoin can be resistant without the price going up. But the price is based on this sense of permanence. It’s a function of everyone knowing with certainty that the Bitcoin code can’t be changed and that the issuance of new Bitcoin isn’t a political matter. Unlike fiat currencies, which are subject to central bank issuing more or less of a currency depending on the economic circumstances, the issuance of Bitcoin is predictable. That’s a unique selling point in a world where everything, even money, is increasingly politicised.

2. The arrival of ETFs

Though the Bitcoin industry takes pride in its outsider status, it has long sought mainstream support, whether from regulators or blue-blood institutions. This January, after 10 years of trying, it hit the mother lode, winning SEC approval for Bitcoin exchange-traded funds, or ETFs. These vehicles, which helped to popularise gold in the 2000s, allow everyday investors to buy into Bitcoin as if they were purchasing a conventional stock. There’s no need to own the underlying asset or to store it oneself.

This convenience is propelling a whole new generation of customers to buy into digital markets via trusted names such as BlackRock and Fidelity. Recently, daily inflows to 10 approved ETFs averaged more than $1 billion, and analysts expect more than $200 billion in trade for Bitcoin in the next couple of years. If so, crypto will have a strong underpinning, helping it to weather regulatory storms and inevitable crises. And the Bitcoin ETFs are just the start. Many expect regulators to approve Ethereum ETFs in a few months and that, eventually, wealth managers will allocate up to 5% global savings to digital assets. Bitcoin is the gateway drug: once people hold Bitcoin in an ETF, the thinking goes, they’ll move on to more exotic digital asset investments later.

3. Regulation works

People in crypto tend to hate regulators and regulation, believing that people and institutions should be able to transact freely. They complain about regulatory interference in general and particularly about the type of intervention we’ve seen over the past year from the SEC. The lack of new legislation governing crypto in the US has led to a series of arbitrary enforcement actions by that agency, leading to a deep sense of mistrust across the Bitcoin ecosystem.

However, regulation can also be a useful tool for industries seeking acceptance. The trial and prosecution of Sam Bankman-Fried last November created a sense of clearing-house, of past failures being put to bed. Finally, many Bitcoiners believe, we can all move on. Meanwhile, the EU passed its comprehensive MiCA legislation regarding crypto, creating greater regulatory certainty within the bloc and showing other jurisdictions the way forward.

4. Elite approval

If you want a cast-iron indication of the new mood around Bitcoin, look no further than Donald J. Trump. Back in 2021, Trump said that Bitcoin was “a scam” that undermines the dollar’s place as the world’s reserve currency. But now he says, if he’s re-elected, he wouldn’t seek to ban it. “I have seen there has been a lot of use of that,” Trump said recently. “I’m not sure that I’d want to take it away at this point.”

Nor is Trump the only high-profile convert. BlackRock CEO Larry Fink has also U-turned, recently backing an Ethereum ETF to go with his company’s Bitcoin ETF. Even, the Financial Times and the New York Times, liberal institutions that have routinely amplified the routine criticisms of Bitcoin, are noticeably more accommodating these days, running approving articles to go along with all the jeremiads. (That said, central bankers, who have the most to lose from Bitcoin becoming serious money, are still lockstep against Bitcoin, even in the face of ETF mania.)

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5. The world is going to end

The less palatable reason for Bitcoin’s rise is that it’s a hedge against very bad things happening. Bitcoin is “disaster insurance” in a world where traditional monetary mechanisms break down. People buy it because they don’t trust central banks. That’s why more than half the adults of Turkey, to take one example, own Bitcoin: because they think it will hold its value better than the Lira.

In this way, Bitcoin is the strangest of exotic assets: its price is both an indication of financial health in capital markets, but also an indicator of deep unease with the current social settlement. On the one hand, the mainstream approval of Bitcoin arguably makes us safer because capital markets are broader-based and people are diversifying into new categories. On the other, its resurgence shows that many people are concerned that the conventional financial system — and, by extension, the broad social system it is based on — is going to fail. They want to “exit” and find something that isn’t controlled by a few dozen middle-aged white men in suits. They want decentralisation away from narrow elites controlling our lives, whether it’s Wall Street, the Federal Reserve or Big Tech.

Having said that, the demise of today’s financial system, long foretold following the 2008-9 financial crisis, hasn’t happened yet. For now, we have the curious situation of mainstream financial institutions marketing the hell out of an asset that was once created to outrun and destroy them. The question is whether this uneasy situation continues indefinitely. Will the mainstreaming of crypto mean it’s sanitised of political and social meaning; that it becomes just another financial asset? Or will Bitcoin’s success lead where hardcore Bitcoiners have always wanted to go? For now, we don’t know whether the promises of global financial revolution made by some of Bitcoin’s more Jacobinical founders will materialise. But, even as it takes another tumble, with some of the new investor funds from early this year going into reverse, we can be sure of one thing: reports of its death were greatly exaggerated.

Almost 20 years later, the first Global Compact Leadership Summit is considered the birthplace of the ESG movement, a kind of constitutional convention for global “governance”. Annan had been championing this new approach since at least 1999, when, at the World Economic Forum in Davos, he announced the creation of “a global compact of shared values and principles, which will give a human face to the global market”. The aim would be to create a “compact” of agreements that could keep up with the radical change being wrought by globalising markets. It would, of course, do much more than that.

Since Annan’s proclamation, ESG has morphed into a social and corporate inevitability. Its manifestations are evident everywhere — from academia’s heady embrace of Diversity, Equity and Inclusion initiatives to the corporate world’s collective gush over protecting the environment, preventing racism and advancing whatever else might be the “current thing” of international righthink.

Its rise appeared unstoppable — until 2023 arrived. Only this month, Republicans in Congress announced they would subpoena BlackRock, the asset management firm most closely aligned with ESG, and State Street, another Fortune 500 financial heavyweight, to investigate whether their ESG policies violate anti-trust law. Days after that news broke, the state of Tennessee announced it was suing BlackRock for making what it called “misleading” statements about ESG.

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For its part, BlackRock — undoubtedly the greatest champion of ESG — is retreating, backing “just 7% of environmental and social proposals at companies’ annual meetings in 2023 proxy season, down from 47% two years earlier,” according to the Financial Times. In the UK, signs of a brewing backlash are just as evident. The Confederation of British Industry (CBI), a major lobbying group, has hired Rupert Soames, a critic of ethical investing, as its next president.

For some, the pivot away from ESG may come as a shock. But the reality is that the equilibrium has been shifting for more than a year. One of the strongest indicators that all was not well with ESG came from the most unlikely of places: the annual letter from ESG’s most high-profile supporter. Larry Fink, chairman and CEO of BlackRock, began publishing his letters to shareholders and CEO in 2012 in which he introduced ESG-speak into the halls of capitalism. But this year, Fink told the Aspen Ideas Festival that he’s no longer using the term since it’s been “weaponised” by critics. And ESG was notably absent from his 2023 letter in March. This might be no more than a symbol of the influence of ESG. But in the context of a decade during which the acronym was proclaimed as a shibboleth of a new kind of global corporate power, one whose proponents construe profit-seeking as a means to an end, that end being nothing less than improving the lot of mankind, it is nevertheless significant.

It’s not hard to see why ESG won broad, even fervent, appeal in its early days. By the mid-2000s, American capitalism had begun to resemble its own caricature. The global economy of the late Nineties and early 2000s was defined not just by excess, but by excessive scandal: the ruinous “privatisation” of Russia; the triple header of Enron, Long Term Capital Management, and Bernie Madoff; and in the background, an Iraq War architected by the former CEO of a major oil industry services company. And then came the mother of all scandals: the 2008 Financial Crisis.

Today, with the media tightly aligned with ESG-embracing Big Business, it’s easy to forget how antagonistic the press was to large companies in the early and mid-2000s. “Transnational corporations” became a go-to epithet insinuating a cartel-like form of legalised corruption; financiers became objects of derision; films such as The Big Short, Arbitrage, Erin Brockovich and Thank You For Smoking highlighted corporate malfeasance.

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The emergence of ESG may have been rooted in a genuine desire to do better. It’s hard to argue with calls, such as that of Brazilian president Lula da Silva at Annan’s 2004 Global Compact Leadership Summit, to see global leaders “engaged in a campaign to free all human beings from hunger”. The same holds true for preserving the natural environment and sharing the benefits — not the externalities — of corporate progress. After all, who doesn’t want a better world?

The problem with ESG, however, is that the practice didn’t match the theory. While ESG set out to make a difference, it ended up becoming a way for Big Business to flip the mass of negative attention into a positive, highly appealing ethos. ESG was all about upholding human rights and ensuring the planet didn’t get incinerated at the altar of ruthless capitalism. This meant that if you were against ESG, you were against ethics itself. And if you opposed the prerogatives of the Big Business espousing ESG, you were a heartless devotee of shareholder capitalism. This binary attitude suited firms such as BlackRock, which depend on, and compete fiercely for, a continuous inflow of fresh capital to invest. If BlackRock could successfully make the case that (a) your firm is the standard for ethical investment and (b) every other approach is so inefficient in the long term that it’s functionally corrupt, then the conclusion regarding which firms get the money is foregone. In other words, BlackRock found a way to win.

In the decade since Larry Fink began writing his letter to shareholders, in which he championed ideas such as “corporate governance and responsible investment”, BlackRock’s market cap quadrupled. The company now has $9 trillion under management, a testament not only to Fink’s financial genius but also to his unparalleled access to global leaders who make decisions at the billion-dollar level.

Fink, as a result, became a darling of the Davos set — and it was there that, in January, he chose to make another ESG confession, this one vastly more significant. At the WEF, he admitted that his firm’s close association with the ESG movement had cost BlackRock an estimated $4 billion in managed assets. While for many (if not most) asset management firms, this would be a fatal blow, it’s in fact a mere trickle lost in BlackRock’s financial ocean. But it’s also a headline. And, no matter how you spin it, it’s a loss — one that could spell the start of a devastating longer-term trend.

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But there was another, more overlooked signal that all was not well with ESG. When Fink released this year’s ESG-free letter, it contained a second omission: in previous years, Fink wrote one letter to CEOs and a separate one to investors. This neatly reflected the concept of “stakeholder capitalism” at the heart of ESG, which calls for equal consideration of all the people involved in a company’s ecosystems, including employees, customers, and the public, not just its shareholders. But this year Fink wrote only a single letter — to investors. Was Fink signalling a retrenchment, a return to the unglamorous, nuts-and-bolts endeavour of shareholder capitalism?

The idea of stakeholder capitalism is attributed largely to Klaus Schwab, creator and chairman of the World Economic Forum, who began spreading the idea in a 1971 study he co-authored called “Modern Company Management in Mechanical Engineering”. This top-down approach to shaping how wealth is created, and in whose hands it ends up, played well to a media educated in America’s Marxism-infused liberal arts colleges. And the business crowd loved it too. Suddenly, bland business conferences felt less like trade conventions and more like geopolitical summits. You weren’t merely investing in funds, selling widgets, or cooking up ever more optimised ads. You were saving the world.

By 2021, ESG had reached its peak not just of influence but power. The pandemic seemed proof of the urgency of its policies. Endlessly, we heard that Covid was a result of mankind “encroaching” on nature, squeezing it until this abstract entity struck back. We were informed that cooperation was essential and non-compliance not an option.

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But ESG’s recent victories are now starting to look pyrrhic. In 2022, Texas led a red-state boycott of BlackRock, announcing plans to pull more than $3 billion out of BlackRock funds. Since then, Republican state legislatures, including those in Florida, Kansas and Idaho, have passed laws that ban or limit the consideration of ESG.

In an even more existential blow to the ESG vision, money has become expensive. During the era of Zero Interest Rate Policy, there was enough cheap money, and enough margin, to sacrifice some of it for the sake of a good cause. But when money is tight, consumers are jittery, and investors running scared, companies take what they can get.

The cultural backlash underway is even bigger. In April, it only took a single misfired influencer outreach effort by Bud Light, which sent cans of beer to Dylan Mulvaney as part of a DEI-guided, trans-friendly campaign, to knock the brand from its top spot in American beer sales, carving 13% off its revenue. Even the Magic Kingdom has not escaped unscathed. After its battle with Florida Governor Ron DeSantis, among the most vocal opponents of ESG in American politics, Disney is now at its most vulnerable in decades, having seen billions in shareholder value wiped away and its once-pristine brand tainted by political controversy. There is no reason to think the trend will slow.

If there is one thing businesses and markets hate, it’s uncertainty. And ESG is starting to look like another unnecessary risk — more so given that ESG has become a valuable political leverage point for politicians looking to ride the surge of populism. This doesn’t mean ESG is done: one of the major problems identified by its critics is the extent to which it has embedded in vital institutions. But we may be at a turning point, and if the risk rises higher, and there is no substantial reward to follow, ESG might find itself on the corporate chopping block.

Strangely, 2 November was the exact day, a year earlier, that CoinDesk — the news organisation where I work — had broken the story that precipitated the fall. Ian Allison’s scoop showed that much of the balance sheet propelling FTX (through its hedge fund, Alameda Trading) was composed of a stablecoin token (FTT) that FTX itself had created. In effect, our reporting showed, FTX had been swapping real people’s real money for a coin with little liquidity and no intrinsic value. And, as the trial would reveal, even this balance sheet was a fiction created by Alameda’s chief, Caroline Ellison, to make FTX look healthier than it actually was.

