The same is true of music. What grates the listener’s ear is the mistakes of the unpractised or unskilled musician in butchering a well-known piece. One hears the errors and false notes in between what one knows to be Beethoven or Mozart, and this is what spoils the recital. One hears the musician not the composer who wrote the music1.

So thought the German philosopher Hans-Georg Gadamer, who described this phenomenon as the ‘transparency of apprehension’. His promotion of hermeneutics or the science of interpretation was aimed at countering both the austere realism of logical positivism (in which the only things considered as true were scientific facts) as well as the extreme relativism of historicism.

According to Gadamer, we re-learn and reinterpret our cultural and social heritage, and in so doing we start to appreciate what is good and bad. The rules by which we do this aren’t the hard rules of science but fuzzier rules derived from language and social tradition.

What has any of this got to do with the US bond market? It is clear by now that the second Trump term is turning out to be a badly-directed play with a questionable cast. The US dollar, and the government bond market that sits behind it, are being bent and twisted in ways which grate the ear and offend the eye.

US power in the post-war period has always been inextricably linked to America’s economic and financial muscle. The dollar is the principle manifestation of this. To see how it is being reinterpreted by those in control of America’s key institutions is to understand what they hope comes next. This in turn helps us work out what’s actually going on now, perhaps revealing that we are in fact watching King Lear rather than the billed production of Henry V touted by the Trump administration.

When it was running smoothly, the US government bond market bound the global financial system. America’s sovereign debt acted as bank capital domestically, central bank reserves both in the US and abroad, as well as sound collateral for trade and investment across the globe.

Those who believe this to be true now and for ever were initially dismissive of Secretary of State Scott Bessent’s announcement a few weeks ago that he was doubling the size of long-end Treasury buybacks from $2b to $4b.

For them, this was merely an exercise in liquidity management for intermittently-traded off-the-run bonds, and nothing more than an extension of a policy started by his Democrat predecessor, Janet Yellen. It was a matter of plumbing and little else.

The US Treasury market’s great attraction is its depth and liquidity that ensures accurate and continuous pricing. Aside from the question of whether Bessent’s move constitutes quantitative easing, or whether such an undertaking by the Treasury is equivalent to similar ‘operation twist’ exercises previously conducted by the Federal Reserve to flatten the yield curve, one can already sense Gadamer’s heavy-handed director at work. If the Treasury secretary has to intervene in the bond market to ensure ‘correct’ yields, is it still the same tool to price global risk that people once thought it was?

After Mr Bessent’s announcement, the voices of the nothing-to-see-here crowd were drowned out by market moves. Gold and bitcoin spiked higher, the dollar weakened, while yields at the long end of the curve fell before again drifting higher as the market worked out that the Treasury was going to have to buy an awful lot of paper to ensure its desired outcomes.

Just as well then that it’s been suggested that Mr Bessent will be using the near $1 trillion in the Treasury General Account at the Fed to buy back bonds2. Issuing short to buy back long isn’t necessarily inflationary in money terms, and while liquidity management isn’t yield-curve control per se, the market is sensing a changing direction of travel here, and this brings into question the role of US Treasuries as a neutral interest-rate pricing tool.

No less august a figure than macro hero Stan Druckenmiller put AI pen to paper in the Wall Street Journal to pass comment on his former employee Bessent’s market meddling:

I have spent five decades trading on a simple premise: Markets aggregate information no committee possesses, and prices are how that information reaches decision makers. The long-term Treasury yield is the most important price in the world. It is also the only fiscal disciplinarian the U.S. has left.3

Mr Druckenmiller clearly felt that this was an issue of price not plumbing, and his suggestion is that the US should start to deal with its deficit issues before it’s too late. While his defence of market principles is admirable, cutting the US deficit from its current 6-7% level is not just politically difficult but economically questionable. Perhaps it is already too late.

The Great Recession saw a fall in US GDP of 4%, a figure just over half the drop required to balance the federal budget. The danger with austerity at this stage is that falling tax receipts and rising unemployment benefits could cause the deficit to go up not down. The sort of yield curve control that Mr Druckenmiller is implicitly opposing is sadly a more politically palatable way of cutting America’s debt as it would be inflation rather than Congress doing the heavy lifting, and at a politically convenient arm’s length.

Laudable though his defence of the market mechanism is, Mr Druckenmiller may also be revealing himself to be the prisoner of an outdated interpretation of the dollar and the bond market.

Mr Bessent’s bond market interventions came a few weeks after he intervened in the currency market to prop up the yen, the need for which was the risk that weakness in Japan’s currency and bond market might force the latter to sell US assets (including Treasuries), thus forcing America’s borrowing rates unacceptably higher.

If the Japanese are not allowed to sell US assets, and if the US is going to impose secondary sanctions on those associated with Iran4, and if US control of offshore dollar funding is going to be transformed by stablecoins backed by Treasury bonds, then the very nature of dollar funding and its cost is going to change, likely in favour of the US but not necessarily to the mutual benefit of its creditors abroad.

Whether the stablecoin project develops as planned through the Genius Act, and whether Iran’s allies (ie: China) either play ball or simply continue to plot their own rival direction has yet to be seen, but simply viewing the US Treasury market as part of an old play about the US domestic economy and its needs no longer feels good enough.

Such considerations reflect a new world in which a weaponised dollar plays a role in a neo-mercantilist system of rivalry that has superseded the old free market one of global economic cooperation characterised by the free flow of goods and capital.

The financial press is predictably focusing mainly on the conventional story of inflation, growth and fiscal responsibility. Good writing should show not tell. There is an awful lot of telling going on in the financial press about Scott Bessent being the bad cop with money printing and Kevin Warsh, the new Fed Chair, being the good cop of monetary discipline. Mr Druckenmiller fits tantalisingly into this costume drama as the former boss of both Mr Warsh and Mr Bessent.

There are also those like Stephen Miran who tell us that higher US yields in fact reflect America’s great growth potential rather than its weak fiscal position or the extraordinary demand for credit from AI super-scalers5.

A few tough remarks from Mr Warsh during his Jackson Hole speech last Friday sent yields soaring, the dollar higher, and gold and bitcoin sharply lower6. This is the market showing everyone what the problem is - a rising dollar, soaring yields and falling asset prices if the Fed is hawkish, a weaker dollar and probably more inflation if the Treasury policy is expansionary, with yields likely rising too if bond repurchases aren’t aggressive enough.

If the Fed does start hiking, then the Treasury may well find the bond market even less cooperative than usual. The market price action on Friday 28th August was a foretaste of that, both for the US and for others, especially Japan.

The market is now slightly in favour of an interest rate hike in September. Perhaps Mr Warsh isn’t Trump’s guy and the Fed will start hiking into a set of mid-term elections which are set to be a bloodbath for the Republicans.

Either way, it is increasingly hard to ignore how plans from the White House are changing the nature of the dollar and the bond market that backs it, and as such, it’s up to investors to reinterpret what this means for their asset allocations, especially the balance between fixed income instruments and hard assets.

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Dame Amanda Blanc, the CEO of Aviva, has warned the government against ‘flying kites’ of potential policy changes to see how the market reacts. Jason Windsor, the CEO of Aberdeen Group, has also chimed in, suggesting the Treasury ought to “engage the industry properly” prior to the budget1.

Quite what these investment giants are so uncertain about is unclear. Despite assurances to the contrary in the run up to the 2024 election, the current Labour government has done exactly what socialist-leaning government always do - raise taxes and borrow more to increase public-sector spending.

It is abundantly clear that the Burnham administration is going to do more of the same. Depending on the Chancellor’s boldness, the revenue side is likely to involve some or all of the following: bank taxes, higher capital gains taxes, changes to pension saving, land taxes, changes to council tax calculations and so on. The ‘broadest shoulders’ will likely once again be bearing the weight of the redistribution of wealth.

Cash grabs aside, it will likely be on the deficit and borrowing side where things get creative. The UK’s primary deficit is currently somewhere between 2 and 3%, with net borrowing (including interest payments) at around 4.3% of GDP. With longer-dated bond yields drifting higher globally, the British government knows it has to be mindful of investors if its going to borrow to fund yet more public spending.

The government has a set of fiscal rules, championed by former Chancellor Rachel Reeves, to which the new incumbents claim they will also adhere. Day-to-day spending (on benefits, health and so on) must be funded by tax rather than borrowing. Overall debt as a percentage of GDP must fall by the end of the forecast period (2029-30), so any borrowing for investment must be growth positive. There are caps on various parts of the welfare budget as well.

Raising taxes clearly allows more welfare spending under these rules, but the danger here is that higher tax reduces private sector investment and growth, thus raising debt to GDP, thereby breaking the other promises.

No matter. Plans are afoot to “boost economic growth by exploiting the fiscal rules to increase government borrowing and spend the money on infrastructure, housing and support for businesses”2. The amount in mind is the not insubstantial figure of £9bn.

How is this to be done? Spending on infrastructure or equity investments in companies will be considered as assets which can offset the cost of borrowing. If this means the net borrowing figures don’t increase, then Mr Burnham’s pledge of “growth in every postcode” can be achieved without breaching Ms Reeve’s fiscal rules. Wins all round.

The only problem with this plan is that it violates the fundamental logic of accounting. Friar Pacioli (see image above) introduced the idea of double-entry booking keeping to renaissance Italy, thereby formalising accounting and in so doing revolutionising lending, banking and investing.

If one makes a loan, the cash balance on one’s balance sheet falls by the amount lent, while an additional line item (loan) is added to the asset side of the balance sheet to offset this and to ensure the balance sheet still balances. In this case, the double-entry activity all occurs on the asset side of the balance sheet.

If one needs to borrow to raise the cash to make that loan, then the liability side of the balance sheet increases by the amount borrowed, which in turn is balanced by a cash entry on the asset side of the balance sheet equal to the amount raised. This is how double-entry accounting works; every action is recorded twice.

When assessing financial leverage, the net debt figure is calculated by taking the sum of borrowing on the liability side of the balance sheet and subtracting from that figure the sum of cash and cash equivalents (and only these two line items) on the asset side of the balance sheet. If cash has already been lent, you can’t net your debt against something that is no longer there. This however appears to be what the government is proposing.

Reductio ad absurdum, if this new wheeze is enacted, the government could theoretically net an infinite amount of lending in this way, certainly well beyond the £9bn figure mentioned in The Times article, since it assumes there is always a cash-like entry on the asset side of the balance sheet against which the debt can be netted.

The problem is that the asset might not be what you think it is. Perhaps the loan will be paid back, but until it is, it’s a loan asset not cash and can’t be used for netting. In any case, the money lent will be spent, and one can’t assume that the value created exactly nets with the sum of the money lent. There is also the additional problem that you can’t record someone else’s asset on your balance sheet. Fr. Pacioli invented double- not triple-entry book keeping.