This was fraud, pure and simple. And over the month of the trial, SBF has been turned into the white-collar criminal par excellence, all by the same media that once fêted and foregrounded him as a charming eccentric. But, though his personal foibles have come to dominate coverage, SBF’s downfall has also been seen as a parable for the entire crypto industry. Our original story set off a tailspin of valuations and crypto prices that is only today righting itself, and the fall of FTX hurt crypto’s reputation among the public and regulators — particularly in Washington D.C., which has turned viciously on the industry and its apologists. The jury on Pearl took just three hours to reach its unanimous verdict, and to many the conclusion was peremptorily clear: crypto was and is a scam, just as SBF and FTX were. For the faithful within the crypto industry, this is a terrifying conclusion. Was FTX really representative of the fundamental wrongness of crypto, an industry that literally creates money out of thin air, as SBF had done with FTT? Or, was FTX, in fact, just a story of immature corporate governance, of structural forces that keep allowing boy-wonders like SBF to do terrible things?

I’ve covered the crypto/blockchain/web3 space as a journalist since 2014, and this is far from the first scandal it’s seen. In fact, long before SBF, I thought I’d seen every flavour of exotic financial scam going. The stories behind “BitConnect”, “Onecoin”, “QuadrigaCX”, and “Mt. Gox” are notorious, and the losses staggering. The Onecoin Ponzi scheme, for instance, started in Bulgaria and fleeced victims of $4 billion. The main perpetrator was one Ruja Ignatova — aka the CryptoQueen — who went missing for years after the scam was first discovered in 2017. She is now thought to have been murdered on a yacht by a drug lord, her remains scattered into the Ionian Sea. QuadrigaCX was a mid-size crypto exchange operating in Canada in the mid-2010s, until its founder, Gerald Cotten, died in mysterious circumstances while on a trip to India in 2019. With his death, $145 million in tokens stored on the exchange inexplicably went offline, apparently missing forever.

Covering these and many such stories was fun. The characters were outsized (BitConnect’s Carlos Matos’s speech to an investor crowd in Thailand became an era-defining meme). And the claims they made for themselves were always outlandish, from “you’re going to get rich!” to “we’re going to save the world”. A lot of the journalists covering crypto at the time believed in the underlying technology and the message of decentralisation (that banks, governments and Silicon Valley fundamentally do have too much control over our lives). But we didn’t take the industry overly seriously, because the actors involved were often not serious about following through on their promises. Crypto was an entertaining sideshow to the mainstream events happening in finance and business.

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By the time SBF came along, emerging as a boy-genius during Covid, it seemed like much of the fun-and-games was over. Crypto had grown up. Its leading companies, like Coinbase, had gone public, sanitised of their earlier ideological commitments of banking-the-unbanked and usurping central banks in controlling the money supply. The industry had disciplined advocates in Washington. Its leaders were part of the financial establishment, still on the margins to be sure, but not in the way the cypherpunks — the community of Nineties-era digital anarchists who gave rise to Bitcoin — were outside society. They had believed in utterly breaking the banks following the 2008 financial crisis, not in getting Wall Street’s assent to reshape finance for the digital age.

Then, in November 2022, salacious details about SBF/FTX began to emerge on the back of our story. SBF had been running a “cabal” of former roommates (several of whom, it was speculated, had been involved in a polyamorous tryst) out of a lavish compound in the Bahamas. It had no accounting department or risk manager, despite being a $32 billion company in an infamously risky industry. Still, many aspects of FTX made it a different type of scandal to BitConnect and the rest. SBF’s organisation had been taken seriously by serious people, including the regulators and many high-profile politicians. It had investors from blue-blooded Silicon Valley firms and it presented itself as part of the next wave of crypto development: sober, measured, media-savvy, and politically connected.

BitConnect, Onecoin, QuadrigaCX et al. had never made it onto the front cover of Forbes or Fortune. The founders of these enterprises didn’t appear before Congressional committees, as SBF was wont to do, to argue for the industry’s interests. They never had private meetings with the chairman of the SEC to argue for favourable treatment. They never paid off one third of Congress — almost 200 representatives and senators. They never appeared in primetime ads, and on-stage, with A-listers like seven-time Super Bowl winner Tom Brady, Larry David or President Bill Clinton. And they certainly never paid to rename football and baseball stadiums with their brand. This was a different crowd to the old bad boys of crypto.

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SBF’s need for attention from the media and the political class is one reason why he’s now taking such a rap for the industry’s failings. He brought it on himself. SBF, who dressed and acted in a casual way that reporters tended to like, was a media addict who revelled in his “king of crypto” status. He gave out his cell number to anyone who would listen to him, making himself available for comment at odd times, day and night. He never missed an opportunity to make a potentially viral TikTok video or eke out a little more airtime. Even after FTX’s collapse, he was still calling up every reporter he knew to try and press his innocence, even as every defence lawyer told him to stay quiet.

So, when the New York Times said that crypto was on trial in the SBF case, it was not entirely unreasonable (though definitely misleading). He was the face of crypto for a couple of years. But, to many in the industry, SBF’s incarceration proves little, because he was never a true believer. SBF never advocated for true decentralisation, as hardened Bitcoiners do. And, when he was palling around D.C. salons in 2021 and 2022, he was largely speaking for his own company, rather than for the industry as a whole. These people point out that the fraud was committed largely in dollars, rather than crypto, and it could have happened in any industry that’s lightly regulated and supervised. Bernie Madoff, Elizabeth Holmes and the Great Financial Crisis of 2007-8 managed fine without any Bitcoin or stablecoins changing hands.

But SBF really was supposed to be the chosen one who could make crypto safe for everyday users. As new laws and regulators come down in the wake of FTX, SBF may have achieved that goal, but not in the way he intended. Today, the words “crypto” and “Web3” are losing their currency, replaced by a legalistic vocabulary of “digital assets” and “tokenisation”. Intermediaries that hold crypto assets, like exchanges, now have to attest to their reserves, so it’s clear that people like SBF are not making off with people’s money for their own enjoyment. Crypto is less about financial freedom and wild speculation around funny sounding meme-coins (like Dogecoin and Shiba Inu) and more about “real-world assets”, such as treasury bonds and stocks.

Wall Street is gradually incorporating crypto into the wide financial nexus in subtle ways, exerting control over future regulation and controls. The T-shirt wearing Bitcoiners, who gave rise to the industry and made it culturally interesting, are being sidelined in favour of suits and compliance officers. This all makes the industry less fun to cover and less scandalous. But it also probably means that crypto is on safer ground: more trustworthy and predictable, and less volatile. SBF was part of a wave of crypto-sanitisers who aim was to move crypto from the anarchic fringe to the mainstream. His accidental legacy may be to make it more like the rest of finance — safe for grandma and relatively boring.

Despite its origins in the post-Second World War period, the history of private equity really begins in the Eighties, the decade in which Western countries abandoned Keynesian economic management for the small-state ethos of the neoliberal regime. Coincident with this turn was the start of a long trend of rising economic inequality. This was driven by two broad changes: the rise of the developing world, led by China, which reduced inequality between rich and poor countries. And the widening of inequality within countries, as newly liberated business owners were empowered to drive down wage bills and drive up profits. When plotted onto a graph, the result was the elephant curve. It provided a visual illustration of how, since 1980, the global one percent captured twice as much of global growth as the bottom 50%.

With ever-swelling pools of capital, this rising international class changed the way they managed their wealth. Having previously invested largely at home, spearheading the growth of national economies, the one percent globalised, shifting capital offshore to exploit the even higher returns of low-wage economies. While this stimulated the rise of a middle class in the developing world — the middle “hump” of the elephant — it also fuelled the deindustrialisation of Western countries. The working classes were shattered, one consequence being the “deaths of despair” that have been chronicled by Anne Case and Angus Deaton.

Profits, however, surged. This gave owners both more capital to invest but also, in an environment where deregulation was underway, more liberty to deploy their capital in aggressive ways. There arose a new breed of owner who was “private” in that they took over publicly-listed firms, often using borrowed money, then removed them from the stock exchange and the prying eyes of shareholders. Thereby free to do as they pleased, they could lay off workers, close shops, sell assets or transfer any debts they had used to buy the firm onto its books. The leveraged buyout was born, and the Eighties corporate raider would go on to be immortalised in the character of Wall Street’s Gordon Gekko, his “greed is good” mantra embodying the ethos of the neoliberal age.

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Like the fictitious Gekko, neoliberal intellectuals maintained that enlightened self-interest, as they preferred to call it, would ultimately benefit everyone. As Bill Clinton insisted when pushing back against private equity’s critics — perhaps ominously in an interview with that celebrated do-gooder, Harvey Weinstein — private equity was helping to revive sick firms and thereby reinvigorate the economy. The story private equity’s exponents told of its virtues might have been lifted from an Ayn Rand novel, in which visionary entrepreneurs take over a moribund publicly-traded firm, get rid of the risk-averse technocrats running it, then apply the tough love it needs to turn around.

Yet there was a dark side to this new era of plutocracy. While the ascent of such barons seems reminiscent of the Gilded Age, today’s elite tend to favour a different business model from their entrepreneurial Victorian predecessors. Whereas the latter were profiting off the wrenching transition of agricultural societies into industrial ones by building things — in particular, railways — today’s elite appear parasitic by comparison. In many cases, what private equity delivers amounts to asset-stripping or consolidations that leave most people worse off, yet add little new output to the economy. This has been called “conspicuous destruction”.

A popular strategy is to acquire a firm using borrowed money, transfer the debt onto the firm, and then run down the firm to pay hefty dividends. Pioneered in the US airline industry after its late-Seventies deregulation, the Eighties would see Carl Icahn buy Transworld Airlines, load it with debt while paying himself hefty profits, and then gradually sell off its assets until it went bankrupt. That same decade, Frank Lorenzo would acquire Eastern Airlines, transfer its assets to another non-union airline he ran, then shut it down.

Of course, you don’t need a private equity front to do this, as any long-suffering Manchester United supporter will tell you (and Lorenzo similarly kept his companies public). But a big advantage of the private equity model is that, unlike United’s much-reviled owners, the beneficiaries remain hidden from public view. By the time the sewage from a privatised utility shows up on public beaches, or tenants are evicted from a council estate after its new owners convert it to luxury condos, the damage has been done.

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As was the case in the original Gilded Age, today’s barons benefit from the collusion of politicians. The shift to a neoliberal policy regime made credit easier to access, deregulated the way businesses operated, and sold off state assets in the name of greater efficiency. A little-known fact of the era of low taxes is that governments were able to contain their spending by selling off the family jewels, then spending the proceeds. As a result, most Western governments now show a net negative worth on their balance sheets. Given that private equity has been a keen participant in this transfer of state assets to private hands, it looks like a terminal phase of Western capitalism, as public spaces are run down to line private pockets and poor people are squeezed hard to support the rich in their glamorous lifestyles.

But it’s actually more complicated than that. Although the growth of private equity has coincided with widening inequality, the latter has not been the sole driver of the industry. There’s another thing that has accompanied the rise of private equity: ageing societies.

When Margaret Thatcher and Ronald Reagan were elected, roughly a tenth of the population in developed countries were retired. Today that share has doubled. Meanwhile, improved health and nutrition have meant that people are living longer. Whereas the average life expectancy in Western countries was about 10 years past retirement in 1980, today that figure has more than doubled. Several Western societies have now crossed the threshold beyond which some people spend more time collecting a pension than they did working for it.

As a result, more and more people now have to be supported by a workforce which, in relative terms, is contracting. This would be challenging enough. What makes it even tougher for Western governments is that the growth of labour productivity, which was rising steadily throughout the post-war period, has now slowed to a crawl. So the hope that fewer workers could support more people by producing more is looking decidedly Pollyannish. Instead, more must be squeezed from the working population.

This can only go on for so long before something breaks. One obvious solution is to reform the pension system, by reducing benefits or raising retirement ages. But given that pensioners are among the most politically engaged in the population, politicians shy away from such decisions. Instead, they’ve tended to move in the opposite direction, as Britain has done by raising benefits. Western governments have funded the increased largesse with tax rises or cuts to other public services and, to bolster private pensions that get no state funding, policies that juice returns on asset markets, such as the loose monetary policies, privatisation and deregulation that have transferred assets to private equity.

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In recent years, pension funds have collectively become the biggest investors in private equity. When tenants of a London council estate organised a rebellion against their eviction, they discovered that the new landlords were a private equity firm owned by American pension funds. Canadian pension funds occupy a similar role in Britain’s privatised water utilities, which have allowed sewage to flow into seas and rivers. In effect, tenants and workers are getting squeezed in no small measure to keep retired teachers and civil servants in the style to which they’ve grown accustomed.

It always astounds people, but it’s true: the one percent don’t exist in mythology but in our neighbourhoods, dining alongside us at our favourite restaurants and bumping into us as they walk their dogs. That’s because, statistically, any homeowner with a defined-benefit pension is part of the one percent that sits atop the global economy.

Life has recently become more difficult for private equity, as central banks abandon their easy-money policies. Returns are falling and new money is drying up, but demands for cash from investors continue. As a result, private equity firms are resorting to increasingly opaque deals, such as transferring assets across their own funds, to meet investor demands for cash. Given how unregulated private equity is, it could be storing up some nasty surprises should the markets turn sharply.

Private equity is thus coming into the crosshairs of politicians and regulators. As our leaders come face to face with the pension funds that invest in private equity, they will confront tough choices. Would private equity be too big to fail? Nobody wants to be blamed for pensioners being told their monthly payments will be frozen for the foreseeable future — but the alternative, of boosting fund values with the time-worn method of easy-money policies, looks ever less likely in an environment of persistent inflation. Major problems may therefore be brewing in the pension industry.

Indeed, pension pots would be a possible target for a tax raid, as collapsing public services across developed economies are forcing politicians to fund spending rises. Before singling them out, though, it’s worth noting that while the one percent have benefited more than most of us from the neoliberal age, their gains pale in comparison to the 0.1%. If we’re to start taxing the rich more, this would be the better place to look.

Whether or not politicians want to tackle topics such as inter-generational justice or the sustainability of the pension system, events in markets may force the question of retirement’s future onto the public agenda. Higher interest rates have begun to knock down asset values and hit profits. If this continues, fund managers will eventually have to deliver the news to their clients. That may turn out to be the nastiest surprise private equity is storing up.

But the freezing of Russia’s foreign-exchange reserves, worth around $300 billion — about half of its overall reserves — was significant. While the US had behaved similarly with Afghanistan, Iran, Syria and Venezuela, none of these targets was remotely as powerful as Russia: a member of the G20, and the world’s largest nuclear power. Likewise, none of the 63 central banks that are members of the Bank for International Settlements (BIS) in Basel — known as the central bank of central banks — had ever been the target of financial sanctions, not even during the Second World War.

At the time, the decision received relatively little attention. Future historians, however, will look back on it as the trigger that set in motion one of the biggest snowball effects in history, one which now threatens the very foundations of the American Empire.

In our age of fiat money, reserves aren’t held in the form of physical dollars (or other currencies) stashed in the vaults of foreign central banks. They are simple IOUs — a credit recorded in the accounting sheets of the Federal Reserve and other central banks. In the dealings between countries, just as in the dealings between individuals or companies and commercial banks, trust is therefore fundamental: just as you would never deposit your salary in a bank if you had even the remotest fear that it might freeze or confiscate your money, no country wants to hold reserves which may be snatched away at any moment.

This move, therefore, violated an almost sacred principle: the neutrality of international reserves. The message was clear: from now on, the US would stop at nothing to punish countries that stepped out of line or defied Western diktats. And if this could happen to Russia, a major power whose central bank reserves were mostly earnings from sales to the West, it could happen to anyone. As Wolfgang Münchau wrote, by weaponising international reserves, the US had “taken the biggest gamble in the history of economic warfare”. In one fell swoop, he noted, the US had “undermined trust in the US dollar as the world’s main reserve currency”, and encouraged China and Russia to “bypass the Western financial infrastructure”. For non-Western nations — especially China, which is heavily exposed to US assets — disengaging from the dollar, and more in general from the US-led international monetary and financial system, acquired a sudden urgency.

De-dollarisation was not something that would happen overnight, that much was clear. But the wheels of history were set in motion. It is no coincidence that most of the world’s nations didn’t join the West in slapping sanctions on Russia, but quietly started strengthening their ties with Russia and China in an effort to reduce their dependence on the dollar-centric system. In just over 12 months, the world has undergone a greater tectonic shift, in geopolitical terms, than it has in decades: the long-heralded post-Western international order — comprising the BRICS and dozens of other countries making up most of the world’s population — has finally become a reality. The US, as former Treasury Secretary Larry Summers recently said, is lonelier than it has ever been.

A key driver of this process has been the world’s gradual disengagement from the dollar. Its demise has been endlessly — and wrongly — predicted since the Sixties, so scepticism here is justified. This time, however, there is good reason to believe that it’s happening. De-dollarisation comes in many forms, but three are particularly easy to spot: the settling of international transactions in currencies other than the dollar, primarily the Chinese yuan; the reduction of the dollar in global foreign-exchange reserves; and the decline in foreign holdings of US Treasury bonds.

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On all counts, the trend seems clear. In terms of international payments, the role of the yuan (and other currencies) has received a massive boost over the past year. The most obvious example is Russia, which has effectively been forced by the Western sanctions to embrace the yuan for most of its international transactions. But several other major countries — including Brazil, Argentina, Pakistan and Bangladesh — have already agreed to (or are in the process of negotiating) the use of the yuan or their own currencies to settle their international transactions. Meanwhile, the BRICS are also working on developing an international currency along the lines of the synthetic alternative proposed by Keynes 70 years ago, the bancor, which was rejected by the Americans in favour of a system anchored around their dollar.

Beyond the BRICS, interest in de-dollarising — or at least in greater use of local currencies — is also growing, most notably in the Persian Gulf, where the US previously wielded unrivalled strategic power. At the first China-Gulf Arab States Cooperation Council summit in December reached a consensus to use yuan for oil and gas trade. And last month, China and the UAE conducted their first transaction in yuan.

Looking at the composition of global currency reserves, the shift towards de-dollarisation might be less apparent. But it is happening. The nothing-to-see-here crowd might point out that the US dollar still dominates the world’s currency reserves, with around 60% of the total, while the yuan accounts for less than 3%. But static snapshots of the present, though true, are of little use in understanding what the future holds. And, according to current trends, the dollar’s share of reserve currencies has begun to contract at 10 times the average speed of the past two decades. Central banks are mostly dumping dollars for gold, while overseas creditors — China, Japan and Saudi Arabia in particular — are increasingly selling off US Treasury bonds.

Such is the progress of de-dollarisation that many in the Western policy establishment are starting to acknowledge that this time is different. Last week, for instance, US Treasury Secretary Janet Yellen admitted that the weaponisation of the dollar through the use of financial sanctions risked undermining its hegemony by pushing countries to look for an alternative, even if its supremacy wasn’t at risk soon. Just two days later, Christine Lagarde, the President of the ECB, made a similar statement, acknowledging that there was now “an opportunity for certain countries seeking to reduce their dependence on Western payment systems and currency frameworks”. She stressed that these changes do not amount to an “imminent loss of dominance for the US dollar or the euro”, but they do “suggest that international currency status should no longer be taken for granted”. The question, then, is no longer if de-dollarisation is happening — but how fast.

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Sceptics, however, continue to argue that there are insurmountable technical and institutional obstacles to the dollar’s decline. They point out, for instance, that there are economies of scale that lead to a relative monopoly in reserve currency status, and that the Chinese yuan cannot become a real reserve currency unless capital controls are phased out and the exchange rate made more flexible. Moreover, they claim, a reserve currency country needs to accept — as the US has — permanent current account deficits in order to satisfy the world’s demand for its currency.

Therefore, there would need to be major changes in China’s financial markets and monetary-economic policies for the yuan to replace the dollar. These are valid claims, but they miss a fundamental point: the de-dollarisation process is primarily geopolitical in nature, not economic. It’s not just about finding an “efficient” system, but about challenging Western monetary hegemony. Moreover, de-dollarisation doesn’t necessarily mean the replacement of the dollar with the yuan, but the dispersion of reserve assets among several major currencies, and other assets, such as commodities such as gold.

And this would be no bad thing. The world’s reliance on the dollar makes economies excessively exposed to changes in US monetary policy, with periods of monetary loosening or, as now, tightening having dramatic knock-on effects on the rest of the world. Nor would this completely be to America’s disadvantage. As Michael Pettis and Matthew Klein argue, the current international and monetary financial system doesn’t pit the interests of nations against each other so much as it pits the interests of certain economic sectors against other economic sectors. In other words, it is not the US as a whole that benefits from the global dominance of the dollar, but rather certain constituencies within the US.

By attracting capital to the US and allowing it to help itself to foreign goods and resources such as oil, simply by printing its own currency — in what Valéry Giscard d’Estaing, de Gaulle’s Minister of Economy, called America’s “exorbitant privilege” — dollar dominance has undoubtedly benefited America’s imperial elites: Wall Street, large global corporations and, most importantly, the national security establishment. It’s what has allowed the US to sustain a regime of perpetual war, on top of exercising financial dominance over much of the world.

But this has come at a significant cost not only for the rest of the world but also for American workers, farmers, producers and small businesses. For America, supporting the world’s primary reserve currency has meant running permanent trade deficits, which has seriously eroded its industrial and manufacturing capacity and its ability to provide well-paying jobs to its workforce — what Pettis calls the “exorbitant burden” of the dollar. The end of this supremacy, then, would turn America into a somewhat “normal” country — a regional power among other regional powers. Both globally and within the US, this would benefit virtually everyone. Indeed, the only losers would be those who have had ample time to enrich themselves.

The absence was especially surprising to Furio Tedeschi, the artist who designed the bull. He had submitted his design to Tradestation with “huge, mechanical balls” — only for the firm to neuter it. “Prosperity and wealth shouldn’t have any gender,” a company official explained. It might seem odd that a symbol of the overwhelmingly masculine crypto community — it is estimated that 94% of crypto accounts are owned by men — has been castrated in the name of diversity. But for a product built on faith, appearances matter.

That the price of various cryptocurrencies, including Bitcoin, began a spectacular decline only weeks after the bull was neutered is the kind of irony that crypto-types would otherwise revel in. But as the realities of the “crypto winter” set in, there wasn’t much joy to be had in a community known for its in-joke culture. The collapse of a number of prominent crypto firms, such as FTX, last November saw crypto crashing to lows that hadn’t been seen for years. The price of Bitcoin dropped to $16,000, only a year after it reached a record high of $69,000, seeming to herald the end of a Bitcoin boom.

These rapid fluctuations in crypto prices were keenly felt in the neutered bull’s new home. While Miami might not yet attract as many crypto transactions in dollar volume as San Francisco and New York City — though it is fast gaining on them — it is one of crypto’s undisputed cultural centres, and has the fastest-growing number of tech jobs in the country. Describing the city as one that moves from “from hustle to hustle”, Miami mayor Francis Suarez has repeatedly praised crypto, once saying that it offers a “tsunami of opportunity”. Natural disasters aren’t usually a metaphor leaders reach for when promoting their cities. But in Miami’s high-risk, high-reward culture, where boom and bust cycles are part of doing business, his phrase feels appropriate.

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Suarez has opted to surf the tsunami, using traditional methods to promote crypto business, including a favourable ecosystem of tax breaks and friendly legislation, combined with an attractive lifestyle for workers. These perks have created considerable momentum for firms to move there: investment in Miami-based crypto start-ups jumped from $6 million in 2020 to $745 million just one year later. There has also been a steady stream of Bitcoin parties and conventions, encouraging potential investors to associate crypto with a lavish lifestyle. Indeed, some have had a little too much fun with crypto: last month, the US Securities and Exchange Commission froze $100 million in assets of Miami-based crypto company BKCoin and one of its co-founders, Kevin Kang. Describing it as a Ponzi scheme, in which investor funds were mixed with Kang’s, the SEC alleges that $371,000 alone was spent on sporting tickets, holidays and an apartment in New York City.

There are plenty of reputable crypto enthusiasts who argue that the currency is a hedge against inflation, and a bulwark against corrupt governments. The blockchain ledgers on which it is stored are said to be incorruptible, and the complex mathematical equations required to unlock the coins constrain supply. But these digital assets also undoubtedly attract those looking to launder fiat currency from dubious sources. One report last year found that $8.6 billion was laundered through cryptocurrency in 2021, up by 30% from the previous year. It’s the currency of choice from Mexican drug cartels, who pump about $25 million through it annually, to Russian mafia figures, one of whom was extradited from Greece to the United States last year, charged with a $4 billion laundering scheme.

Miami has, inevitably, seen a number of high profile crypto-related arrests. In January, Anatoly Legkodymov — a Russian national who legally resides in China, operated the crypto exchange Bitzlato out of Hong Kong, and did his work in Miami — was arrested by Florida authorities for running a $700 million “haven” for funds “intended for use in criminal activity”. Months earlier, a respected 76-year-old University of Miami professor of global crime networks was jailed for money laundering. He had been working with Alex Saab, a Colombian national and “super facilitator” for sanctioned countries looking to do business in global markets, who used Venezuelan cryptocurrency Petro Gold for many of the transactions.

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How Miami has come to attract these sorts of international figures is largely a matter of geography and demographics. The city’s culture is inextricably tied to its location in the centre of the Americas. It is closer to many Caribbean nations than to Washington DC, and acts as a transport hub for those travelling between North and South America. It also has one of the highest immigrant populations in the country, whose experiences have probably influenced the city’s general attitude to authority. Cuban émigrés have been arriving steadily since the United States first began overthrowing their governments in the Thirties, and the ascension of Castro in 1959 meant that many new Floridians had a decidedly anti-government bent. In the Seventies and Eighties, while the rest of the world was struggling through oil shock recessions, a flood of cocaine money saw Miami transformed from a tourist outpost into a major metropolis, and a place where prosperity often has shady roots. In the past decade, Miami has become an attractive alternative to London for highly upwardly mobile Russian and Chinese citizens looking for somewhere to make a reliable investment.

But some turn to crypto out of necessity. Of US cities with over 100,000 people, Miami has the largest “unbanked” population; around one in five residents doesn’t have a bank account. This is more likely due to the enormous number of undocumented workers in the city, who live from cash payment to cash payment, than to money-laundering kingpins. And when many traditional money exchanges closed their doors during the pandemic, migrant workers turned to crypto to send back home.

This is where two very different perceptions of crypto intersect: while some Miamians sell it to achieve the good life, others use it to keep themselves and their overseas families alive. And even if some of the world’s shadiest elements are attracted to crypto, so are some of its most influential: giant Silicon Valley VC firm Andreessen Horowitz continues to plump for it; in its recently-released 2023 report, it called for “crypto computers, not crypto casinos”.

Next month, Miami hosts Bitcoin 2023, the annual convention that last year introduced the neutered crypto bull to the world. It has been suggested that the currency, in the intervening 12 months, could become entirely worthless — one website has tracked 473 instances of prominent people falsely declaring it dead. But those who aren’t following Bitcoin’s daily fluctuations may not have noticed that it has quietly risen almost two-thirds since last Christmas. Its association with shady money and macho risk-taking is a symptom of economic malaise rather than a sign that crypto itself is the rot. Crypto is not going anywhere.