Another related idea in the offing is the assumption that the government is sitting on a huge stock of assets against which it can borrow. No less a figure than Andy Haldane, the former chief economist at the Bank of England, has suggested using the UK’s land assets to revitalise the government’s flagging house-building programme3.

He suggests the government owns public land with a value of £400bn that could be allocated to local and mayoral combined authorities at no fiscal charge. Future rental income streams could be borrowed against to provide funds for house and commercial property projects on the land in question. He has other suggestions to make the development and management process more efficient and cost effective.

In a letter to the FT in response to Mr Haldane’s proposal, Dag Detter of the government advisory company Detter & Co suggests that there is a host of other ‘valuable public assets trapped in administrative silos’, the value of which isn’t or never will be realised4. Assessing properly what one owns is the first step in calculating one’s real wealth and thereby what one really has as collateral to borrow against.

Mr Haldane and Mr Detter’s suggestions both have merit, but there is a problem here. Those looking to find ways in which governments can spend more love to ogle the asset side of the balance sheet, but rarely care to do the same with respect to the liabilities.

In the Office of Budget Responsibility’s (OBR) March 2026 outlook, the long-term prospects for the UK public sector accounts are described as ‘challenging’. Debt-to-GDP will be 275% by the 2070s, and should the economy be hit by ‘a significant shock every nine years’, that debt figure will be 325%5.

Given the current UK debt-to-GDP figure of just under 100%, common sense suggests that such high future debt levels are unreachable, and that the government will be insolvent long before that figure is achieved, if only because the borrowing costs will be so high that the Debt Management Office (DMO) will no longer be able to issue paper freely.

If governments are intent upon bigging up the asset side of their balance sheet, financial prudence suggests that this should only happen with a sober assessment of the present value of future unfunded liabilities, especially when considered in the context of long-term demographic changes (an aging population) or environmental developments (such as climate change).

Everyone knows this won’t happen, and that the 2070s are far off enough not to matter to the current parliament. Expect more financial wizardry, more debt and more spending. Ultimately it will be the market that has to call time on any new financial shenanigans. Beware the 30yr gilt yield, Mr Burnham.

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In the days following last week’s Federal Open Market Committee (FOMC) meeting, commentators on Wall Street have, like the bond market itself, struggled not just with the policy stance of the new Fed Chairman Kevin Warsh, but also with his style.

In the absence of forward guidance on interest rate policy, market volatility has increased. Following the FOMC meeting, 30 year Treasury yields moved sharply higher to peak at multi-decade highs of 5.28%.

With the Fed once again holding rates in the face of an incipient war-related inflation shock, the long end of the curve is showing signs of losing faith in the Fed’s willingness to target inflation. US inflation has now been above the Fed’s 2% target for 64 consecutive months.

Chairman Warsh’s blithe catchphrases have not impressed either. 3 FOMC members were in favour of a 25 basis point rate hike. This sort of dissent, common and well-communicated by the Bank of England, is highly unusual at the Fed, and was described by Mr Warsh as a ‘family fight’. Describing the Fed’s stance as ‘watchful thinking, not watchful waiting’ sounds equally glib in the context of the bond market’s ensuing sell off.

During China’s Cultural Revolution, Mao’s Red Guards targeted the ‘Four Olds’ - old ideas, old culture, old customs, and old habits. While investors will hope that Kevin Warsh’s change of approach at the Fed falls short of this, change is clearly in the air, and the market and its pundits are struggling to adapt.

Some olds are clearly being dumped - forward guidance for one. FOMC unanimity is another. With President Trump’s well-known preference for lower interest rates as well as his sadly better known propensity to pillory those who cross him, the dissent of FOMC members Neel Kashkari, Beth Hammack and Lorie Logan may yet take on a political character, if only due to admonishing Presidential tweets.

President Trump has been notably quiet about interest rate policy of late. The odd tweet about wanting rates lower, but very little pressure on his new Fed Chairman. Given the White House’s obsession with the stock market and the need to finance yet another war, one wonders how long this will last.

If FOMC dissenters do end up in the President’s crosshairs, the market may start to raise questions about policy independence. FOMC members currently seem to be safe from Presidential sacking for policy reasons rather than those narrowly defined under the ‘For Cause’ standard. This barrier does however seem to be a relatively flimsy one to the casual observer.

As well as sweeping away olds, Mr Warsh clearly has some news as well. The Bureau of Economic Analysis is currently reworking the calculation methodology on the Fed’s favoured inflation measure, the Personal Consumption Expenditures index (PCE)2.

The easiest way to get inflation down is to say it doesn’t exist by calculating it away. No rate hikes needed then. The rise in long-dated Treasury yields may be the market pricing in stronger growth in the future, or it may just be pricing in feeble inflation fighting. Only time will tell.

In the press conference after last week’s FOMC, Mr Warsh suggested that while he still considers the PCE index to be the Fed’s best measure, he also said with reference to the inflation index methodology, "who knows come after next January what we might say about strategy. I suspect the task forces might have something to add."

The Wall Street Journal’s Nick Timiraos pointed out on X/Twitter that Mr Warsh in a speech at the IMF 15 months ago had himself condemned such methodological sleight-of-hand:

"frequent changes to the Fed's metrics—including its professed preferred measures of inflation—are beneath the high standing of the central bank. Central bank credibility is the coin that purchases American economic strength. In Washington, a central banker can ill-afford to be anything other than a straight-shooter."

Mr Warsh wants investors to “play the ball, not the referee”, but changing the rules mid game clearly undermines that principle. The graph below shows US 30 year real rates (inferred from the TIPS market) as having moving higher during 2026 despite the lack of Fed policy tightening.

Real rates are inferred from headline yields less an inflation calculation. If the inflation number is dodgy, so is the real return rate, with implications for GDP growth, investment and so on.

This has wider implications for the currency markets. The gold price generally stands as an inverse measure of government debt levels and fiscal profligacy. Gold’s price peaked in late January just as the nomination of the ‘hawkish’ Mr Warsh was announced. It has traded poorly ever since in apparent reaction to the prospect of a tough, inflation-fighting new FOMC Chair.

Quite how long the dollar can stay strong in gold terms given the FOMC has skipped two hikes and is talking about changing the inflation methodology is anyone’s guess. Despite this, the market is still pricing a roughly 60% chance of an interest rate hike at the Fed’s September meeting.

Gold generally trades inversely to real interest rates, so one might expect it to rally if the market starts to sense that the Fed wants to meddle the inflation rate lower. The broader question of dollar strength is however one which starts to bring the Fed into the sphere of influence of the Treasury and US policy beyond its own borders.

Central banks generally try to focus on domestic issues, but this is made more difficult for the Fed given the dollar is the world’s trading and reserve currency. The Fed pointedly doesn’t talk much about the dollar as a result, and so it should come as no surprise that last week’s US intervention in the currency markets (selling euros to buy yen) was a move initiated by Scott Bessent at the Treasury.

Japan’s problems are key to understanding the changing role of central banks globally. the Bank of Japan (BoJ) is trapped by high inflation which is forcing Japanese Government Bond (JGB) yields higher. It is struggling to accommodate the necessary rate hikes because of Japan’s massive stock of debt, which stands at over 200% of GDP. The sharp rate hikes the bond market is demanding could put the country on the road to insolvency.

While the BoJ has been defending the yen in the markets last week, the US Treasury felt it necessary to step in as well in order to show very publicly that the US doesn’t want to see countries liquidating their holdings of US assets (especially Treasuries) to defend their currencies.

Japan’s large foreign asset holdings and carry trade have been a source of cheap funding to the US for decades, and its unwind and repatriation is the last thing the US needs right now.

The Japanese / US intervention took the yen/dollar rate down from just over 160 to around 156. Despite an estimated $50b+ of spending, it has already drifted back to 158. Interventions are really a fancy word for bailouts, and the size needed to sustain a currency market bailout is usually beyond the means of any sovereign. The US Secretary of State Scott Bessent should know this as well as anyone - he was working for George Soros back in 1992 when he took on the Bank of England and broke sterling, forcing Britain to leave the Exchange Rate Mechanism.

While the Fed’s primary concern is the US economy, Fed rate hikes would likely strengthen the dollar. the DXY dollar index has risen a little this year, but in relatively lacklustre fashion given the sharp rise in long-term US real interest rates.

So while the US markets are flapping about the absence of Fed hikes, the end of forward guidance and even the prospect of fewer FOMC rate setting meetings, it is perhaps the changing patterns of global markets and geopolitics which may be starting to guide the Fed’s hand behind the scenes3.

The world’s financial markets are starting to acknowledge the reality of the related problems of rising yields to the backdrop of a record global debt mountain. Japan’s interventions show a system starting to teeter to an extent that the US Treasury has felt the need to step into the currency markets.

Scott Bessent’s subsequent overture to the Fed to expand is FIMA Repo Facility to help Japan to raise dollars without having to sell Treasuries is a clear illustration of America’s core weakness made public4. Japan has plenty of US assets and doesn’t need swap lines to fund itself, but with a $2 trillion deficit and nearly $40 trillion of debt outstanding, the US simply can’t afford to pay the higher rates that might result from a bout of Japanese foreign asset liquidation.

For Fed watchers and bond investors more generally, a change of mindset is clearly needed. If it becomes clear that for reasons outside the Fed’s usual purview that the FOMC can’t raise rates, then the market will have to think about what happens next.

The most likely course of action would be some type of yield-curve control (YCC), pinning rates at an artificially low level to allow high nominal GDP growth to reduce the relative burden of debt, paving the way for future policy normalisation. The source of funds for that GDP growth is however another question entirely.

If the Fed is thinking of recalibrating its favoured inflation measure, and as some suggest YCC is a matter of when not if, then suddenly the 3% real yield that TIPS seems to be offering looks like a very interesting proposition for US investors, especially to the backdrop of a toppy-looking stock market.

At the very least, investors ought to be thinking a bit more widely than their traditional suite of domestic growth and inflation metrics to understand why the Fed is behaving the way it is. Without broadening their horizons, they may miss the revolutions going on elsewhere.

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When wars end, so does the government spending that drives military-related industrial production. In most cases, demand collapses and the economy shrinks. Servicemen return to civvy street and struggle to find jobs. This happened in 1919-’20 after World War I. In 1945, the great fear in the US was that with the end of hostilities, the economy would once again fall into depression.

The collapse in government spending was massive. In 1945, roughly 50% of GDP went on war-related spending. This fell 75% by 1947, with Federal spending that year constituting just 16% of GDP. A $32.5 billion government deficit in 1945 had become a $2.5 billion primary surplus by 19471.