Today’s financial rules often seem designed to maximise inconvenience for individuals carrying out small transactions. Despite the stupendous number of business regulations, however, the big events often seem to be missed. The collapse of Silicon Valley Bank (SVB), the bank of choice for large numbers of tech companies, is just the latest to surprise us.

On Saturday, more than 200 UK tech companies, worth £3.5 billion in venture funding, riled themselves up into a state of panic. They wrote an open letter to the Chancellor warning that they now face an “existential threat”, and suggested that the Bank of England’s attempts to downplay its impact showed “a dangerous lack of understanding of the sector and the role it plays in the broader economy”.

The truth, however, is that shocks like this are inherently difficult to predict. Indeed, it is more or less impossible, unless the central regulator is omniscient. The losses which have caused SVB’s collapse, for instance, seem to have arisen from the bank making complicated bets on interest rates and getting them wrong. It’s easy enough to explain after the event — but it’s very hard to anticipate.

And so Lenin’s maxim springs to mind: it’s better to have a few bright minds capable of thinking outside the box about the resilience of a system than legions of box tickers designing myriad rules which purportedly eliminate risk.

A similar issue confronts Rishi Sunak ahead of his first Budget tomorrow. Apart from the SVB crisis, two financial developments haunt his financial programme. They are both bad — and they both stem from a misguided attempt by regulators to control risk.

The first is contained in the sudden rush of UK companies deciding to quit the London Stock Exchange for Wall Street. ARM, for example, which is based in Cambridge and describes itself as the R&D department for the global semiconductor industry, has decided to place its forthcoming IPO, expected to be valued at some $40 billion, in New York. CRH, the world’s largest building material supplier, is also moving its listing from the UK to the US.

The second concerns recent warnings by pension funds that they face massive losses. Despite the surge in equity values in the stock market, drops of more than 20% are being recorded in funds managed by top outfits such as Aviva. The Retirement Protection Pension Fund of Clerical Medical (part of Lloyds Banking Group) has managed to lose 38.7% of its money in the past 12 months.

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The culprit, particularly in the second case, is the burdensome Markets in Financial Instruments Directive (MiFID2). The directive requires investment firms, which includes pension providers, to collect a huge amount of information from their clients, ranging from their preferences on sustainability to their “risk tolerance”. There are many boxes to tick and many forms to fill in; according to Forbes, the MiFID2 regulations contain 1.5 million paragraphs. This sums up the approach of our regulators, who appear to believe that the solution to everything is to write yet more paragraphs. Such behaviour fosters the illusion of control. But it is just that: an illusion. And the outcome has been disastrous for many pensioners.

As individuals move into their 50s, their pension providers are encouraged by the regulations to implement a so-called “lifestyle” investment approach. Their funds are gradually moved from what the regulator deemed to be risky investments, namely equities, to government bonds, designated as safe assets. These bonds are indeed safe in one sense of the word: since the Bank of England was created well over 300 years ago, British governments have never defaulted on their loans.

But their market value is highly sensitive to changes in interest rates. Rates were held artificially low by central banks throughout the 2010s following the financial crisis, but they started to rise last year, even before the turmoil of the short-lived Truss government pushed them up to 4%. And if there is one fundamental principle behind the pricing of bonds, it’s that if interest rates rise, the value of bonds goes down. As a result, pensioners have been left with big capital losses on their portfolios — and all because of a collapse in the values of an asset class which regulators deemed to be “safe”.

The problems of the London Stock Exchange arise from several factors, but the MiFID2 regulations are at their centre. As a result of their risk-averse approach, pension funds have been allocating far less of their assets to shares in companies (equities). According to recent estimates, just 27% of UK pension fund allocation is in equities, compared to more than 50% in the US. And it is equities which are the real lifeblood of any stock exchange; little wonder that firms are defecting to what is now a much bigger market.

Rishi Sunak and Jeremy Hunt will have to contend with this core problem of overregulation if they are to fulfil their desire of Britain becoming “the next Silicon Valley”. Sunak has placed investment and innovation at the centre of his government’s policies. But despite a proliferation of schemes designed to encourage corporate investment over the years, UK levels remain persistently low. According to the OECD in 2021, for example, capital spending in Britain was only 17% of GDP, compared to a developed country average of 22%. In Europe, only Greece was lower among OECD members. And by all accounts, the Chancellor is very likely to persist with the planned increase in corporation tax.

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Yet the causal connection between taxation and investment is very well established, as Phillipe Aghion’s 2021 book by The Power of Creative Destruction makes clear. Aghion and colleagues cite a paper in the top-ranked American Economic Review which finds that a 1% increase in the top rate of corporation tax leads to a 6% drop in the number of patents and a 5% fall in the number of inventors. The point here is not a case for finely tuning the exact detail of a taxation regime: it simply has to offer suitable incentives to innovators and inventors.

To be fair to Sunak, he has backed up his words with deeds. Last week, along with the Technology Secretary Michelle Donelan, he launched the first major piece of work from the newly created Department for Science, Innovation and Technology. While some of it does seem to be a re-hash of existing policies, the document recognises that different methods of funding science and innovation need to be tested. After all, a major problem with research councils is that it is very hard to get “left-field” projects financed. These are ones with a very high risk of failure, but which really push the frontiers of knowledge when they succeed. It is much less risky, however, to finance “safe” proposals, which simply add incrementally to knowledge and whose results are essentially known in advance.

Sunak and Donelan propose that institutions known as Focused Research Organisations are tested. Essentially, these are not-for-profit start-ups which are too big for a single academic lab to do and which are too complex for a loose, multi-lab collaboration. The crucial feature of the document is not any particular detail or policy, but Sunak’s apparent understanding of the importance of “try and test”. This holds that, rather than specify in great detail a structure which is predicted to give good results, it is better in an evolutionary environment to try something in practice. If it works, you can then reinforce it. If it doesn’t, you can drop it and try something else.

As for the SVB crisis, the UK’s flexible and speedy response has been equally encouraging. A crisis broke — and rather than form a committee to try and work out the perfect response, the Government acted. A wide range of options was reportedly considered, and the problem was swiftly solved over the weekend by HSBC taking over SVB’s UK arm for just £1.

Sunak, then, unlike his immediate predecessors, appears to understand the complex, inherently unpredictable nature of the modern world. It is a world where agility, flexibility and swift decision-making are the necessary qualities; where a “better fewer” approach is crucial; and where documents with 1.5 million paragraphs are at least 1.49 million paragraphs too long.

ESG first entered the investment and banking mainstream as a survival strategy. In 2009, BlackRock had acquired Barclay’s Global Investors Ltd, making it the largest investment firm in the world with almost $3 trillion in assets under management (AUM), a sum larger than the total revenue of the US federal treasury. Politically speaking, BlackRock’s emergence as an investment superpower could hardly have come at a worse time. Amid the wreckage of the 2008 Financial Crisis and then the ululations of the “Occupy Wall Street” movement, public suspicion of big banks and corporations was at an all-time high. Finance, in particular, became a morality play: financial institutions were the greedy villains, while policymakers played the heroic civic advocates reining them in. For BlackRock, the chances of continuing to grow freely in such a hostile policy climate seemed remote.

But BlackRock’s leaders had an epiphany — one that would repeat itself in the C-suites of several of its competitors in the early 2010s. What if big investment houses could rebrand themselves as so unimpeachably virtuous and civic-minded that their virtue outshone even their regulators themselves? Such a strategy would be game-changing. Not only would it afford investment houses a mile-wide road to limitless growth; it could even, if played judiciously, accord the companies themselves quasi-governmental power.

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The ESG principles underpinning that strategy had already been written. The 2004 United Nations report “Who Cares Wins,” which introduced the principles of ESG to a worldwide audience, suggested that investors would make higher long-term profits if they put more emphasis on environmental and social progress. The small print was that the task of defining these impossibly broad categories (“environmental” or “social”) would be left to international institutions. Per those institutions’ priorities, “environmental” would mostly focus on implementing CO2-reduction goals, while “social” would mean anything related to the UN’s stated social goals on issues such as gender parity, racial justice, and poverty reduction. In other words, from the very beginning, the goal of ESG was to harmonise the priorities of political elites with those of business leaders. This approach was nothing new in Europe, where Klaus Schwab and his World Economic Forum (WEF) had long blurred the lines between business and government. But in the US, where the WEF ethos had failed to take root and the shareholder remained king, it was a radical departure.

When the UN invited global financial institutions to sign onto the Principles for Responsible Investment (PRI) in 2007, the total global assets managed by ESG-minded investing vehicles was around $10 trillion. By 2020, a mere 13 years later, that has grown to more than $30 trillion worldwide and more than $17 trillion in the US. New private equity firms and investment outfits devoted purely to ESG — such as Al Gore’s Generation Investment — were springing up every year, and most large US investment firms began offering ESG-mandated mutual funds, leading Bloomberg in 2021 to project $53 trillion invested in ESG by 2025.

As the ESG agenda took hold, the individual investor increasingly found himself shunted aside. Admittedly, the roots of this shift lay in the early Eighties, when federal proxy voting rules were changed to allow fund managers such as BlackRock to vote on behalf of their clients. The idea was a good one at the time, in that it recognised that few individual investors have the time to attend shareholder meetings or the wherewithal to make their views known to company leadership. But it handed vast power to investment companies — admittedly under the understanding that they would vote on behalf of their clients for one purpose only: the maximisation of profits and shareholder returns. It was, however, only a matter of time before this power was exploited.

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That time came in the 2010s, as investment companies began instead to vote in line with the ESG agenda. Company leaders who opposed this were either quickly made to see its inherent wisdom, overruled, or out of a job.

In 2020, BlackRock voted at 16,200 shareholder meetings on 153,000 company proposals. Frequently, these votes were against company management. According to the company’s own Investment Stewardship Annual Report: “In 2020, we identified 244 companies that were making insufficient progress integrating climate risk into their business models or disclosures. Of these companies, we took voting action against 53, or 22%. We have put the remaining 191 companies ‘on watch’. Those that do not make significant progress risk voting action against management in 2021.”

In the same report, BlackRock boasted of having voted against management more than 1,500 times for “insufficient diversity” in company management. This interventionist approach was hardly limited to BlackRock. At State Street Global Advisors, in 2017 alone, proxies voted against the re-election of board members at 400 companies that it felt had made insufficient effort to appoint female board members.

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But for huge investors such as BlackRock, attending shareholder meetings remained a rather inefficient method of coercing company managers into accepting the Good News of ESG. By 2012, Larry Fink had already discovered a far better method: the royal proclamation.

Fink’s first few letters contained tell-tale signs of the revolution to come, particularly in 2015, when he chastised managers for returning too much money to their investors in dividends and buybacks. Then, in his 2018 letter, he went a step further, advocating that CEOs step away from traditional shareholder capitalism and toward ESG by embracing the idea of “stakeholders”. In his words: “Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” “Every company,” he wrote, “must not only deliver financial performance, but also show how it makes a positive contribution to society.” Allow me to translate: On behalf of millions of shareholders I’ve never met, I declare that they no longer truly own the companies they have invested in. Society does.

As Vivek Ramaswamy convincingly argues in his book Woke, Inc., this feint of widening the pool of “stakeholders” beyond shareholders marginalises the shareholder and elevates the manager. By making companies answerable to everyone, proponents of stakeholder capitalism make them answerable to no one.

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In his 2020 letter, modestly subtitled “A Fundamental Reshaping of Finance”, Fink decreed that all American companies must redesign their businesses to align with the goals of the 2015 Paris Agreement on climate change, with the implied threat of shareholder activism or even divestment if they failed to do so. To that end, he declared that all portfolio companies would thenceforward need to define climate risk as investment risk in their financial analyses — a measure designed to disadvantage companies engaged in heavy industry or fossil fuel production or use, and likely shunt them into cleaner businesses. Furthermore, since the nearest-term climate risks for many businesses are government climate regulations rather than the actual effects of climate change, this is a thinly-disguised method for coercing companies into complying with international climate agreements.

Second, Fink stipulated that companies must disclose their climate risk to investors using accounting methods created by two organisations which are constituted primarily of representatives from investment companies including BlackRock and international organisations such as the UN, World Bank, and IFC. Fink ordered that these disclosures specifically draw a path to the two-degree global temperature increase stipulated by the Paris Agreement.

A reader sympathetic to Fink’s goals might reasonably ask why such use of the bully pulpit is a problem. After all, if companies don’t do the right thing on their own, why shouldn’t Larry Fink incentivise them to do so? But in making his demands, Fink is speaking with the authority of an elected representative who has polled his investors and found that his proposals have their universal support, when he has not.

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Considering that BlackRock is headquartered in the United States, which within the last decade elected a president who withdrew America from the Paris Agreement, there are probably many BlackRock investors who would either reject ESG principles out of hand or else disagree with Fink’s methods of applying them. For example, while many Americans would agree with Fink that climate change is cause for concern, some would dispute the idea that reaching Net Zero emissions by 2050 is a workable strategy, or even that businesses should focus on climate change at the expense of prioritising other problems such as hunger, poverty or terrorism. Similarly, some individual investors might disagree with State Street’s insistence on gender and diversity quotas for company boards.

Living as we do in a free-market capitalist democracy, there is supposed to be room for disagreement on questions such as these. When companies disagree with one another, the result is that they choose different strategies, allowing the market to choose the best strategy in the long term. But when the CEOs of every company in America answer to Larry Fink first and their actual investors second, that diversity — and therefore, the probability that we ever discover the best strategies — plummets.