Post-war inflation was high, hitting 20% in 1946, but this is misleading in that much of the inflation was a ‘catch up’ process given wartime price controls. In terms of monetary inflation, although Fed interest rates were pinned at low levels, M1 money supply slowed from its double-digit wartime growth levels to 6.5% in 1946, 5.5% in 1947 and negative 1% by 19492.

So with government fiscal spending collapsing and monetary growth slowing, conventional wisdom expected a slump. In fact, the opposite happened. The economy boomed. The fears of high unemployment also proved unfounded, even as many women left the workforce due to the end of wartime production and the return to work of America’s demobilised servicemen. By the late 1940s, it was clear the depression was gone for good, and the US enjoyed two decades of stable economic growth.

In a consumer equivalent to the baby boom, post-war America went on a spending spree, backed by some $150 billion of wartime savings which could suddenly be splurged. Rationing ended and wartime production was replaced by a return to the manufacturing of consumer goods, household durables, automobiles and the like.

But it was really the return of private sector investment which spurred the growth that in turn prevented a post-war slump. In the 1920s, private investment had been running at around 16%. It was negative when President Roosevelt took over in 1933, and remained severely depressed throughout the rest of the 1930s. By 1948 however, it had hit 17.9%. Boom, literally.

One of the key failures of the New Deal era in the 1930s was the absence of a private sector recovery. This was in part due to a government assault on private enterprise, driven by a desire not just to regulate but also to start shaping the economy in a way which the federal administration had previously never done.

Some of this might have been justified, especially in the financial sector where the wild west Wall Street of the 1920s came under the regulatory oversight of the Securities and Exchange Commission (1934). The Glass-Steagall Act (1933) split up the banks into commercial and investment banking to avoid a repeat of the instability that had characterised the 1929-’32 period. Deposit insurance was also introduced to help restore confidence in the banking sector.

But it was elsewhere that government meddling hobbled the ambitions of the private sector to spend and invest, killing what John Maynard Keynes described as ‘animal spirits’ in his 1936 General Theory of Employment.

The most notorious example of this anti-business drive was the ‘undistributed profit tax’ (UPT), passed as part of the Revenue Act of 1936. This federal tax was levied on retained earnings to a maximum level of 27% with a desire not just to raise revenue but force businesses to stop hoarding cash. If companies didn’t hire, invest or pay dividends, the government simply took the profit.

While it only raised $145 million in 1936 rather than a hoped-for $600 million, the revenue gain from UPT was marginal to the huge amount of uncertainty it caused in the business community3. The psychological effect of this and other measures explains the lack of business investment in the latter half of the 1930s, and this in turn is key to understanding why America struggled to recover from the Great Depression before the onset of World War II.

What the war taught (or reminded) Washington was that business was useful. Rather than the assaults on private enterprise that characterised the New Deal era of the 1930s, the 1941-’45 period saw a much closer working relationship between the Federal government and the private sector as the economy shifted into full war-time production.

This goodwill and trust survived the war, and the lack of fear of legislative reprisals by vengeful Washington politicians meant the private sector got its mojo back, hence the boom in investment expenditure that characterised the immediate post-war period. With the private sector reasonably sure of the future, capital expenditure soared, allowing government spending (and debt) to decline while the economy expanded rapidly.

It is unclear what Britain’s newly-anointed Prime Minister will do with the economy. Andy Burnham has said he will stick to the current fiscal rules, but procedural slight of hand means he will not be questioned in Parliament about policy detail before September.

Whatever the reassurances about fiscal probity, it is clear Mr Burnham will want to make his mark. There is much talk about wealth taxes, land taxes, the equalisation of capital gains with income tax levels and so on. There are also rumours of another expanded budget in November, much like the tax-and-spend extravaganza that the outgoing Chancellor Rachel Reeves held in 20244.

Just before that budget, Market Depth suggested that the chances of the government helping the UK economy to grow by raising taxes on the private sector were nil (see article below).

In fact, much in the same way the US New Dealers’ assault on private enterprise scared off investment thus prolonging the Great Depression, so has Ms Reeve’s fiddling with payroll taxes and employment rules killed the appetite to hire and expand amongst Britain’s small and medium sized enterprises (SME’s).

SME’s are the engine of growth, but unlike big firms who can easily borrow from banks or from the bond market, smaller firms rely much more heavily on retained earnings to fund investment, hiring and growth. By crushing SME profitability and thus stopping them from retaining earnings, the effect of recent government reforms is analogous to those of America’s Undistributed Profits Tax discussed above.

Had the British economy been thriving, it is unlikely the Prime Minister and his Chancellor Rachel Reeves would be packing their bags this week. Strong growth allows many failings to be overlooked, even those like Mr Starmer’s tin ear and uniquely poor political judgement.

While there is much uncertainty about the detail of future Labour policy, there is clearly only going to be one direction of travel - even more intervention in the economy. Whether or not changing the council tax for a land tax is fair or not, or whether a wealth tax would raise enough revenue to justify the risk of capital flight, it seems clear that Britain is set for another bout of fiscal activism.

Government intervention by its very nature creates the sort of uncertainty which is kryptonite to the forward planning that underpins private sector investment. Mr Burnham’s Manchesterism has excited the parliamentary Labour party into forgetting its recent thrashing in the May local election. The odds are however that it won’t excite the animal spirits in the business community that Britain so desperately needs.

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Following the Fed intervention to mitigate the fallout from the 1997-8 emerging market crisis which brought down the Long Term Capital Management hedge fund, Time Magazine put Greenspan on the cover along with Robert Rubin and Lawrence Summers under the title “committee to save the world”.

Yet Mr Greenspan was not held in high esteem by everyone. Critics suggest that his blinkered focus on inflation targeting allowed the financial market effects of the 1990s tech-driven productivity revolution to fester and foment, forcing drastic intervention during the early 2000s dot-com crash. This left interest rates too low for too long, setting up the housing bubble of the 2000s.

Chat about too-low interest rates causing intertemporal disequilibrium in the economy may sound a bit abstract2. An easier metaphor to explain the original sin of Greenspan’s ignoring asset bubbles in the mid-1990s would be that of a go-kart careering down a hill with ever bigger swerves, eventually toppling over and tipping the driver out onto the tarmac. That crash was 2008.

The housing bubble ended in the financial crisis of 2007-9, itself necessitating even bigger Fed interventions by then-Chair Ben Bernanke. Rates were then once more kept too low for too long; bigger asset bubbles ensued, ultimately leaving us in the strange world we have today where trillionaires and paupers cohabit America.

Yet before he took over at the Fed, Mr Greenspan’s economic outlook was diametrically opposed to his interventionist activity while in office. In an article first published in Ayn Rand’s ‘Objectivist’ newsletter in 1967, Mr Greenspan held forth about how gold anchored the world money system and kept bank lending in check:3

‘Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade.’

Mr Greenspan took over at the Fed in August 1987, almost 16 years to the day after President Nixon suspended the dollar’s convertibility into gold. It is perhaps not surprising then that such high aspirations of fiscal probity about sound money were set aside by the need to manage and intervene in the increasingly financialised US economy.

While Jay Powell wasn’t known for having an intellectual hinterland, Randian or otherwise, his transformation in office from tough guy to supplicant was nonetheless just as dramatic.

Taking over the role of Fed Chair in February 2018, he oversaw the reduction of the Fed’s balance sheet while also hiking interest rates. His quip that the Fed was “a long way from neutral” on interest rates while also suggesting the balance sheet reduction was “on autopilot” ended up with a market crash in December 20184.

Then the volte face. Suddenly in January 2019, the Fed was ‘patient’ when it came to further rate hikes. July 2019 saw a ‘precautionary’ rate cut despite an unemployment rate below 4%. The September 2019 repo crisis then saw the Fed suddenly injecting $75 billion into overnight markets to abet a sudden liquidity shortfall.

2019 though was merely the overture to massive Fed intervention not only in government bonds and mortgage-backed securities but this time also in corporate credit in response to the Covid-19 crisis in 2020.

Later that year, Mr Powell announced a shift to ‘average inflation targeting’, thus temporarily allowing inflation to sit above the stated 2% goal in order to correct for past periods of lower-than-target inflation5.

Since then, US inflation has consistently remained above the Fed’s target, peaking at 9.1% in June 2022. The Fed abandoned its average inflation policy in August 2025. While Jay Powell has received much kudos for standing up to President Trump, especially over the latter’s bizarre assault on the Fed Chair for cost overruns at the central bank’s Washington headquarters6, his legacy will forever be tainted by the Fed’s foot dragging when dealing with the post-pandemic inflation surge.

Since being linked to the job of Fed Chair in January this year, Kevin Warsh has been treated by markets as yet another unflappable hawk. Gold has fallen over 25% and 2 year US real interest rates have rocketed higher as market expectations have shifted from a couple of rate cuts to a couple of hikes, a move helped of course by the effects of the Iran War on commodity prices.

Joining the Federal Open Market Committee (FOMC) as a voting member in 2008, Mr Warsh built a reputation for hawkishness, especially with respect to his stance on the size of the Fed balance sheet.

Despite hikes from both the European Central Bank and the Bank of Japan this month, the FOMC kept rates on hold in June. Mr Warsh’s tone at the post-meeting press conference was however again taken by the market as hawkish.

In terms of specifics, he looked to abandon forward guidance on interest rate policy, while also reviewing the issue of the Fed’s balance sheet with respect to reserves and reassessing the methodological changes for data gathering7. The latter may mean a new approach to inflation calculation, but that is as yet unclear.

With various policy reviews outstanding and with forward guidance withdrawn, Mr Warsh is rightly giving himself some time and flexibility, doubtless a smart move given the uncertain path of inflation following the Iran War. The market is clear though - the Fed Chair is a hawk, and rate hikes are inbound.

As Mr Warsh was being sworn in at the Fed in May, Stephen Miran was handing in his resignation from the FOMC. Following last week’s FOMC meeting, Mr Miran wrote an Op-Ed in the Financial Times which perhaps indicates that ‘hawkishness’ might not be the correct measure of the new Fed Chair8.

Mr Miran picks up on two key themes mentioned by Mr Warsh in last week’s press conference. The first is the idea of the Fed’s responsibility towards price stability rather than a ‘precise inflation target’. Price stability is of course the letter of the law when it comes to the Fed mandate, but stable prices are ones which don’t move, and that is something more associated with the hard money era of the gold standard than the post-1971 system.

The other is a reduction in size of the Fed’s balance sheet in order to strengthen its independence, limit its day-to-day involvement in markets while increasing its ability to fight genuine market crises, presumably from the position of a smaller asset base which could be increased at short notice.

It is hard to describe either of these proposals as hawkish in the strict sense of the word. Reducing the Fed’s balance sheet isn’t a matter of simply dumping reserves into the market. Aiming for price stability as in zero inflation clearly isn’t a call for a rapid hike in rates to kill inflation, currently at 4.2% for the year ending in May.

The US primary deficit is likely to be around $2 trillion this year, meaning in total the Treasury will need to issue and roll between $10 and $12 trillion of debt. The Federal government’s interest expense for the first 8 months of the fiscal year was a massive $723 billion, up 9% year-on-year. All else equal, market estimates of Fed hawkishness really need to be assessed in the context of these figures.

If however Fed independence isn’t the starting point, perhaps the smaller Fed that Mr Mirin is talking about, and the sort of policies that would reflect it, might make more sense in the wider context of what the Trump administration is trying to do.

Back in November 2024, Mr Mirin authored a white paper on how the US could get more out of its reserve currency status and role as global policeman. Policies mentioned included changing bond maturities and coupons for foreign-held US debt, using tariffs to raise revenue and weaken the dollar to help US exports. (A fuller discussion is contained in the Market Depth note below.)

While Secretary of State Scott Bessent talked about a strong dollar in a CNBC interview yesterday, he said it was likely going to be due to the strength of the US economy not just higher rates.

More interestingly, in a recent speech to the Economic Club of New York about ‘Economic Statecraft in the 21st Century’, he focused on a number of policies that marked a sharp shift away from what has come to be seen as the norm for US post-war economic and geopolitical behaviour9.

In the context of revisiting the assumptions of the post-war settlement, Mr Bessent talked about ‘national capacity’, shorthand for industrial and technological self-sufficiency. He went on to mention the dollar and US markets and their role in the world, especially in the context of digital assets, tokens and stablecoins, as well as shaping the economic future to protect against interests of an authoritarian or mercantilist nature (read China).

Building an economy where this is true and where US working families are not just consumers but also participants (as Mr Bessent suggests) is clearly highly inflationary. This reflects not just capital expenditure but the effect of higher domestic prices and wages from home-produced goods.

Given the US fiscal position, this is not a world where the Fed just acts hawkish in an old fashioned way, especially if as Mr Miran suggests, the Fed of the future is a slimmed-down guardian of price stability not an interventionist monetary spigot.

Rather than a conventional dove and hawk debate, on the eve of the 250th anniversary of the founding of the US, it might help investors to think of the Fed in terms of what else is going on in the Trump administration. This is especially true if one entertains the idea that the new Fed Chair might secretly be President Trump’s guy and not a Trump appointee gone rogue like Jay Powell.

How could Scott Bessent’s goals be achieved? Most of the suggestions are pretty radical: tokenising an increased US Federal debt and expanding banks’ capacities to hold it and lend against it; revaluing the assets on the US balance sheet, which presumably means things like bitcoin or gold; restructuring the maturities and coupons on longer-dated debt, especially that held by foreigners and so on.

With respect to the Fed, while monetisation of the deficit would go against Mr Warsh’s dislike of a big balance sheet, yield-curve control is often mentioned as a tool to manage the long-end of the yield curve if the Treasury were pursuing a sharply expansionary fiscal policy.

With the mid-terms looming and President Trump’s popularity in the dumps, the current administration’s window for action is closing. The Fed Chair doesn’t set policy rates, but he can guide the institution. Perhaps now is the time for investors to consider the direction of that guidance in the context of noises coming out of the Treasury, and what Fed independence means given what Mr Bessent has just mapped out as the likely path for US economic statecraft in the coming years.

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2026 is not a year when it feels like Britain is riding high. With another potential change of prime minister looming, Britain is once again jockeying for the sick man of Europe title, although others, notably Germany and France, are also pushing hard.

Much of the focus on Britain’s malaise resides with the public finances. The Daily Telegraph, in a particularly red faced and bulgy eyed special report at the weekend, raged that “Britain is staring into a £3tn debt abyss”1.

We are told that debt is going up by £7,500 a second (£27m an hour and £650m a day and so on), while an official from the Office of Budget Responsibility (OBR) is quoted about how military spending and an aging population are key variables in pushing the numbers higher.

Professor Ken Rogoff, an economist formerly with the IMF, is also quoted as saying the risk is that the UK beats the US to a debt crisis because there is not only no growth story (unlike the US with AI) but also it is clear, given Chancellor Rachel Reeve’s forced U-turn over welfare cuts, that there is absolutely no appetite for austerity.

So what of the big figures for UK debt? Heading into the global financial crisis (GFC) in 2008, Britain’s public debt to GDP, ignoring the off-balance sheet sleight of hand by Chancellor Gordon Brown, was around 36%. Currently it sits at around 94%, and with inflation in a secular upswing, the cost of financing this higher debt is starting to become onerous.

At the same time, household debt has fallen dramatically. Peaking at 155.8% of GDP in 2008, it fell to 135% in 2016. In Q4 2025, it had fallen to 117.5%2. Deleveraging is not all bad as it in part mirrors better bank lending practices. It may also simply reflect over-exuberance in the run up to the GFC. It does however suggest a more cautious and downbeat household sector.

A recent report by the Boston Consulting Group(BCG) reveals the final part of the UK’s debt puzzle, that of bank lending to the non-financial private sector3. At its peak, this amounted to 90% of GDP in 2008, but the figure had fallen to 59% by 2025. Lending to small- and medium-sized enterprises (SME’s) has halved to 6.5% of GDP since 2011. Of the lending that does still go to SME’s, 51% goes to real estate firms, up from 39% a decade ago. No wonder British productivity sucks.

The most basic economic decision is a binary one - to spend or to save. Spending is an act in the present for the present, while saving is an act in the present for the future. Investing is often thought of as something additional, but its really just the manner in which we save. Households plan for the future by sticking money in bank accounts, pensions and the stock market. Companies do so through capital projects and research. Both can borrow to do this; a student loan is in this sense no different to a business loan to build a new factory.

The problems in an economy tend to arise with dissaving - borrowing to finance consumption in the present rather than projects for the future. With public sector debt rising and private sector debt falling, the UK is clearly borrowing to consume not to invest. Stagnation and a debt crisis are the endgame should this trend continue.

While some Labour politicians appear not to understand that running a primary deficit by definition means the government has to borrow in the financial markets, not all of them are financially illiterate. As one might expect from a PPE graduate from Oxford, Yuan Yang, MP for Earley and Woodley, makes a more convincing case that at least someone knows what’s going on4.

In an Op-ed about politicians and the debt problem in the FT, Ms Yang correctly points to energy imports as the long-term reason for Britain’s higher inflation, although she pointedly avoids the controversy about Labour’s North Sea drilling ban. She also reflects on the problem illustrated above on the link between debt, growth and household consumption.

Her solution though is very Labour, “developing the state’s capacity to drive up the production of essentials such as energy, water, housing and transport via sustainable investment, market reform and smarter regulation”.

Laudable intentions for sure, but the key to growth is the SME sector and this has clearly been starved of resources. Higher payroll taxes and stricter employment regulation alongside a kamikaze adherence to net zero are the opposite of what small businesses need to thrive. Encouraging banks to focus on SME lending while incentivizing the same businesses through lighter regulation and tax breaks are elements sadly missing from Ms Yang’s and Labour’s plans.

If anything, the government seems to be heading in the opposite direction, with PM Keir Starmer looking to cut transport and net zero spending to bolster dead-end investments in defence5. His new plan is to increase MOD spending by between £12 and £18b.

Andy Haldane, the former chief economist at the Bank of England, is clearly in Mr Starmer’s camp on this one. Citing an Ipsos survey showing 7 out of 10 would support higher defence spending if it meant more apprenticeships, jobs, infrastructure and innovation, he goes on to suggest using tax breaks and the like to encourage savers to invest in ‘war bonds’ to finance the endeavour6.

Mr Haldane refers to a plan from 1940 drawn up by John Maynard Keynes involving “compulsory savings from income, repaid with interest through a tax on wealth. With compulsion replaced by voluntary tax incentives, a similar scheme could work today.”

Not only is defence spending dead money in the sense that once the guns and ammo have been fabricated they don’t contribute to future growth, it is a plan which ends up syphoning even more private savings into public coffers. Technological progress can be a by-product of war, but it is never its stated purpose.

In a sign of how the Overton window of acceptable opinion is shifting, Mr Haldane’s own FT colleague Gillian Tett includes financial repression (artificially low interest rates) as well as high inflation as the likely means by which governments deal with their debt problems7. This provides some context to Mr Haldane’s proposal - war is about the most inflationary act in which governments can engage, and the story of war bonds in the twentieth century is one of savers being totally stripped out. You first, Andy.

Ms Tett cites an OECD report saying governments need to take four steps to start to deal with the debt issue: “demystify the budget for politicians; communicate clearly with the public; give citizens a voice in fiscal policy; and co-opt civic bodies to be fiscal advocates.” PR seems to be the sugar helping the medicine go down, but the OECD’s medicine is the usual one: budget cuts, tax rises and productivity reforms. Default is not an option, at least not in nominal terms.

The OECD report pointedly ignores the most efficient method of debt reduction though, that of rampant inflation. Ms Tett explains how Britain and America inflated away their debts after World War II, but rightly questions whether the same tools could work without capital and financial controls.

So far, Labour has hiked taxes to multi-decade highs and a Burnham premiership would likely mean more of the same. The government has been forced to abandon austerity by its own back-bench MP’s. Without changes to SME lending practices as well as dramatic deregulation, productivity growth will be as elusive as ever. That leaves inflation. No wonder markets are on edge.

There is of course hope - the same BCG report on bank lending pushes for AI and digitalisation (tokenisation) to rejig the financial services sector to unlock SME growth and bring back the UK financial sector’s pre-2008 mojo.

With sufficient will, any government could do this, and it wouldn’t necessarily mean a rerun of the Thatcher years. The combination of high quality human capital, digital and fintech know-how, sympathetic SME regulation and taxation as well as lending directed to productive parts of the economy would likely do the trick. All that’s needed now is a party with these sort of policies.

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“in 1983…we woke up and noticed that the cars all looked the same. There was a simple explanation. They’d all been through the same wind tunnel. We nodded assent at the evident improvement in fuel efficiency, but we could not escape a weary sigh of disappointment. Modern life is rubbish.”

If Mr Carroll thought cars in the 1980s increasingly looked the same because the safety and aerodynamics testing meant manufacturers were starting to converge on similarly efficient designs, then the 2020s has news for him.

A recent survey by iSeeCars showed that the percentage of greyscale cars (black, white, silver and grey) has grown from 60% to 80% between 2004 and 2023, with the percentage of more colourful tones falling from 40% to 20% during the same period1.