There is a further irony in this. Over the past decade, as investment houses such as BlackRock have exerted ever-greater influence over decision-making at their portfolio companies, investors have in fact been signalling for them to take a step back. We can see this in the growing popularity of passive strategies (in which investment companies take a backseat role) compared with active strategies (in which they more frequently buy and sell stocks and actively intervene in the affairs of portfolio companies to improve performance). In 2011, 21% of US AUM were managed passively, compared with 79% managed actively; by 2018, the split had narrowed to 36% to 64%. Parity is projected for 2025. BlackRock’s own active-to-passive balance has followed a similar trajectory. Their portfolio had been primarily actively managed until 2009. But by 2018, $3.9 trillion of their $6 trillion assets were invested passively. Just as BlackRock’s customers were voting with their dollars for the firm to intervene less in company policy, BlackRock’s leaders were declaring it their sacred duty to intervene more.

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Over the years, ESG advocates have parried charges of overreach by responding that investing with ESG criteria is just as lucrative as traditional investing. This has always been a dubious argument: after all, if favouring ESG-friendly companies were a prudent financial strategy, an investor would not need to publicly commit to ESG in order to do it; it would simply be the best financial decision.

The evidence of ESG’s performance has until recently been ambiguous enough to offer ammunition to both sides. But that has begun to change. In 2022, eight of the top ten actively managed US ESG funds (including one of BlackRock’s) performed worse than the S&P 500. This demonstrates two things. First, that ESG funds are not some financial miracle. And second, that the performance of ESG funds is tightly bound to the tech industry, which had a terrible year in 2022. (Unsurprisingly, tech stocks are overrepresented in ESG funds, since it is easier for tech companies to claim low environmental impact than companies that actually make things.)

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Not only is ESG failing to make money, but it is not even achieving its non-financial goals. One sizeable Columbia University and London School of Economics study published in 2021 found that US companies in 147 ESG portfolios had worse compliance records for both labour and environmental rules than US companies in 2,428 non-ESG portfolios. They also found that companies added to ESG portfolios did not subsequently improve compliance with labour or environmental regulations. This study added to a growing body of evidence that ESG investing is not only anti-democratic but ineffective.

Over the past few months, investment companies have begun to take notice. Of particular note was investing giant Vanguard’s December 2022 decision to pull out of a Net Zero 2050 pledge. Last week, Vanguard CEO Tim Buckley told the Financial Times: “We don’t believe that we should dictate company strategy […] It would be hubris to presume that we know the right strategy for the thousands of companies that Vanguard invests with.” The just-announced presidential campaign of Vivek Ramaswamy, one of the most articulate spokesmen on ESG’s excesses, will doubtless only amplify demands for corporate independence.

Larry Fink has not yet posted a 2023 letter. Perhaps he is delaying as he contemplates how to respond to the growing anti-ESG tide, a tide he bitterly decried at the January WEF in Davos. I might be unusual among ESG detractors in my belief that Fink should write another CEO letter this year. But it should be a very short one, the writing of which is unlikely to take too much time away from his busy schedule of saving the planet through regular flights to Aspen and Davos. The letter should read, simply:

Dear CEO,

I’m sorry.

As with many such super-policies — including the now-moribund “globalisation” for whom Davos 2023 served as a five-day, open-casket wake — answers regarding ESG have been handed down from on high before those most affected by it ever asked the questions. These are the basics: what is ESG? What does it mean for us? And, guided as it is by the very visible hand of the Davos elite, where is it taking us?

The Environment, Social and Governance movement grew out of a late 20th-century approach that used capital as a means of fighting for social and moral causes. The boycott of Apartheid South Africa is frequently cited as a landmark case, with businesses pulling out of the country in response to the regime’s brutal and racist policies — a progenitor of today’s approach to Russia. But the watershed moment for ESG came in 2004, when a UN initiative called the Global Compact released a report called “Who Cares Wins”. Issued by some of the world’s biggest (and most financially aggressive) banks, the report laid the groundwork for how the financial world can “integrate environmental, social and governance issues in analysis, asset management and securities brokerage”.

Since then, the global capitalist ecosystem has been able to “integrate” ESG issues to an extent the movement’s founders could have only dreamed of. Today, ESG is more a pledge of corporate legitimacy than it is a framework of ethical guideposts, with some of the world’s most corrupting, polluting, and abusive firms taking up the green standard of the movement with an alacrity that’s at times unnerving.

Today, companies from tobacco giant Philip Morris to BP — whose Deepwater Horizon platform dumped 200 million gallons of oil into the Gulf of Mexico — don’t just tout their ESG bona fides but have devoted millions in crucial resources to the endeavour, building entire corporate departments to purpose. Even Gazprom, the Russian oil giant that feeds Putin’s coffers with petro-dollars, puts out an impressive “Sustainability Report” that notes the company’s commitment to ESG. “As a globally significant energy company, Gazprom always conducts business in a considered and responsible way,” Gazprom chairman Alexey Miller writes in the report’s introductory message.

This is nowhere more apparent than at the World Economic Forum’s annual confab at Davos, which I attended this year not as a member of the WEF, but as the guest of a New York-based think tank. At Davos, even small fry like me could hear the watery murmurings of ESG coursing through the currents of power. It was everywhere — in every break-out meeting, every wine-drunk dinner, and each trudge through the snow-lined streets towards the next event.

Like many global ideologies, ESG bears a kernel of truth. After witnessing the predations of successive financial scandals, the exploitation of vulnerable people in sweatshops and mines, and the wholesale destruction of natural environments, it’s hard to argue that capitalism does not need a broader system of checks and balances to reign in humanity’s perennial tendency towards excess. This idea became excruciatingly apparent during the early 2000s, when neoliberalism gallivanted around the world, exploiting labour, sucking up resources, and generally sowing economic chaos, including in Russia whose economy was “privatised” by WEF headliners and darlings of the global ESG fan club, such as former US Treasury secretary Larry Summers. Out of the ashes of neoliberalism’s “naughty Noughties” came a new impetus for capitalism to clean up its act.

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But the core question swirling around ESG is who, exactly, is supposed to do the scrubbing? The “Who Cares Wins” report was published in 2004, just months after the “Oil-For-Food” scandal struck the UN, which saw billions in humanitarian funding to Iraq siphoned off, using the UN as the (very much reusable) financial straw. The scandal was so gargantuan it drew in the UN Secretary General, founder of the UN Global Compact, the founding bureaucracy of the ESG movement. On the social front, the UN also saw horrific allegations that some of its peacekeepers were running child sex and sex trafficking rings in the very places they were supposed to protect.

In this sense, ESG might appear to be more of a feint; public relations wrought to its utmost. But even when not tied to reputation-tainting financial scandal, it’s precisely the involvement of supra-democratic global organisations such as the UN and WEF — which are accountable to no electoral constituency — that puts people on edge. For those who don’t get to spend $250,000 on a five-day-long conference, ESG can seem like a network of interlocking policies that are never put to a democratic vote.

And the corporate and governmental advocates of ESG appear to be optimising it to startling effect. Much the same way that organised global power was able to sidestep Apartheid South Africa’s electorate by degrading the country through economic might until the government became untenable, the same international elite is learning to do the same on the level of the individual. Thus, when Canada’s truckers protested in response to vaccine mandates, it didn’t take legal action to break up the protest, but concerted economic action that simply made the lives of the truckers untenable.

While the trucker protests seemed to align on the axis of nationalism vs globalism, the response — including shutting down some of their bank accounts — was a play from the ESG handbook. As the issue of vaccine mandates arose in the US, the gaze of enforcement turned from government to corporate actors. Michael Peregrine, a corporate lawyer who focuses on governance wrote in Forbes that: “if the government, including state and local leadership, is unable or unwilling to adopt such measures [as vaccine mandates], the burden may fall on private enterprise to step in, as a matter of social responsibility.”

While there is a heavy critique of market capitalism associated with ESG, there is also a faint echo of its core tenet: that capital should reign supreme. The difference is that while for neoliberalism, capital was the ends to achieve at the cost of (almost) any means, for ESG, capital is the means that’s justified by a moralistic end. In this sense, it’s the later term of the moniker, “governance”, that is the most salient. In the ESG setting, governance is about how companies are run. The notion here is simple: Enron — an American energy company that practiced only a thinly-veiled cronyism as it committed fraud and ultimately failed — is the definition of bad; BlackRock — driving profit as it pledges to invest only in causes accredited by ESG — is good.

Such a Manichaean division, however, obscures the fact that, however exquisite the window dressing, corporations cannot play the role of ethicist, priest or prophet, and the more they try the more we risk corrupting those essential roles. Not just that, but it also calls into question the judgment of companies entrusted with a fiduciary responsibility to their stakeholders, including employees. “The contradictions and apparent hypocrisy of BlackRock’s actions have… politicised the ESG debate,” wrote Bluebell Capital Partners, a BlackRock activist investor, in a scathing letter. “The reputational damage of being dragged into this politically charged debate, in our view, is very significant because it calls into question the independence of BlackRock as an asset manager.” Bluebell noted that despite its rhetorical largesse, BlackRock still makes lots of money from fossil fuels, raising legitimate questions about the “G”, governance, at work in the world’s most vocal corporate supporter of ESG.

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On a global scale, the term speaks much more to what many feel ESG has as its true objective. As the WEF helpfully puts it: “Global governance is a means to manage issues that cut across national borders — whether it is a war, a pandemic, a financial crisis, climate change, or a geo-economic dispute.” In this sense, ESG has rapidly filled the void left by the death of globalisation. If the latter was an imperative to spread capitalism laterally around the world, ESG can be seen as an effort to vertically consolidate the power accumulated by globalism, which is now available — for a price, that is — to weigh in on our most pressing ethical, moral, and epistemological concerns. It’s capitalism not in your life, but as your life: Ask not what your global governance movement can do for you, but what you can do for your global governance movement.

There is little doubt that ESG is a tool of the elite. It’s nominally aimed at constraining the excesses of globalised capitalism, but in effect it’s just as much a means of entrenching those excesses, codifying them in a moralistic power structure. After all, who gets to decide what makes for good environment, social and governance practices?

What’s certain is that ESG is here to stay. At Davos this year, perhaps the second-most discussed subject was the great wealth transfer taking place around the world — that is, money moving from the previous generation of families whose slogan was “preserve the capital” to the current generation of the ultra-wealthy whose priority is “preserve the planet”. For this new generation of wealth, as well as for the decision-makers whose careers and policies they fund, and the activists whose messages they carry, ESG is not a passing trend but very much the moral engine driving the rise of a new approach to power and economics. What it means for the rest of us, however, is decidedly less certain.

It is thought that 600,000 people have fled Kharkiv, Ukraine’s second largest city (population 1.4 million). Mariupol no longer has enough electricity, water, food or medicine for its population of less than half a million. Children are dying of dehydration. Russia has bombed the largest nuclear reactor in Europe and now controls a further two power plants. Two days ago, Chernobyl was shut off from the grid and, with that, the IAEA monitoring systems. The spectre of nuclear disaster hovers.

The Ukrainian Armed Forces and Civilian Territorial Defense have fought with immense courage and skill to defend their homeland. Putin thought Ukrainians would welcome his invaders with cheers. He thought he’d be sitting in Kyiv after 72 hours. He was wrong. So now comes the “scorched earth” strategy. Just as they did in Chechnya and Syria, Russian forces are destroying everything in their path, with no regard for human life. Unless something changes, Kyiv will become the next Aleppo.

Can the West save Ukraine? Make no mistake: we are helping. Putin is paying a military cost he didn’t expect largely thanks to the bravery of Ukrainians, but it’s bravery made possible by the incessant flow of military equipment and training from Europe and the US and, perhaps above all, the UK. But the Russian convoys rumble inexorably on. Ukrainians continue to die. More is needed. The question is: what?

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“I think we have been too slow and too selective,” says Natalie Jaresko, who served as Ukraine’s Minister of Finance from 2014-2016, soon after Russia first invaded, and who was responsible for renegotiating Ukraine’s debt following the Maidan Revolution. “People in Ukraine are dying… More sanctions need to be rolled out with immediate effect.” And they must be broadly applied to both state-owned entities and political leaders — in Belarus as well as Russia.

“They must also comprehensively target Russia’s economic elite and their families,” she continues. “A good place to start would be the top 100 richest Russians as ranked by Forbes. We must put as much pressure as possible on Russia’s elite to force Putin to end this unprovoked slaughter of Ukrainians.”

The West’s financial sanctions are biting. The Central Bank of Russia (CBR) has already lost access to around two thirds of its reserves, so it’s having a hard time defending the rapidly devaluing ruble. Russians can no longer access hard currency as a result. The removal of certain Russian institutions from the SWIFT payments systems, and the exit of American Express, Mastercard and Visa from the country, are also pummelling the Russian banking system. But Putin continues, nonetheless.

More needs to be done, says Jaresko. We could delist all Russian public entities from our stock markets,  We could divest public pension funds from Russia. We could require all publicly-listed companies to report on any Russia-related activity. “We need to sanction all state-owned banks, not select banks, immediately; and we need to exclude all Russian banks from the SWIFT system”, she tells me.

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By Kat Rosenfield

Jaresko speaks of hammering Putin financially, but there’s more than one way to pile on the pressure. Yuriy Vitrenko, Ukraine’s former Minister of Energy and the CEO of Naftogaz, Ukraine’s state gas supplier, sees energy as the way to squeeze Russia. When I call him, I’m told he’s in “a bunker somewhere in Kyiv with a Kalashnikov nearby”. Perhaps not meant to be taken absolutely literally, the comment points to a wider truth: Ukraine’s entire governing infrastructure is now more or less underground.