In an entertaining article about why everything now looks the same (article link), Alex Murrell, a Strategy Director at global branding agency Epoch, shows how it isn’t just cars that seem a bit samey these days.

When discussing interiors, he describes the triumph of the ‘International Airbnb style’, a bland mix of white walls, raw wood, bare brick and Nespresso machines. He describes the utilitarian sterility of ‘non-places’ like airports, service stations and hotels. In terms of architecture more generally, office blocks as well as multi-family apartment blocks all seem to have converged on a similarly bland and inoffensive look.

Amusingly, he also discussed how the world of ‘tweakments’ has led to the emergence of the ‘Instagram Face’, so everyone is starting to look the same as well. If you can’t afford the jabs and fillers, there are filters and apps on your phone which can give you the digital equivalent.

As a branding guy, Mr Murrell is excellent at describing that everything looks the same. His analysis of the why behind this convergence to uniformity needs some further exploration.

For buildings, he does well to suggest that stricter building codes, rising land costs, industry consolidation and cost control (with building firms reusing plans on multiple sites) explains much of the trend to the average.

For cars, Mr Murrell suggests bright colours may fade quicker or be more expensive to apply, or that in turbulent times people don’t like bright colours (er hello, the 1970s). As an aside, he also mentions the better resale value of monochrome cars as a reason behind the trend.

With this last point, perhaps inadvertently Mr Murrell hits on a reason that links trends in cars, houses, offices, interiors, faces and a whole host of other consumer markets as well.

It may be a bit cheaper to manufacture greyscale cars rather than brightly coloured ones, and it may be the case that monochrome shades fade less over time, or that having fewer choices of colour is a bit more efficient from an industrial perspective.

Yet are these factors responsible for what Mr Murrell describes as a shift from 40% monochromatic cars in 1996 to 80% by the late 2010s? A doubling in two decades? Surely not.

Something much bigger happened at the same time - people changed the way they owned their cars. In the UK, around 80% of new cars are now purchased using dealer or consumer finance loans. The figure is a little higher in the US, with similar trends in Europe and Asia. Comparable patterns exist in the second-hand car market too.

What has happened since the 1990s is a massive expansion in auto leasing and financing. Back in the 1960s and 1970s when the auto loan industry was in its infancy, people generally owned all those quirky and colourful cars outright, and did so paying cash up front. Nowadays, people may be in possession of a car, but it’s likely on financing and will probably be traded in within a few years.

This means the resale and refinancing of second-hand cars is as important as that of new vehicles, and this may explain why dealerships tend to go for lower-risk monochrome cars which are easier to resell. The same mindset likely applies to an owner who is thinking just a few years ahead to his or her next trade-in.

If you don’t really own your car, you don’t really get the right to have that individual look that once distinguished the different marques. A new car on the drive used to mean that ‘someone was doing well’. Now it just means that someone is shelling out a few grand a month on a lease. The ubiquity of the auto lease appears to have rewired our sense of value.

The same is likely true of the trends behind Airbnb and the residential housing market more generally, but for a slightly different reason.

Mortgages are obviously not a new concept, but what has evolved is the way we value houses. What was once merely a home (for raising a family or at the very least just for living in) is now also regarded as a financial asset whose value hopefully rises over time. This wasn’t how property worked in the 1850s or the 1950s, even if property prices drifted up and down over time. Changes in the mortgage market (higher loan to values, lower deposits, interest-only mortgages and so on) have transformed the way we value bricks and mortar.

An Airbnb rental property is clearly a purely financial asset which offers an ongoing yield as well as the potential for a capital gain if and when the asset itself is flipped. The ‘buy-to-let’ mortgage was only launched in the UK in the late 1990s, but it can be seen as both the product of, as well as a catalyst for, a new way of valuing property which now seems so natural as to be normative.

This isn’t a gripe about how debt or the ‘cash nexus’ undermines society2. The point here is to show how changes in the world of finance (how we pay for cars, what sort of mortgages we can take out on flats) can have a reciprocal effect on what we value about the things we own and consume.

The suggestion is that much of what we now value and particularly why we value it has come about as the result of growing financialisation over the past half century or so. That process has been largely abetted by the tailwind of falling interest rates due to falling inflation.

The 2020s seems to be shaping up as a pivotal decade with interest rates rising again as inflation once again becomes a thing. The effect on what we value and why we value it will likely be profound. This may make the future a very different one from what we currently expect, but if it means more exciting cars and less of those big eyebrows, it might not all be bad.

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Goethe was writing about the French ‘borrowing’ from German literature, and while a lesser wit might have just talked about expediency, pragmatism or mere admiration, he wanted to make sure the deeper and more profound elements of the French character were highlighted.

A similar sort of shiftiness appears to have been at work in a recent announcement by the US Treasury that various US allies in the Gulf and Asia have requested dollar swap lines due to uncertainty and liquidity strains resulting from the war with Iran2.

Secretary of State for the Treasury Scott Bessent took to X/Twitter a few days later to make sure the message about liquidity and ‘smooth functioning in dollar funding markets’ was clear. But in so doing, he inadvertently revealed two problems with the swap programme.

First, by saying, “Many of these countries have pristine sovereign balance sheets and large dollar holdings”, he raised the question of why such wealthy countries would need swap lines at all.

Secondly, and more tellingly, by saying, “Dollar dominance and reserve currency status are strengthened by constant long-term initiatives, including countering the growth of problematic, alternative payment systems”, he perhaps revealed not only America’s strength, but also its weakness, and in so doing, the unstated reason behind the war with Iran.

Who benefits? Of the ‘Gulf states’ the Treasury mentioned, the UAE provides a good starting point. The combined size of the UAE’s various sovereign wealth funds is just under $3 trillion. It’s central bank, CBUAE, had an estimated $290 billion of reserves at the end of March 2026, while CEIC data puts bank reserves at $925 billion as of February 2026. Not exactly short of a bob or two - just the sort of candidate in need of a swap line?

The UAE has clearly taken a huge revenue hit as oil exports through the Straits of Hormuz have been disrupted, and it is perhaps the risk of these Gulf states dumping US Treasuries to plug unforeseen fiscal deficits that may have prompted the US Treasury to propose swap lines. The dollar might be America’s currency and everyone else’s problem, but US government bonds are the world’s reserve asset but very much America’s problem.

What complicates analysis of the UAE and the swap line announcement is the UAE’s simultaneous departure from the OPEC oil cartel. While this could be portrayed as a win for Trump with the UAE opting for more oil exports thus capping prices while also potentially aligning the emirates more closely with the US and Israel against Iran, there is nuance here too.

The UAE’s Ambassador to the US described the decision in the FT as about “far more than production quotas or wartime disruptions”3. The rationale was about positioning the UAE as a more diversified economy in a changing global structure. In the article, the Ambassador cites 35 recently signed ‘economic partnerships’ and goes on to list several of the countries concerned by name, with one glaring omission - China.

In the context of US security guarantees proving to be far less durable than expected, and with Trump acting unilaterally and seemingly often at random, the importance of the investment pact between the UAE and China which was signed in April should not be underestimated4.

Wherever it ultimately leads, the announcement of the Sino-UAE pact puts an altogether different slant on the timing of those US swap lines, especially given Mr Bessent’s allusions to ‘problematic, alternative payment systems’ mentioned above. There is clearly only one country he was thinking of when he wrote those words.

The UAE has apparently warned the US that it is willing to sell oil in yuan if there were a dollar shortage in the Gulf. While this could ostensibly justify a dollar swap line, it must be remembered that the UAE is the seller not the buyer of oil, thus a receiver of dollars rather than a party seeking dollar funding to transact5. Basically, the UAE has options alongside the dollar.

The UAE’s departure from OPEC doesn’t necessarily just mean a move closer to the US. Reuters mentions a pre-existing “rift between the UAE and its neighbour Saudi Arabia”, and this has likely increased with Saudi overtures to Pakistan and the latter’s attempts to ingratiate itself with the US by hosting the peace talks involving Iran6.

Clearly the UAE’s new path isn’t simply one of moving towards America. Saudi refusal to allow the US to use its bases for Operation Freedom shows the GCC pushing back on being employed as a decoy duck while President Trump plays out the peace talks narrative with Iran7. The GCC isn’t simply Team America.

The Vietnam war was once described as ‘the unwilling led by the unqualified to do the unwanted for the ungrateful’, and there seems to be a bit of that about US Treasury swap-line largesse to the Gulf states. So what is really going on?

In a recent Bloomberg interview, Hank Paulson, the outgoing Secretary of State for the Treasury when the 2008 financial crisis hit, gave a stark warning about the US Treasury market and the risks it posed:

“when you hit the wall and you’re trying to issue Treasuries and the Fed is the only buyer and the prices of the Treasuries are going down and interest rates are up, that’s a dangerous thing…People say, when are you going to hit the wall? I obviously don’t know, it’s impossible to know….When we hit it, it will be vicious, so we have to prepare for that eventuality.”8

JP Morgan’s Jamie Dimon, a recent critic of private credit markets, is now highlighting the rising risk to global government bond markets should policy makers not be proactive in the face of geopolitical shocks, rising oil prices and widening deficits9.

While Paulson plus Dimon does not necessarily equal gospel, the fact that two such prominent establishment figures are making such stark warnings about government debt is noteworthy in itself. Such chat is usually considered infradig in polite society.

War is expensive, and Trump isn’t a fan of tax rises, which means bigger deficits, which means more bond buyers are needed. So who’s buying?

The graph above shows that Fed balance sheet holdings of US Treasuries have ticked up $225 billion from the late-2025 lows. US banks currently hold $550 billion of US debt, up from $400 billion in 2025, a record high since 200710. The US Treasury itself is playing its part with liquidity management buybacks whose size has started to reach $15 billion per auction in April11.

In terms of foreign holdings of US Treasuries, Treasury International Capital (TIC) data shows countries like the UK and the Caymans with huge (and rising) holdings even as China’s balance falls. These are foreign holdings for sure, but often linked to massively-leveraged hedge fund basis trades where bonds are held against interest rate futures as an arbitrage. Demand yes, but of the flakiest sort (as the March 2020 sell off showed).

So with the Fed buying what it can while apparently not doing quantitative easing, the Treasury trying to cap long-term yields with a ‘liquidity management’ programme, banks loaded up with high quality liquid assets as reserves, and hedge funds running hugely leveraged positions to pick up a few basis points of yield, there still seems to be a need for the US Treasury to put out swap lines to disincentivise would-be sellers in the Gulf and Asia from dumping US bonds to pay the bill for higher energy prices and the like. Not exactly a power move.

Add to this chat about selling oil in yuan and incidental announcements like the Kingdom of Saudi Arabia opening an office for its PIF investment vehicle in mainland China12, then America’s ultimate predicament is being more clearly exposed by the war with Iran.

If there were anything linking Venezuela and Iran, then it would be that both supplied oil to China. This being the case, much of what therefore passes as policy to ensure dollar liquidity and global trade should be considered in the light of Sino-US rivalry.

From the US perspective, there are two aspects to countering the threat to the dollar from China: offense (the issuance of dollar-backed stable coins would fall into this category) and defence (of which the swap line policy is an example). The former involves long-term planning, the latter short-term expediency.

The intended outcome might not be US global hegemony as we know it; perhaps a dollar trading block reflecting a US sphere of influence separate to the emerging Chinese one. If there really is any 4D or 5D chess going on behind all the bluster in the Whitehouse, then balancing these two aspects of US global economic policy is likely where it’s at.

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“Britain’s current contribution to the world is to reveal the ultimate result of economic and social policies [meaning] the state must fulfil all needs…The price can only be still slower economic growth and still lower living standards for all the British, rich and poor. Goodbye, Great Britain, it was nice knowing you.”1

While March 2026 UK CPI inflation rose to 3.3%, and while the OECD reported that personal taxes in the UK were rising more quickly than in any other rich country2, and while a new mansion tax has just come into effect, and while unemployment ticked up to 5.2% in the quarter to December 2025, and while 2024 saw the new government grant an inflation-beating pay rise to public-sector workers, the WSJ wasn’t referring to the current Labour government, but its 1975 predecessor.

Back then, inflation was moving towards and beyond 20% per annum, corporation tax was 52%, the highest bracket of income tax was 83%, while the top rate of tax on unearned income was an enervating 98%3. Unemployment was moving towards the feared 1 million mark, and government deficit spending was spiralling.

After implementing a dramatically expansionary budget in 1974, Labour Chancellor of the Exchequer Dennis Healy (see photo above, with extravagant eye brows) was forced to reverse direction the following year, and in 1976, the IMF was called in to make a loan in return for public spending cuts.

Labour’s Harold Wilson had somewhat unexpectedly won the 1974 election. But unlike his optimistic accession to power a decade before in 1964 with promises of progress through the ‘white heat of technology’, Wilson’s second stint at prime minister was marked by indecisiveness, poor leadership and an excess of brandy.

It may be stretching the analogy to compare the Wilson of 1964 and 1974 to the Blair administration of 1997 and Starmer’s 2024 version, but clearly the latter’s government has always lacked the Third-Way vibe of late 1990s Labour.

As Keir Starmer’s extended self-exculpation over the Mandelson affair continues, even members of his own party are talking about his exit as a matter of when not if4. The question for markets therefore is what comes next.

As far as public opinion is concerned, things are very rocky already. A recent Ipsos poll of economic optimism (graph above) shows 78% of Brits expecting the economy to get worse over the next 12 months, 12% thinking it’ll stay the same, and 6% thinking it’ll improve, giving a net score of -72, the worst reading since 1978 (the year which ended with a ‘winter of discontent’ that sunk Labour for a generation).

Writing back in November 2025, Market Depth was sceptical of calls from investors to get stuck into the UK gilt market (see link below).

Back then, UK 10 yr gilts were yielding 4.19%. On the 14th April this year, a £15 billion syndicated deal on the 4 7/8 % of 2036 yielded 4.9158%, 70 basis points higher despite a 25-basis point interest-rate cut by the Bank of England in the meantime. While fan girls can point to the record £148.2 billion of bids for the deal reflecting a strong and deep market for gilts, that is missing the point entirely.

Syndicated deals often get massive ‘books’ of orders where many of the bids are flattering given they are entered at unrealistically high yields (ie: very low bid prices). In this instance, using a syndicated deal is in fact a sign of market stress, since the normal auction process was bypassed. Investors with long memories will recall Greece’s 10yr syndicated deal back in March 2010 which marked the starting gun for the collapse of the European bond market over the next two years.

Getting off a bond deal amidst war, an oil shock and sharply rising inflation is an achievement of sorts. But this Labour government has gone hell-for-leather to raise taxes (on businesses, individuals, housing and elsewhere) while also splashing taxpayer largesse on the public sector in terms of wages and other concessions. A solidly climate-friendly approach to energy is also hurting as oil and gas prices spike, although there is some hint that maybe, just maybe, the government will relent and allow a bit of drilling in the North Sea before the lights go out5.

Clearly the backdrop of high tax, low growth, high debt and high public deficit spending in a small open economy that runs a large current account deficit is not an ideal set up for those hoping for a strong pound or a positive outlook, and the Ipsos poll above clearly reflects that sentiment at large.

Unfortunately for Britain, Labour was elected with a 174-seat majority back in 2024, largely rendering irrelevant votes of no confidence via the House of Commons as an opposition tactic at this stage.

Keir Starmer may lurch on, if only because the alternatives (including the wild-eyed eco warrior Ed Miliband and tax-dodging Angela Rayner) are so poor. What is clear already is that Mr Starmer’s political capital has been devalued almost to nothing. The upcoming May local elections may devalue it more, if that is in fact possible.

Were Mr Starmer to continue as PM, recent U-turns over the 2-child benefit cap hint that both he and his Chancellor Rachel Reeves, already at the mercy of the Labour back benches, may be forced to move further to the left, hence the reference above to the Labour policies of the mid 1970s.

Those looking to Nigel Farage as a new Thatcher to lead the country out of socialist hell may well end up disappointed. Reform’s recent U-turn in favour of maintaining the UK’s pension triple lock does not bode well for the party’s free market credentials6. Practical politics perhaps, but not really the medicine the market will likely be calling for at that stage.

For Reform, picking up the dregs of a defeated and demoralised Tory party is also not a positive sign for a party who’s effectiveness in power will almost entirely be driven by the quality of the personnel it fields as prospective MPs.

If one imagines the reaction to Liz Truss’ short-lived government amongst the UK’s bureaucratic and administrative elite and then multiply that several times over, one can see the difficulties facing a possible Farage-led government were it to win power. Only the very best could make progress in that environment, and so far, Reform doesn’t appear to be recruiting that calibre of people either as prospective MPs or in support and advisory roles.

Britain is what could broadly be described as a 'high-beta’ open economy, although one that is increasingly being drowned by high taxes and excessive welfare spending. The exaggerated weakness of sterling during the global financial crisis and also during Brexit is a reflection of its vulnerabilities both at a general and an idiosyncratic level.

For investors, the prospect of how this vulnerability will play out if the government lurches to the left or lurches to the left and then to the populist right after a general election is a worrying one. The pound and gilt yields will be the battle ground on which we’ll find out whether economic drama is the successor to psycho-drama. The WSJ editorial back in 1975 lamented how anyone with any money was taking every opportunity to get it out of the country. 50 years on, that still doesn’t sound like bad advice.

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One thing led to another, and Slater set up Slater Walker Securities with Peter Walker, a Tory MP who would end up as a highly successful Secretary of State for Wales in the Thatcher government of the 1980s.

Slater’s strategy was to buy up shares of businesses which the family still ran but where the family no longer held a controlling equity interest. Underperforming assets and land could be sold off, the latter to feed the growing property boom of the 1970s, and the proceeds used to fund the next acquisition in the cycle.

Hostile takeovers such as that of Cork Manufacturing by Slater Walker in 1965 were almost unheard of, leaving city grandees spluttering into their sherry at the mere thought of the caddishness of these new upstarts1. Slater Walker though moved from strength to strength, using both debt and its own soaring share price to fund more buyouts.

Joined by the likes of Sir Jimmy Goldsmith and Tiny Rowland, Slater and other corporate raiders in part filled a role that both Labour and Tory governments were trying but generally failing at: to increase productivity growth in a UK economy lagging its continental rivals. Cutting away the deadwood to leave leaner, more efficient and more profitable businesses seemed like the way forward.

The problem was that the whole process was ultimately a sham. Using debt and overpriced equity to acquire companies and then flip their assets for a quick turn does not increase productivity. The latter involves either people working more efficiently (an improvement in human capital) or the same people employing better technology (doing more with less). Doing smart things with money is not the same game, profitable though it might be in the short run.

Slater and the corporate raiders came unstuck in what became known as the UK’s Secondary Banking Crisis (1973-5). Following the Yom Kippur War and the OPEC oil shock of 1973, the British government was forced into drastic measures including instituting a three-day week to reduce energy consumption.

The British government’s expansionary fiscal policy was reversed, with public expenditure cut by £500 million in order to prop up the pound. The Bank of England (BoE) played its part too, hiking interest rates to 13% by November 1973 and demanding banks tender 2% of their assets as special deposits2.

In the ensuing banking crisis, 30 institutions were bailed out by the BoE at a cost of £100 million, while the effects of the fiscal tightening and credit crunch pulled the rug from under the corporate raiders. Slater Walker, which had expanded into banking, was one of the victims. As a result, Jim Slater became what he himself described as a ‘negative millionaire’, with debts of £3 million versus assets of just £2 million.

The stock market, which had been a major source of financing for the raiders, inevitably crashed. The UK’s FT30 fell 73% between 1973 and 1975. On the other side of the pond, the oil shock and its consequences also did for the high-flying Nifty Fifty, the 1970s equivalent to today’s Mag 7.

War in the Middle East involving Israel - tick. An oil shock that may get worse - tick. Government austerity, central bank rate hikes and a stock market crash? Not so fast. The set up in the 2020s is different - more government debt, more ‘creative’ central banks, a greater willingness by governments to run deficits, a stock market increasingly driven by passive investing which is less valuation-sensitive. All are notable differences between the current situation and that of the 1970s.

The demise of the stock market in the mid 1970s was a slow, steady but extended event, so the fact that equity markets in 2026 are surprisingly sanguine given the huge exogenous shock of war in the Middle East can be explained in those terms, however counter-intuitive that might at first seem.

Of more immediate concern is the debt side of things. US CPI inflation came in at a hot 0.9% in March, complicating the Fed’s desire to cut interest rates if growth slows or unemployment rises. Upward inflationary pressure on rates could push US 10yr Treasuries to 5% and mortgage rates to 7%.

What this means for the refinancing of debt is key. The Treasury has some $10 trillion to refinance over the next 12 months. In private markets, which tend to have a 5-year tenor on lending, the 2021-2 vintage is coming to the point of refinancing.

Like the corporate raiders and property developers back in the early 1970s who rode the wave of the UK’s Barber boom of easy credit, the borrowers of the early 2020s took out loans while rates were at zero amidst a money glut following Covid-19.