“We are in charge on securing the supply of gas to Ukraine,” he tells me. “Probably 90% of Ukraine households use it for heating, and we still have minus temperatures at night. If there’s no gas, then it’s a national tragedy. The Russians are deliberately targeting coal supplies and of course they are attacking nuclear power plants — there’s lot of pressure on the energy system.”

But Vitrenko understands that Putin, too, is vulnerable when it comes to energy. Russia is a malignant petrostate that doles out gas to a gasping Europe. This is both its major strength, and a weakness. If you can hit Russia here, you hit it hard.

Vitrenko wants concrete steps to be taken. The first is to set up a mechanism by which money from the sale of oil and gas is put into a dedicated escrow account accessible to the Kremlin only when it withdraws from Ukraine. It’s a system used in dealings with Iran, and Vitrenko believes that Moscow is now more of a rogue state than Tehran.

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But this is not enough. In the medium term, he says, the West needs to do everything it can to halt its reliance on Russian gas and oil. “The US will have to up its output as well as Norway, while Europe needs to start switching to biogas,” he says. Critically, he also wants to see a temporary switch to coal until “we get rid of our dependency or get additional volumes of gas that are not from countries invading other countries”.

I point out that there might be criticism of the environmental impact of reverting to coal. “Trust me, the environmental damage of war is far greater than that of coal,” he says. “But we need to understand that the dependence problem we have is not just about being dependent on fossils fuels but also on Rogue regimes.”

Vitrenko recognises that the initial reaction from the West has been strong, and that it surprised the Kremlin, but he also emphasises that it must last. “It is important that western leaders show that they will not backtrack”, he tells me. “We need to change the calculus of Putin and those around him. It’s clear that they expected a softer reaction from the West, but unless it’s maintained they will be able to find ways around it.”

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Svitlana Zalishchuk, a former MP who now works with Vitrenko, is equally blunt. “Putin is not going to stop,” she says. “He is trapped by his own bad decision-making, if he loses the war in Ukraine, he’s dead politically — he won’t be the president of Russia anymore. He’ll continue so we must, too.

“It’s true people are always afraid of escalation, about starting World War III, but it has already started… We allowed his disinformation, his election interference, his killing of own opposition, the imprisonment of Navalny. We didn’t respond to any of that that which is why invasion came. But now we’re still afraid of escalation.”

Her words shame the West. In 2001 and 2003, we promised to liberate Iraqis and Afghans from tyranny and instead eventually abandoned them to it. In 1994, under the Budapest Memorandum, we promised Ukraine that if it gave up the nuclear weapons on its territory after the fall of the USSR, we would guarantee that it didn’t face aggression from the UK, the US or, critically, Russia. But when Russian troops marched into Crimea and then eastern Ukraine, we looked away. We did nothing.

Betrayal, in the movies, is crystal clear. But in reality, few of us are Benedict Arnold or Kim Philby or Ephialtes. We tend to betray not in black and white but in a thousand shades of grey. The averted gaze, the shuffle across the street, the decision to ignore what is plain to all.

This is what we have done to Ukraine and to so many allies over the last 20 years. Right now, the Kremlin is suffering, but it will calculate that in a month or two — when the news cycle has moved on — things may be different. Will bank accounts quietly reopen, along with the Moscow branches of Zara and McDonald’s? We need people to buy our overpriced houses, and pay our libel lawyers and fork out for our school fees.

But we cannot allow it to happen again. If not for Ukraine’s sake, then for ours. As Jaresko concludes, “Ukraine’s survival is the world’s only guarantee that this conflict does not expand into Europe and the wider world. The actions we take now will be worth any short-term cost. Global peace and freedom are at stake.”

What would happen, though, if instead of creating the impression of headlessness, we actually took artists out of the creative process? Well, now we can find out. Researchers are experimenting with applying machine learning to visual imagery, and the result is the unnerving phenomenon of ‘GAN art’.

A ‘GAN’ is a ‘generative adversarial network’, which is to say two machine learning networks programmed to run in parallel. The first is fed a set of input data, such as a type of image, and told to generate new, believable versions of that data. The second is tasked with assessing whether the new, AI-generated data are real or fake.

The aim is for the first network to succeed in fooling the second network more than half the time. As the two models adjust in relation to one another, they become increasingly skilled at predicting and manipulating patterns in the input imagery.

One playful result of this is web or smartphone apps that invite the user to ‘create’ — that is, prompt the AI to create — images based on text. Wombo is a popular one: you can choose from several different ‘styles’, enter your text prompt and watch the machine create an image.

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When you do so, two things become apparent. First, the more abstract the prompt, the more difficult it is to distinguish the output from human-created art. But secondly, there’s something indefinably off about them. That comes more clearly into focus when you give the machine a more specific prompt — as I discovered when I asked Wombo to draw me a cat.

Cat images are so popular and widespread online that one 2013 cat food ad claimed that they make up 15% of all internet traffic. With such an immense dataset, you’d think an AI would find it easy to generate a cat image.

But when I prompted Wombo with ‘Kitten’ I got what looks like the disfigured victim of some deranged scientist’s experimental flesh-sculpting, as viewed through a haze of LSD. Here it is; judge for yourself.

Looking at this abomination, the off-ness becomes easier to grasp.

Everyone — at least, everyone human who’s ever spent time online — knows what a kitten looks like. A skilled artist can convey a kitten’s shape and movement with a few lines of a pencil. But that knowledge is acquired not just by mechanically digesting and attempting to synthesise the aggregate of two-dimensional kitten images, but also understanding what kittens are, and what they mean in our cultural context.

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Without that capacity to filter and actively re-interpret in terms of the wider context, replacing meaning with pattern recognition creates something that’s both eerily almost-intelligible but also deeply disturbing. It is, as Macbeth says, “a tale told by an idiot”.

So what, you might say. GAN ‘art’ isn’t art. It’s a game, to amuse us for a few moments online when we should be doing something else. But absurd as it is, the idea of AI ‘art’ only takes a pervasive contemporary dream to a slightly more absurd conclusion: that of eliminating individuals from human culture.

The positive version of this dream imagines that we could promote equality by minimising the role of specific, individual contributions to human society. You see versions of this in the widespread academic effort, for some decades now, to downplay the study of ‘great’ individuals in favour of mass movements or widespread sociocultural phenomena.

Well-established in disciplines such as history or literature, this has percolated even as far as the quintessential study of great individuals, the ‘Grand Strategy’ course at Yale. Here, the course director Professor Beverley Gage prompted debate last year when she shifted the course curriculum away from individual political actors toward grassroots activism and civil rights.

We see same the effort to de-emphasise leadership in favour of the collective in the rise of technocratic forms of government. This is often well-meant: this study shows populations support technocracy in proportion to how incompetent their elected government is perceived to be. In other words, the more disillusioned we grow with the ability of our elected leaders to govern, the more longingly we look to ‘neutral’, depoliticised ways of running our affairs.

And confidence in human leadership is waning across the board. Angry populists condemn the ruling class as out of touch; critics decry the current government as incompetent; others dismiss the electorate as ignorant or racist. The problem, across the board, is: us.

Faced with our manifestly disappointing powers of human self-governance, the dream of eliminating leadership can’t but seem appealing. And it’s in this light that we should view Tuesday’s vote by our MPs, to entrench vaccine passes in British domestic life.

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This has been presented as a measure to control Covid — or, as George Osborne put it, a matter of “citizenship”. But it’s worth bearing in mind that emergency powers have a way of sticking around. Anti-terror measures enacted in America in the wake of 9/11 massively expanded US surveillance and are still in force. Once the infrastructure and social norms are in place for digital ID, they are unlikely to go away again — especially given the Government has already signalled a desire to introduce such a scheme.

From some perspectives, digital ID is an obvious and sensible move. In a 2020 video, the aerospace and weapons manufacturer Thales offers an enticing picture of how much easier many ordinary interactions could become with a ‘Digital ID Wallet’. Controlled from a smartphone by each individual user, Thales imagines this centralising a user’s personal data, eliminating the messy business of individual assessment and human error from ID checks and record-keeping across all areas of life.

The power of such tools is evident, as is their appeal from a governance perspective. But once they’re in place, the scope is infinite to extend them beyond simply logging driving licence records.

Once identities are held digitally, our behaviour can be tracked — and ‘nudged’ — digitally as well. And our elites, habituated by university courses that highlight the importance of large-scale social and cultural patterns over the specifics of individual experience, already look eagerly toward the potential offered by AI pattern recognition. But machine learning systems are only as good as their inputs. And pattern recognition isn’t the same thing as interpretation.

In an AI ‘art’ generator, this has little impact beyond creating creepy kitten-images. But in contexts that affect people’s lives more directly, machine learning has more serious implications. Imagine, for example, that we embraced a ‘prevention’ oriented public health system, using citizen data collected around a Digital ID Wallet. This isn’t so far-fetched: a data-driven pilot scheme aimed at tackling obesity via measures including tracking scheme members’ shopping history was launched earlier this year.

And while the existing pilot scheme focuses on rewards, a unified ID would make it easy to implement sanctions too. The Health Pass now required for entry into bars, clubs or venues to combat the spread of Covid-19 could without great difficulty be extended to other behaviours or linked with purchase history. What this change means is the arrival, likely for good, of a mode of digital-era governance where for the first-time participation in public life can be made conditional on ‘healthy’ behaviours.

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The mutant kitten is a vivid illustration of what happens when you task a computer with doing something human, without the capacity to understand what humans actually care about. Applied to real lives, the blind brilliant-idiot quality of AI pattern recognition is already causing miscarriages of justice.

Now imagine extending that deep into your life: having your Health Pass suspended because you’ve bought too many units of alcohol this week, perhaps, meaning you can’t access essential services. Never mind that you were shopping for an event at your local social club. The computer sees a pattern. And unlike for a human, for machine intelligence there’s no difference between pattern recognition and meaning.

The slow collapse of social meaning into computer-legible pattern is reshaping us into a post-political, post-individual human order — one resisted most vigorously, to date, by conservatives. It was chiefly conservative politicians and voters who framed Brexit as pushback against technocracy. At Yale, conservative donors including Henry Kissinger forced Professor Gage to resign earlier this year. And on Tuesday 98 Tories — nearly a third of elected Conservative MPs — rebelled on Covid passes. Boris owes his victory to Labour Party support, and is probably a dead man walking within his own party now.

But Boris’s loss of face in his own party is one fraction of a far more deadly bleeding of authority: our downward spiral of disintegrating trust in human government full stop. As long as this continues, the temptation will persist to solve the crisis of authority with ever deeper rule by AI: the only compromise option left when we can’t agree on which human or humans should be in charge.

Fittingly, while writing this, I stumbled on another, current digital art project titled Headless. This one doesn’t depict the impersonal nature of finance — it’s trying to harness decentralised digital technology to human ends, by embracing it as an engine of creativity.

I hope its creators are right to think this can be done. For we’ve just taken another step closer to a world ruled by machines; machines that are brilliant at detecting patterns, but idiots when it comes to understanding what those patterns mean. And unless we’re able to humanise those technologies, this dawning age of digitised governance will digest the patterns of our social order and regurgitate a world of idiotic, inhuman cruelty.

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By Giles Fraser

If you doubt me, take a look at the bond market. A bond is a tradable slice of government (or corporate) debt. In normal circumstances, a bond ‘matures’ after a fixed period of time, when the holder gets paid what the piece of paper originally sold for, plus the ‘coupon’ (i.e. the interest on the loan). This determines the bond’s yield. And this is where the madness comes in.

Bonds with negative yields – i.e. that pay back less than the original purchase price when they mature – not only exist, they are becoming wildly popular. Here’s Stephen Letts of ABC with the jaw-dropping numbers:

“The weirdness in financial markets at the moment seems boundless.

“In the past two weeks the proliferation of negative-yielding bonds has erupted — 30 per cent of the global, tradeable bond universe is being sold with a guaranteed loss attached to the coupon. 

“That’s an eye-watering $US16.7 trillion dollars’ worth”

Governments are, in effect, charging lenders to lend them money.

This invites an obvious question: why would anyone agree to a deal like that? Wouldn’t they be better off just sitting on the money?

I’ll try to explain by analogy.

Have you ever had furniture stored in one of those out-of-town warehouses? If so, you’d expect to get your sofa and armchairs back in one piece, but you wouldn’t expect to get, say, an extra armchair by way of ‘interest’ on your ‘deposit’. In fact, you’d have to pay the storage company for the service of looking after your stuff.

That’s the logic behind a negative yield bond – it’s a payment to the issuer to look after your money. But, hang on, why can’t the money be lent out at interest – so that you earn a positive yield upon it?

Well, you could say the same about your surplus furniture. Instead of paying to have it stored, why not hire it out and make a profit?

The answer is that there’s no shortage of furniture; most people have too little living space, not too few things to fill it with. Moreover, the hassle and risk of hiring out your stuff is too much trouble – especially if you might want it back at short notice. It’s just much easier and safer to pay the professionals to store it for you.

Of course, there are many more uses for surplus money than surplus furniture – moving it around is easier too. However, the fact is that there’s more capital floating around the world right now than we can find (profitable) uses for. If this weren’t the case then interest rates wouldn’t be so low.

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Like furniture, bad things can happen to financial wealth that isn’t looked after. It can be stolen, investments can fail, banks can go bust, asset prices can collapse, stock markets can crash. These risks need to be managed – and for institutions like pension funds with vast sums of money under their care, and powerful regulators to satisfy, the cost of that management adds up. By buying bonds for their investment portfolios, they are in effect getting governments (plus some corporations) to manage part of the risk for them. Indeed, demand can be so high and suitable alternatives so unavailable, that bonds sell at zero or negative yields:

An excellent briefing for Bloomberg by John Ainger shows where this is happening:

“Investors have to pay to own more than 80% of Germany’s federal and regional government bonds; almost the entire Danish government market is negative. The U.S. is one of a dwindling number of nations with no negative-yielding sovereign debt.”

In the short term, the recent rapid growth in demand for negative yield bonds is being driven by declining confidence in stock markets and property markets – with investors expecting stock and property values to fall in the near to medium term.

There are other signs that the money market expects a downturn in the economy. For instance, it’s normally the case that yields on bonds that mature in, say, ten years are higher than those that mature a lot earlier. That’s because long-term debt is seen as riskier – there’s simply more time for things to go badly wrong. However, at the moment, it’s the other way round – the short-term yields are higher than the long-term yields. This is called an inverted yield curve. (Don’t confuse ‘inverted’ with ‘negative’, in this context inverted just means that the market is pricing short-term debts as riskier than long-term debt.)

Yield curves have inverted at various points in the past. It’s a classic sign that the market is expecting a recession. However, there’s nothing classic about the current craze for negative yield bonds – the phenomenon barely existed more than a few years ago. What’s happened since is without precedent. As unpleasant as recessions are, we should be much more disturbed by the fact that $16 trillion dollars (and rising) are currently invested in products guaranteed to make a loss.

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A healthy capitalist system is one that can both make a profit and reinvest it profitably. The corporates are still making money, but they no longer seem to know what to do with it. Things have got so bad they’re literally paying the state to take it off their hands.

They’ll be paying their taxes next.

But is it?

Usain Bolt is certainly the fastest over 100 or 200 metres, but if he and his fellow sprinters were to compete in a major marathon, they wouldn’t stand a chance of winning. In 2016, it was reported that Bolt had never run a mile (in one go) – let alone 26 of them (plus 385 yards). At the middle and long distances, the top names change, and also the body types. Distance runners have long, lean muscles rather than thick ones, their wiry frames built more for stamina than explosive speed.

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The most dramatic shift in competitiveness comes in the ultra running events – i.e. any race longer than a marathon. These include ‘conventional ultramarathons’ such as the IAAF-recognised 100km race, but also jaw-droppingly extreme events like the Montane Spine Race, which stretches 268 miles along the Pennines from Edale in Derbyshire to Kirk Yetholm in the Scottish Borders.

In these supreme challenges of endurance, women are competitive against men. Earlier this year, the remarkable Jasmin Paris completed the course in 83 hours, 12 minutes and 23 seconds – smashing the previous record of just over 95 hours.

*

Who’s best at what is often a matter of time. From the less than 10 seconds of the 100 metres to the gruelling day-upon-day of the Spine Race, different people excel at different timescales. And not just in running.

It’s a subject that Malcolm Gladwell explores in two brilliant episodes (here and here) of his Revisionist History podcast. His particular focus is on America’s Law School Admission Test. The LSAT is a standardised exam that determines whether you get into law school – and also which law school. Needless to say, the most prestigious institutions take their pick from the highest-scoring candidates. And, of course, it’s the cream of the crop that get the plum jobs after graduating.

The podcast features a speech by the late Supreme Court Justice Antonin Scalia, in which he said that he only chose clerks from the top law schools because it was the surest way of not making a hiring mistake. The kicker was that his remarks were made at a law school that did not fall within this highest echelon; yet far from reacting with hostility, his audience laughed along merrily.

So an awful lot rides on one’s LSAT score. But what exactly does it measure? Well, you can see for yourself in the current sample paper. It doesn’t test legal knowledge, but rather reading comprehension and logical reasoning. There are five sections – including three sets of multiple choice questions used to calculate each candidate’s overall score. There’s also an unscored ‘writing sample’ (essay) section, which can be used by two schools as a supplementary means of assessment.

The fifth section is also multiple choice – but instead of being used to assess the candidate in any way, the results are used to assess experimental questions for use in future exams. The examiners use the results to ensure that the LSAT is an effective measure of aptitude for law school students. Eliminating bias is a further objective. For instance, a question on which there was a significant gap in performance between male and female candidates would be rejected for future use.

And yet, Gladwell argues, the LSAT is biased – towards those who can blast through the questions at speed. Each section has to be completed in a strict 35 minute time slot. Therefore it doesn’t just measure comprehension and reasoning, but rapid comprehension and reasoning.

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This wouldn’t matter if a test that gave people more time to think produced much the same ranking of candidates. But what if time made all the difference?

It certainly does when it comes to physical challenges like running, and we can see a similar pattern in purely intellectual activities.

Gladwell gives the example of chess, which at the top level has an international ranking system established through competition. In a standard chess game, players have 90 minutes in which to complete their first 40 moves and 30 minutes for the rest of the game. However, there are various gradations of fast chess, in which players have much less time to make their moves. This changes the rankings significantly. The best player in the world in standard chess is not the best player in ‘blitz chess’ or ‘bullet chess’.

*

In his 2011 book Thinking Fast and Slow, Daniel Kahneman describes two modes of thought: “system 1”, which is instantaneous and instinctual and “system 2”, which is considered and calculating. One doesn’t have to limit oneself to that particular dichotomy to see that time gives us the space to deploy mental abilities that can’t be hurried. For instance, time to think gives the top chess players the ability to mentally picture the branching permutations of how a game might develop multiple moves ahead.

Of course, most things in life are not like chess. Being unconstrained by the rules and logic of a gamified environment, they’re immensely more complicated. But that makes time to think all the more important. Human beings are capable of all sorts of things beyond the split second and the unforgiving minute – like empathy, insight, creativity, inspiration. We’d all be lost without them, but especially those in positions of power and responsibility who have to deal with a bigger slice of life’s complexity than anyone else.

And yet the means by which we select our elites are biased towards quick thinkers not deep thinkers. The LSAT is hardly alone in perpetuating ‘fast privilege’. Similar against-the-clock methods can be found everywhere from IQ tests to civil service examinations.

And it’s not just pure aptitude testing either. In theory, our universities test students on their knowledge of whatever subject they’re studying. But what manner of knowledge: profound or superficial?

Oxford University’s Philosophy, Politics and Economics (PPE) degree has been described by Andy Beckett in The Guardian as the “degree that runs Britain” – because so many members of the political and media elites are PPE graduates. There’s a very long list of them here, which includes David Cameron, Jeremy Hunt, Bill Clinton, Rupert Murdoch and Ann Widdecombe.

PPE students are required to ingest knowledge across a broad front and regurgitate it in the form of frequent essays, tutorial performances and exams. But though no soft option, it is a degree for generalists not specialists – and thus an all-too-fitting preparation for UK politics. David Willetts, another PPE graduate, describes British political life as “an endless recreation of the PPE essay crisis.”

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Writing about his book Bluffocracy (co-authored with Andrew Greenway), James Ball argues that Britain has “become a nation run by people whose knowledge extends a mile wide but an inch deep.” A reshuffle is always a good time to see their bluffing skills in action. Politicians walk into new jobs, pick up an unfamiliar ministerial brief and proceed to talk about it in parliamentary debates and media interviews as if they were life-long authorities on the subject.

Journalistic attempts to expose their lack of knowledge are usually thwarted because the interviewers are bluffing too – resorting to easily deflected gotcha questions, instead of deeper conversations that might reveal something important about what our politicians think (or don’t think).

Last week, Yascha Mounk floated the theory that the real problem with PPE and similar Oxbridge degrees is that they reward students for making deliberately counterintuitive arguments:

“…ambitious students at Oxbridge are taught to go for a First by doing something extraordinary. 

“And by far the easiest way of doing something ‘extraordinary’ is to make a spirited case for a counterintuitive (and probably wrong) conclusion.

“This pedagogical tradition is responsible for (or perhaps stems from) a lot of the best things about Britain… It’s why British commentators are rarely boring…”

However, he thinks it also encourages “influential people – including writers and politicians – and especially writers turned politicians” to make “fun cases for irresponsible positions”. Which, he suggests, is one reason why we’re facing the prospect of a no deal Brexit.

Mounk concedes his theory is “probably wrong” and, ironically, itself an example of making a clever argument for a wacky proposition. However, the serious point that can be made is that the quality most valued in our highflyers is the ability to assimilate as much information as possible in as little time as possible – and then reapply it with maximum speed and agility.

Whether it’s the debating society tricks pulled by our politicians, or the “delivery at pace” expected of our civil servants, or the ‘hot takes’ extracted from our journalists, or the frenetic workload of the corporate lawyer, what recruiters are looking for is processing capacity not understanding.

*

In the wake of the global financial crisis, many books were written in an attempt to understand what went wrong. One of the best was A Call for Judgement by Amar Bhide. The argument is encapsulated in his Harvard Business Review essay, The Judgement Deficit – in which he says that while the decentralised, entreprising nature of capitalism saw off the centralising tendencies of state socialism, it then fell victim to a new kind of self-imposed centralisation:

“…one that is the work not of old-fashioned autocrats, committees, or rule books but of statistical models and algorithms. These mechanistic decision-making technologies have value under certain circumstances, but when misused or overused they can be every bit as dysfunctional as a Muscovite politburo. “

The most spectacular example is what happened to the financial sector:

“A host of lending officers used to make boots-on-the-ground, case-by-case examinations of borrowers’ creditworthiness. Unfortunately, those individuals were replaced by a small number of very similar statistical models created by financial wizards and disseminated by Wall Street firms, rating agencies, and government-sponsored mortgage lenders. This centralization and robotization of credit flourished as banks were freed from many regulatory limits on their activities and regulators embraced top-down, mechanistic capital requirements. The result was an epic financial crisis and the near-collapse of the global economy. “

It’s not that IT replaced all the people – humans are still an essential component of even the most advanced corporate systems. However, they have allowed a huge amount of previously human judgement to be automated and therefore centralised. A bigger proportion of the decisions that matter can be concentrated at the highest levels of management – allowing the financial rewards for such work to be concentrated there too.

A corporate operation that shifts the balance to IT-mediated systems as opposed to distributed decision-making by experienced human workers is also easier to scale-up. This allows markets to become increasingly concentrated in the hands of fewer, larger companies – meaning even more money for those at the top. It also means that corporate growth can be achieved by exploiting monopoly effects rather than investing in product improvement, which of course is bad for innovation.

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Innovators, though, are disruptive of centralised systems – which is another reason to select the knowledge class elite on their ability to think fast, not deep.

I realise I’m painting a picture of them as cogs in a machine, which isn’t entirely fair. These are highly able individuals and some of the most able – e.g. those recruited into top law firms, consultancies, financial institutions and tech companies – are very well rewarded. They’re also made to work punishing hours – a reflection of their scarcity value and the desire of a corporate system to get the most out of its most expensively purchased components.

What’s true of the business world has a parallel in politics – only in this context the centre hoards power for its own sake, not to maximise profit and executive pay. In theory, a government minister should be in a position to think deeply about the policies they’re responsible for, drawing upon the expertise of their civil servants and the experience of frontline workers. Armed with such knowledge they’d then be in a position to pursue meaningful reforms.

But anyone who’s seen government from the inside could tell you that’s not how it works at all. The purpose of most ministers is not to exercise judgement on any significant matter but to process and communicate decisions made in Downing Street and the Treasury – if only by rubber stamping the mechanistic actions of whatever slice of the civil service hierarchy he or she nominally oversees.

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How university re-establishes hierarchy

By Peter Franklin

Of course, no centralised system of control is ever so perfect as not to need running repairs and work arounds. There’s always a demand for those who can improvise solutions when things don’t run according to plan and where local circumstances present unanticipated challenges. Dealing with such situations requires both judgement and creativity – but only in service of the system. Those most capable of it rise through its ranks; until, that is, they mess up irredeemably – at which point they can provide one final service: as a scapegoat for the failings of the system itself.

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The crying shame of the way we select our elites is that our finest, most fertile, minds are being wasted. They’re either sidelined because they don’t excel at tests of quick thinking, or because they can think both fast and deep, but are kept too busy by the systems they serve to ever think the disruptive thoughts that they’re capable of.

Sometimes an independently-minded individual does break lose – defying the selectors to follow their own paths. The tech pioneers who dropped out of college to start-up disruptive enterprises are a classic example. The irony though, is that some of the companies they founded have become monsters – corporate behemoths exercising super-centralised control not only over their own business, but ours too.

Neoliberalism was meant to set the market free – and yet, despite the IT revolution, this is an era of stagnant wages, growth and productivity. In seeking an explanation, we should start at the gateways of the knowledge economy.

Suggested reading

Should the rich be allowed to destroy their own wealth?

By Peter Franklin

Yes, I know the heart bleeds – but there really is a global shortage of places for the seriously rich to put their Earthly riches. There just aren’t enough alternatives to the bog standard option of the bank account.

Indeed, interest rates wouldn’t be at record lows around the world if there weren’t a global glut of cash.

Writing for Axios, Dion Rabouin notes that US companies have “record cash holdings of close to $3 trillion”. Wealthy individuals aren’t doing too badly either:

“The top 1% of U.S. households are holding a record $303.9 billion of cash, a quantum leap from the under $15 billion they held just before the financial crisis.”

Of course, most of us would love to have this ‘problem’. And, in a way, we do. Though the non-wealthy have little or no share in the global money glut, our lives are affected by what happens to it.

Those charged with managing extreme wealth are channeling the cash into places where it can do more harm than good – for instance, the property market where it inflates house prices and rental values. Then there’s the practice of share buyback – in which cash-rich companies buy up their own stock:

“Companies made a record $1.1 trillion in stock buybacks in 2018 and are on track to surpass that number this year.”