Now the world has changed. While it was the asset strippers in the spotlight in 1973, today it is private credit. In Q1 2026, investors tried to pull some $20.8 billion of a total of $300 billion from private credit funds run by Apollo, Ares, Blackstone, KKR and Blue Owl amongst others3.

Blue Owl alone faced $5.4 billion of redemption requests in the first quarter, and has now activated a 5% gate to these withdrawals4. Its stock has nearly halved this year. While these problems predate the Iran War, the latter is clearly going to make refinancing harder and redemptions more likely.

No less a luminary than JP Morgan’s Jamie Dimon has waded in on the topic, saying,
“I do believe that when we have a credit cycle, which will happen one day, losses on all leveraged lending in general will be higher than expected, relative to the environment,” adding that, “credit standards have been modestly weakening pretty much across the board”5.

Despite the current extreme geopolitical uncertainty, many markets seem to have shrugged off the bad news. This seems extraordinary given the severe disruption to energy supplies, petro-chemicals, fertilizers and not least the world trading and money system which is already certain even as its full impact has yet to pass through the global economy.

In the period from 1973 to 1975, those areas of global finance with the most rosy of outlooks (the stock market) and the greatest exposure to financial leverage (the corporate raiders) were the ones who suffered most. While Jim Slater ended up writing children’s books, other raiders like Sir Jimmy Goldsmith went to the US and played key roles in the leveraged takeover and junk-bond spree of the 1980s. The grift always goes on.

After such a long economic expansion following the global financial crisis, and with investors conditioned to policy accommodation and bailouts, one can understand how in the short term markets tend to price optimistic outcomes and quick recoveries because that is how the recent past has played out.

In the more distant 1970s though, politicians and central bankers learned a harsh lesson in that their go-to policies of pump-priming the economy and easing credit conditions to boost growth and reduce unemployment became a losing bet as inflation took centre stage amidst stalling real GDP growth.

The lesson back then was that the interventionist policies of the past were not only not working, but were increasingly making things worse. The apparent robustness of markets at present may be driven in part by the deeply-held assumption that support from central banks or well-meaning government policy is on its way.

For markets dealing with an inflation shock though, the effect of quantitative easing or energy price caps may not prove to be as munificent as first appears. Some investors are already warning of ‘scar tissue’ even if an end to the war is found swiftly6. Beware the wrong type of backstop.

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The 1,450 tonnes of gold transferred to Prussia was reminted into approximately 1.4 billion thalers, a figure far greater than the estimated 340 million thalers the war had actually cost the Prussians. Despite doubts, France actually raised the money easily from two large bond issues, both of which were heavily oversubscribed by the public.

Once the thalers were minted in Berlin, most were either spent (on defence, public works and the like) or distributed to other German states. In addition, the equivalent of 120 million gold marks were kept in the Juliusturm in the citadel in Spandau, Berlin, for the express purpose of use in the event of a future military mobilisation.

As it happens, the gold in the Juliusturm was never actually spent, and ended up being transferred to France as reparations following the conclusion of the Versailles Treaty in 1919.

The term ‘Juliusturm’ is still used colloquially to refer to a government budgetary surplus, but the treasure itself didn’t do the Germans much good in 1914. It’s equivalent value was gobbled up by the war machine within a matter of weeks once mobilisation had started. So much for prior planning.

Despite claiming throughout the war that a third of notes issued by the Reichsbank were backed by gold, in 1914 the German government almost immediately started an arms-length deficit-financing programme using printed money which was not only highly inflationary during the war but set the stage for the hyperinflation of 1922-31. Nothing is more destructive to the public finances than war.

According to the Pentagon, the first week of America’s war with Iran cost $11.3 billion2. That seems cheap, given the Pentagon is now asking for an additional $200 billion to finance the conflict3. This is of course on top of the projected $961.6 billion requested by the Department of Defence for 20264. If the war continues, and if precedents like the Iraq war are considered, the final figure will likely be much higher.

Speaking on ‘Meet the Press’ on 22nd March, Secretary of State for the Treasury Scott Bessent somewhat disingenuously described the cost of the war as ‘supplementary’, and that it would not involve any tax rises to fund it. So if revenue is not the source of the extra spending, does this just mean more debt?

At the time of writing, yields on 10yr Treasuries have risen from under 4% at the start of the conflict to their current level of 4.44%. With inflation expectations rising sharply due to higher energy costs, The market outlook for the Fed’s activity in 2026 has shifted dramatically from pricing in 2 cuts to now around a 40% chance of a rate hike by the end of the year.

Unsurprisingly, such a rapid shift in inflation expectations has wreaked havoc in the bond market, with the MOVE bond volatility index spiking to over 100 and almost into the Fed ‘intervention’ zone (see graph below).

Since US Treasuries are the main collateral posted by leveraged trading entities like hedge funds, higher bond volatility means tighter bank lending conditions, thus forcing widespread de-grossing and deleveraging in markets, hence the wild moves in favoured investments and what ostensibly seems to be paradoxical moves lower in safe haven trades like short-dated treasuries and particularly gold.

Higher bond volatility and reduced hedge fund appetite means a tougher backdrop for issuing more government debt, just at the point it seems that the Treasury’s obligations are rising dramatically.

This added issuance will of course be on the back of an approximate $8-10 trillion of Treasuries which are due to be rolled in 2026. Kevin Warsh, the current candidate to take over the Chairmanship of the Federal Reserve from Jay Powell, has a history of hawkishness and a reputation for disliking quantitative easing. While past performance is no guarantee of future outcomes, whoever takes over the Fed is going to be leading an institution which is being pulled one way by the White House but in a distinctly different direction by the market.

Fans of the 2010 HBO mini-series The Pacific will recall the story of John Basilone (played by Jon Seda) who was pulled out of front-line duty to sell war bonds across America after winning the Medal of Honor at Guadalcanal (see the cover of Collier’s Magazine above).

After Pearl Harbor, ‘selling’ the war against Japan to the average American was not all that hard. Public opinion over the current war with Iran is decidedly more mixed, with polls generally showing about even for and against, which of course may change with time5. In any case, this conflict doesn’t really have the existential feel of 1941 about it - or so we hope.

With foreign investors grappling with higher energy prices, the appetite from abroad for more US debt may also be limited. When the speaker of the Iranian Parliament comes out and says US Treasury bonds are “soaked in Iranian’s blood” while warning “We monitor your portfolios, This is your final notice.”6, there should definitely be some caveats for foreign emptors of US debt right now.

With Iran also apparently threatening to allow only tankers through the Strait of Hormuz if they pay fees in Chinese yuan7, the international mood music for the US dollar and its debt is clearly not that friendly.

Who does that leave? It’s possible that the White House may aim directly at business in terms of securing financing (equity or debt) against future ‘spoils of war’, but not only is that pretty risky as a supposedly weekend war nears the end of its first month, but there is of course the risk of prosecution or fines should the verdict of the war go against President Trump at some later date.

While bond markets are pricing in rate hikes due to inflation, there is of course the risk that not only bond-market volatility itself but also the needs of national security necessitate a market intervention by the Fed. The precedent of the Fed setting yields during the Second World War in order to help the Treasury is clearly the analogue here. The price the Fed would have to pay though is the end of any remaining reputation for independence of action. Yet funny things happen during wartime.

The other option would of course be a massive revaluing of the gold reserves held by the Fed on behalf of the Treasury which, at the stroke of an account’s pen, would fill the Treasury’s coffers with whatever amount of money was needed.

The price of such a dollar devaluation versus gold would be the end of any ongoing claims that the US dollar and US Treasuries were the world’s reserve asset of choice. That said, given how gold has been and continues to be spanked the last few weeks, the outcome of a dramatically higher gold price due to Treasury intervention is clearly not being priced by the market.

The point though is this - while the bond market is pricing in the effect of inflationary pressures from rising energy costs and general market disruption, it may also be starting to think about the financing demands of the Treasury for the war. The latter is however something which investors need to think about in terms of events rather than just current market estimates of future interest rate policy due to changing inflation expectations.

The idea of necessity being the mother of innovation also applies to government financing, and the path of events can deviate rapidly and dramatically from what would for example be considered ‘normal’ behaviour like central banks hiking rates in the face of rising inflation.

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The test is ostensibly about delayed gratification - those who wait get more, and the test is often used as a way of gauging a child’s aptitude for study and potential future achievement.

What is interesting is that the test itself is an economic one - consume now or wait for later to get more (the extra marshmallow acts as interest earned). What is really interesting though is that four year old’s intuitively get the premise that waiting is only worth it if you get more. The logic seems to be ingrained in us.

At the most basic level, once subsistence is taken care of, all economic decisions ultimately boil down to a choice between spending and saving which mirrors the marshmallow test. If the reward is high enough, we choose to save in order to consume more in the future. What this means in turn is that all economic decisions are ultimately decisions about time - a choice between now or later.

Confidence or bullishness suggests hope about the future, bearishness and uncertainty reflects fear. As our levels of caution and optimism vary, it is really our perceived investment time horizon which is either bullishly extending or bearishly foreshortening.

In terms of spending and consuming, nothing is more expensive or consumes more than war. Given the framework of the investment time horizon explained above, it shouldn’t therefore be a surprise that periods of conflict are those in which the economy’s time horizon becomes highly truncated. Surging oil prices, spiking costs for flights out of the Middle East and the prospect of higher food prices from disruption of the fertilizer industry are the first signs of this happening.

While phrases like ‘hand to mouth existence’ reflect a very short time horizon for the individuals concerned, no time horizon is shorter than combat itself. While people like mouthing off about ‘living in the now’, only those involved in combat and who are imminently risking their lives know what this really means. The sense of this is brilliantly captured in a 1995 BBC documentary by Adam Curtis about the experience of fighting in World War II entitled ‘On the desperate Edge of Now’1.

In this choice between spending and saving, spending (or consuming now) should generally be thought of as inflationary while saving (delaying consumption to the future) is deflationary.

Right now, just being concerned about inflation isn’t enough. Because of the huge global stock of debt, disruptions to markets invite the risk of a deflationary crash where asset prices could collapse were confidence to fail. This could be as great a risk as the inflationary effects of surging energy costs.

Because of this, the idea of war shortening our collective investment time horizon offers us a much better way of assessing the risks facing the global economy and financial markets. This compression of time can be deflationary in some areas at the same time being inflationary in others. In fact, it is deflationary in some areas because it is inflationary in others.

The current impact on headline inflation due to the disruptions in oil, gas and fertilizer feed-stocks (notably urea) in the Gulf scarcely needs further illustration. Although the war is far away, gas prices are pushing towards $4 per gallon in the US, a reminder to Americans that the war is not as far away as some people might like to think.