Buybacks increase demand and reduce supply, thus pushing up share prices – already inflated by the effects of quantitative easing. The executives can say they’ve ‘added value’ and are rewarded accordingly – not least in the form of ‘tax efficient’ stock options.

Admittedly, the company wouldn’t have the cash for the buybacks if it wasn’t profitable in the first place – but that’s not difficult when you can borrow money at rock bottom rates (QE again), buy up the competition and exploit a monopoly position. The company’s soaring market capitalisation means that the banks are happy to keep lending it money… and so on and on it goes, generating further surpluses of cash for the fortunate few.

Suggested reading

Why low interest rates poison the economy

By Peter Franklin

Obviously, none of this is good for the long-term health of the economy – and, for most of us, it’s of no short-term benefit either. What, then, can we do about it? Taxation is an obvious weapon, but the thing about enormous piles of cash under professional management in a borderless world is that they don’t sit still waiting to be punitively taxed.

A slightly different approach is to use tax to disincentivise some of the less desirable uses of the money glut. Property-based assets are an obvious target, because it’s not like we’ll end up with less land if we scare away the speculators. Targeting share buybacks is trickier. While we might want to discourage this and other forms of ‘financial engineering’, we also want to encourage equity investment in productive enterprise – and the finance industry is full of people who can disguise the former as the latter.

Ideally, we’d have such an enterprising, innovative economy that there’d be ample opportunities to invest in growth-generating industries. Established companies would be so threatened by new competitors that they’d invest their profits in business development instead of the complacency of share buybacks. It would also be good to have more rich people with the brains, balls and heart to invest their money imaginatively, courageously and philanthropically. That’d mop up the money glut.

Needless to say, these happy scenarios depend on culture change – which, if it happens at all, is a long-term process. So, in the meantime, is there anything that the state can do to attract excess capital into socially-useful investments?

Visionary public funding programmes of the kind that gave the internet its start are great – but, again, it’s a long-term process. Fortunately, there are some quicker wins to be had – areas where strategic state-led investment can unlock avenues for productive private investment.

Consider the decades of under-investment in the economic infrastructure of our cities beyond London. Addressing key weaknesses – like the state of our non-Londoncentric public transport system – does not require futuristic technologies, but tried-and-tested upgrades that more productive local economies already have.

Suggested reading

The irrelevant debate over the top rate of tax

By Peter Franklin

The challenge for government – including local government – is to become a credible enabler of private sector investment opportunities. That means an end to the imprudence of politically-driven mega-projects like HS2 and Hinkley point, and a pivot to smaller, less complicated, productivity improvements.

The fact that so much potential has been left locked-up for so long is an indictment of our over-centralised political system and our lopsided national economy. But that can be changed – indeed, it is being changed as local communities are re-empowered and the foundations of a modern industrial policy are put in place.

A new prime minister has an opportunity to shift this work into a higher gear.

Suggested reading

Why home ownership is the real key to progress

By Reihan Salam

But what became of those unsold, unsellable and abandoned houses? An eye-opening long-read by Alana Semuels in The Atlantic provides a substantial part of the answer:

“In 2010, at the height of the foreclosure crisis, the federal government watched nervously as hundreds of thousands of families lost their homes. Empty houses blighted neighborhoods, their shades drawn, their yards overgrown. Without some kind of intervention, federal officials worried, the housing market would continue in its free fall, prices would keep dropping for existing homeowners, and the economic recovery, already tenuous, would be imperiled.”

The US government therefore “incentivised Wall Street to step in”:

“It worked. Between 2011 and 2017, some of the world’s largest private-equity groups and hedge funds, as well as other large investors, spent a combined $36 billion on more than 200,000 homes in ailing markets across the country.”

Rather than re-selling once the economy recovered, the homes have been rented out via property management companies.

In theory, the efficiencies and expertise that should come from letting homes on a large scale should mean a better deal for tenants – compared to renting from private landlords with no more than a few properties. However, there’s more than one possible business model here.

Model A is to strive to provide the best service possible; model B is to provide the worst possible service you can get away with – finding inventive ways to skimp on repairs or stick tenants with extra charges. Where landlords are competing for high-earning and potentially litigious customers in prosperous areas, then model A is likely to predominate. But in rental markets where people have limited means and fewer options, model B (though immoral) becomes viable.

Of course, there are many examples of small-time landlords exploiting tenants too. However, these bit-players aren’t in a position to dominate the rental markets of entire neighbourhoods. Nor do they have the lobbying clout that big companies have (especially those in which major financial institutions have direct investments).

One can see why politicians are grateful to the major landlords. If they hadn’t taken over the management of so much unwanted housing then the state would have had to do it instead. For those who prefer market-led solutions or who merely doubt governmental competence, the new status quo looks like the least worst outcome.

Furthermore, one could also argue that up-market and down-market options are a general feature of consumer capitalism – and that it’s the job of any industry to cater to all budgets. As long as tenants get what they pay for, and no laws are being broken, what’s the problem?

However, housing isn’t like other markets. Whether one owns a home or rents it has profound consequences for long-term economic empowerment. Moreover, supply is notoriously inelastic, not least because the key input – land – is the most finite of resources. The expansion of the private rented sector in the US (and the UK) has therefore come at the expense of owner occupation. So, if your idea of capitalism is a property-owning democracy, then the last ten years or so have delivered a series of setbacks.

Suggested reading

Why home ownership is the real key to progress

By Peter Franklin

If, on the other hand, your goal is to undermine popular support for capitalism, then presiding over the boom-and-bust of the property market, bailing-out the banks responsible and then incentivising big investors to hoover up sub-prime property and rent it back to the working class is an excellent way to go about it.

As Semuels puts it, “the trends that favoured these new landlords were largely produced by a financial crisis that Wall Street had itself abetted.”

Even when landlords provide an acceptable service to customers whose best option may be to rent for a while, it is vital this does not become a system in which ordinary working people are trapped so that the wealthy can profit.

Capitalism must not build a new road to serfdom.

In a sane world we’d call this inflation. In fact, it is inflation – and to which there are two solutions: increase supply and/or reduce demand.

Policy makers mostly ignore the demand-side, focusing on supply – i.e. how can we build more houses?

Suggested reading

Why 'peak death' won't solve the housing crisis

By Peter Franklin

Clearly, we need to remove the main constraints – of which three are the most fundamental, applying not only to housing, but to just about anything.

Firstly, resistance. A lot of people don’t want new housing near their own homes – and their unhappiness generates political pressure against new development. Solution: beautiful houses so that development makes places better not worse.

Secondly, time. There’s never enough of it, is there? In Britain, we still basically build houses by hand – and that’s a lengthy process. Solution: factory-built houses, using advanced onsite and offsite fabrication technologies to speed up the process of construction.

Thirdly, space. Always at a premium where people most want to live, this is the tightest constraint on building new homes. Solution: ‘tiny houses’ so that we can have more of them on any available site.

This last one is the subject of an insightful piece by Vauhini Vara for the Believer:

“Modest homes have existed for as long as people have sought shelter, but the tiny house—typically defined as a dwelling of 399 square feet or less, often built on a trailer, that functions as a miniature version of a regular house—is supposed to represent a deliberate design choice. The version of tiny living that is glamorized on TV and that appears in curated Instagram accounts features images of young, yogic, flannel-wearing couples lazing about in delicious little spaces. “

As well as the cutesiness of the designer tiny house, there are other, more substantial, attractions. With ever increasing numbers of us living alone or as couples without children, family-sized homes seem like a waste of space – not to mention a waste of other resources like energy. Smaller dwellings mean that more people can live in sought-after areas such as city centres or rural beauty spots, where much of life is lived outdoors not in. In urban settings, tiny homes lend themselves to modular forms of construction and can make use of every sliver of land; while in rural settings, the 21st-century version of the log-cabin treads lightly on the landscape. Finally, what better reason could there be to de-clutter your life and make Marie Kondo proud?

Suggested reading

Why home ownership is the real key to progress

By Peter Franklin

So are tiny houses the big solution? Writing from an American perspective, Vara sounds a distinct note of caution. As well as being limited in size, these homes are also limited in number:

“…the most surprising aspect of the tiny-house phenomenon might be that, while the lifestyle has never been more visible, real-life tiny-house dwellers are hard to find. Fewer than ten thousand of the homes are estimated to exist nationwide. “

Note that this doesn’t include the vastly greater number of trailer park homes dotted across the US, but then, as the author points out, the tiny house movement seeks to present modest living as a positive choice. The irony is that to get round regulations “builders have taken to putting tiny houses on wheels and building them to the less restrictive codes that apply to RVs [recreational vehicles]”.

Then there’s the issue of land, which complicates the idea of tiny homes as a solution to the affordability problem:

“The median price of a home in the US is $220,000, which most people finance with a mortgage. Tiny homes usually sell for $40,000 to $90,000 without land, and buyers typically pay cash or finance them with a property loan.”

That’s great for people who want to own their homes, but have limited access to capital. However, they also need to rent or buy the land on which their homes are built or parked on. Where land is cheap that ought not to present too much of a challenge. But where land is expensive (and thus where, by definition, the housing crisis is at its most acute) construction costs are not the main cost. Squeezing more dwellings onto a particular parcel of land – by building up or building small – only increases the number of possible tenants / owner occupiers / investors and thus the commercial value of the land.

Suggested reading

Would you trust a robot to build your house?

By Peter Franklin

In other words, we’re back to the demand-side of the housing crisis.

Tiny homes, prefabricated homes, beautiful homes – all have their benefits, but the fundamental issue isn’t what we build, but what we build it on (and how much it costs).

By the way, the rival ‘disaster capitalist’ solution to the housing crisis, which is to embrace sprawl and ugliness plus unregulated finance, will also fail – and for exactly the same reason.

Until policy makers deal with what is quite literally the underlying problem – land prices and the mechanisms by which they’re inflated, there will be no lasting solutions.

Every other initiative, no matter how laudable, is a distraction.

But what if the City does shrink? Would that be a disaster for the UK? Not everyone thinks so – indeed, as ‘Schumpeter’ points out in The Economist, the notion that Britain’s financial sector is too big is “gathering momentum.”

Further reading

Nomi Prins: The central banking heist has put the world at risk

By Liam Halligan

The article focuses on a book by a “former contributor to The Economist,” Nicholas Shaxson. Despite this connection, the anonymous author of the article mostly disagrees with him.

Of course, there’s little doubt that the sector is an elephant in the room of the UK economy:

“Financial firms from around the world are drawn to the British capital; the assets in the country’s financial system are ten times its GDP.”

However, for the rest of the country, this isn’t always a happy living arrangement:

“Many Britons suspect that the City succeeds at everyone else’s expense. That view is decades old, but the financial crisis of 2007-08 intensified it greatly. The crisis brought the economy to its knees; the state spent £140bn ($220bn) bailing out banks.”

While inner London is disproportionately rich – other parts of the country are disproportionately poor – with 2016 EU figures showing that the UK has six of the poorest ten regions in Northern Europe.

It is suspected that London, and especially London’s financial sector, is sucking talent, investment and opportunity out of the rest of the country:

“Mr Shaxson provocatively compares Britain’s situation to that of Angola, a country where oil makes up over 95% of exports. Oil should bring widespread prosperity to Angola, but it does not. Brainy Angolans flock to the oilfields rather than to the civil service or health care. Floods of foreign capital raise the value of the currency, making non-oil industries uncompetitive.”

Schumpeter disputes the comparison – and clearly there are differences between a dominant sector centred around the extraction of a single natural resource and one that offers deep expertise across of a wide range of specialised services. However, there is a significant concession to Shaxson’s argument:

“…the City does encourage foreign investment in British firms and property. That pushes up both wages and rents in London, and probably the pound too, making it harder for other, price-sensitive export industries to thrive.”

Schumpeter also notes that “relative to its economy, Britain sees 50% more mergers and acquisitions than America”.

As, I’ve written about before, an influx of foreign capital for speculative purposes generates juicy fees for middlemen and money handlers, but little in the way of genuinely productive activity. Furthermore, if it’s a net influx then it will push up the value of the currency and widen the current account deficit.

Further reading

And finally: the good news from flyover county

By Peter Franklin

The new British disease – i.e. a debt-ridden, low-productivity economy prone to asset bubbles and extremes of inequality – is the natural consequence.

But if that’s the problem, what’s the solution? Certainly not one achieved with a blunt instrument. Seeking to shrink the financial sector without distinguishing between speculative and productive investment (and the expertise that enables the latter) would risk doing more harm than good.

The real answer can be seen from the sheet glass windows of the city’s statement architecture. Look down and you can see it: the river Thames.

Had it been left to its own devices, London’s great river would be wide and shallow – spreading out to where it wasn’t wanted or needed. It would also flood on a regular basis, causing catastrophic damage. But over the centuries, the Thames has been tamed. Bridges have been built; the river embanked; and a great barrier put in place to hold back the tidal surges.

As with water, so with money. We needn’t reduce the volume of finance flowing through London, but we must do more to direct it – or at least direct it away from where it does no good. Speculation, especially in land, must be discouraged – with the tax and regulatory framework favouring productive investment instead.

Speculative investment is lazy investment – requiring no great knowledge or expertise. A country does not require a sophisticated financial sector to suffer property booms. asset bubbles and Ponzi schemes. It just needs more money than sense.

Therefore, constraining finance from following its own worst instincts need not sap its energy. A properly regulated financial sector, like an soundly embanked river, would flow faster and deeper than it did before.

Further reading

Ten vested interests the Tories failed to tackle

By Peter Franklin