It is however the de-risking in the financial markets which needs greater focus. Deleveraging is the classic symptom of investor confidence about the future failing, and as expected, the tell is a broad sell off in all assets except the dollar (and oil, for obvious but idiosyncratic reasons).

What is most interesting though is that after a brief fall below 4% in the first days of the conflict, 10 year Treasury yields have now risen to 4.26% as the market prices in fewer Fed rate cuts, the prospect of more inflation and possibly fears about the fiscal situation in the US.

The irony is that given the huge leverage in the global economy, nothing could be more deflationary than a sharp rise in government bond yields due to an oil- and war-induced inflation shock. Credit markets are already creaking with gates going up around private credit funds. The mistakes around bad lending actually happened in 2021 and 2022, but the problem only appears in 2026 as and when the debt is due to be refinanced, and the last thing credit markets need now is a general spike in interest rates.

Pretty much the only two successive quarters of deflation in the US in the last 50 years were those during the peak of the great financial crisis of 2007-9. Lenders calling in their loans is the classic sign of a shortening investment time horizon, and one which is deeply deflationary until there is a policy response of massive money printing, and the latter is not even guaranteed to cause a broader inflationary trend if the money printed stays only in the financial markets.

So despite the US apparently losing control of the off-ramp with respect to the war with Iran, US equity markets, sitting around 5% below the highs, are clearly still pricing in a swift end to the conflict and no repercussions with respect to corporate profitability or a wider change in the geopolitical status quo.

The last time America got into a costly war it couldn’t easily get out of (Vietnam), the entire money system changed. In August 1971, President Nixon suspended the dollar’s link to gold, effectively ending the Bretton Woods system and ushering in the inflationary decade of the 1970s. War ended the gold standard in 1914, the bimetallic (silver and gold) system in France in 1871, and also was a key contributor to the bankruptcy of the French state that ushered in revolution in 1789. And so on.

What followed the Bretton Woods system was a de facto if not de iure petrodollar system, whereby the Gulf states, especially Saudi Arabia, traded oil in dollars and used the proceeds to invest in US government bonds or equities. The US part of the deal was supposed to be the military blanket of freedom. Whether this was real or not, the events of the last few weeks have shown US protection to be insufficient at the key moment.

So when Iran announced that it would grant safe passage to oil tankers sailing through the Strait of Hormuz if the cargo was traded in Chinese yuan2, the ears of those looking at potential threats to the US-dollar trading system pricked up. This may just be posturing by Iran, but given the history of war changing money systems, it is clearly a theme to be followed closely.

The 1970s was a decade of stagflation which was set up by war, oil shocks and profound changes to the global money system. The current period risks a similar outcome, abetted this time by an AI revolution that may strip white-collar workers of their spending power.

In his book The Last Stone about the Sheila and Kate Lyon murder interrogations, Mark Bowden brilliantly summed up what the 1970s felt like in a way which no economist could come close to:

Ground was shifting under enduring institutions of American life, and the promise that had propelled the country so dynamically through the 1950s and 1960s had soured. Jobs were scarce, and paychecks didn’t go so far - a phenomenon dubbed ‘stagflation’. Americans stopped buying stocks - they were no longer betting on the future.3

For those thinking about how war and its consequences can change the economy and the investment outlook, Bowden’s commentary provides significant food for thought. Not quite the desperate edge of now, but clearly no longer a blue-sky outlook. Let’s hope the war finishes before any more damage is done.

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With this in mind, his first lecture, about ‘the dilemma in philosophy’, described the conflict between two ways of thinking. The first was called ‘tender minded’ and the other ‘tough minded’.

The tender minded group approximated to the rationalist or idealist view of the world. Much like the enlightenment in which rationalism came of age, such thinkers were generally optimistic, adherents to the idea of free will but above all prophets of the primacy of abstract thought and the elevation of ideas above human experience.

In contrast, the tough minded could generally be described as empiricists, holding that facts were key and knowledge from experience trumped fancy a priori ideas. Such a mindset was generally materialist, sceptical, fatalistic and pessimistic. If the enlightenment rationalism of the tender minded imagined an ever-improving human condition, then the tough minded would say that entropy means eventually the sun dies and with it, all of us. boo.

2026 has started with a bonfire of software-as-a-service (SaaS) equities which appears to be spreading to other sectors as every new release from a generative AI firm appears to threaten the basic assumptions of corporate business models. While it may be that the bloodbath could be a timely correction in otherwise overvalued equities, there is a sense that equity prices, being as they are a view on the present value of future company cashflows, are subject to growing uncertainty about what happens next.

Like William James’ tender and tough minded philosophers, the prognosticators in the debate about the future of the economy and society under the influence of AI tend to fall into camps of either breezy optimism or morbid pessimism.

For the pessimists, AI will be supremely successful but entirely destructive, with an abundance of intelligence eliminating the profit moats of multiple businesses. With entry barriers effectively eliminated, anyone can vibe code their way to a delivery business, a payment system or even an insurance business at almost no cost and in no time.

The result will be a collapse in the earning power of the white collar worker, and with that, a downward spiral in consumption, increasing instability in the housing market, and a crisis in our debt-driven economy. Those who have benefited from globalisation and financialisation over the past fifty years will soon find themselves in the same position as blue collar workers when offshoring and automation came for them.

For the optimists, the story of human progress and man’s extraordinary ability to adapt to change suggests that society will take the changes wrought by AI in its stride. Freed from dull and repetitive administrative tasks, workers will find themselves on the crest of a wave of productivity growth which will drive economic gains while simultaneously improving their quality of life. Falling costs in one place mean more to spend elsewhere. Wins all round.

Both sides clearly make many assumptions, not least that there is enough capital to fund this AI-driven future as well as enough materials to build it and energy to power it. There is also the real question of whether AI, particularly the large language models (LLM’s) with their hallucinations and questionable data feeds, are really up to any job, let alone the daily tasks of skilled, white collar workers in a complex, modern economy.

What about analogies? The pessimists seem to be thinking in terms of examples like cars coming along to nobble the hopes of saddle-makers and horse-breakers. The optimists tend to cite economic theory about patterns of adoption, legislative safeguards, S-curves of productivity gains and so on.

It’s true the industrial revolution pushed people from the land to the towns and from manual labour via automation towards what eventually became known as the knowledge economy, but AI is not the first or only technological revolution to displace humans at the top of the intellectual pyramid.

One example of this having already happened is the financial markets, particularly the activity of trading and execution. While the disruption to trading over the past few decades hasn’t been caused by generative AI, the way that machines and algorithms have slipped into the seat once proudly occupied by the big swingers of the trading floor is clearly instructive.

In the twenty first century, trading generally left behind open outcry in the pits and shifted to the computer screen. From ‘voice’ trading on the telephone, the move has also been towards traders using execution algorithms on their computers, and from there to automated quantitative trading, eliminating the trader and salesman altogether. Retail investors now also have direct market access of a sort unthinkable a generation ago and at a fraction of the cost.

The result? For equity trading, brokerage commissions of 25 or even 50 basis points have been whittled down to maybe 5 basis points for discretionary trading and fractions of a basis point for algorithmic execution. Retail platforms have stolen flow from brokers, while the likes of Robinhood actually get paid for their trading flow. This is the margin and moat destruction of AI pessimist nightmares.

But what do you know? The fat cat has not become extinct. Banks and brokerage houses are still with us. There are still traders making money. There are still salesman broking ideas, even if their research is more commoditised and therefore commands less of a premium.

Some traders still get mega-bonuses. Other roles have been ‘juniorised’ or eliminated altogether. New sectors like tokenisation, blockchain and crypto have appeared, absorbing old and new talent alike. Some people have taken their skills elsewhere. The lazy ones just sit around and occasionally post on Substack.

What is interesting though is that while their has been creative destruction, the industry has adapted and changed. Passive funds, with their lower fees, have grown while active managers, with their notorious ability to underperform their benchmarks, have dwindled.

The beneficiary of the falling fees and lower trading commissions has ultimately been the end investor as the administrative drag on their portfolios has decreased. This is clearly a win for the AI optimist types. Whether passive investing is overall a good thing is a different question altogether. The market seems more efficient and accessible, while execution is certainly cheaper.

For investing, the future is now: should anyone one wish to, the tools for trading a host of global stocks and other financial instruments have long been available at the touch of a button, and with it, all the necessary data and information which anyone, professional or otherwise, could possibly need to make an informed investment decision.

What we have now in generative AI is a tool to summarise all that research data, and that is a new and exciting proposition, as well as a democratising one, should one care to take the time to get involved.

But the investor still needs to take a view on how risky he or she wants their investments to be, what their time horizon is, or how much leverage if any they want to use and so on. Intelligence may now be abundant, but common sense is no more common than it ever was.

Even a brief analysis of the developments in modern finance shows a nuanced mix of winners and losers amidst an industry that is totally unrecognisable from its namesake of thirty years ago but which is nonetheless still here and thriving.

It ought to be remembered that while SaaS companies are taking a shellacking, the cost for using individual items of software is a small part of clients’ expenses, and good corporate planning doesn’t just mean ditching operational systems in order to set employees free to vibe code their way to a more cost efficient collective future - that way lies anarchy.

As with the financial trading example above, perhaps one ought to think in terms of evolution rather than extinction events. The rapid repricing of equity valuations is not the same as instant adoption and obsolescence.

Weighing up conflicting opinions was one of William James’ goals in pushing his pragmatic school of philosophy. As the name suggests, pragmatism’s core concern is usefulness. James’ view of ethics reflected this. Rather than truth being absolute and eternal, it was subjective and contingent. The question to be asked therefore was not ‘is this good?’ but ‘what is this good for?’ or ‘who is this good for?’

The latter question reflected James’ inherently pluralistic and democratic tendencies. Such a bottom-up perspective was no doubt in part the result of him being a nineteenth century American - a pleasant contrast to elite-leaning peers like Nietzsche. The implications of such views for our AI future are obvious.

James’ aim was ultimately to reconcile the rational and the empirical. Religion for example could be a social good if it had a practical benefit in the world and so on. Much of the current debate on AI is about absolutes of good and bad, and that is always dangerous when considering an unknown future.

Asking what is AI good for but more importantly who it can be good for is seems like a far more constructive approach, especially if one’s gaze is constrained by boring practical considerations of building and financing the future. A brilliant tool for the keen individual as well as an unrelenting scourge of white collar mediocrity? Perhaps both, and that’s not necessarily a bad thing.

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Along with mouthing off about the maillard reaction and ‘good’ olive oil, foodie types love to gabble about umami or the fifth taste as though it’s some great new discovery. Asian cooks have known about it and embraced it for well over a century. MSG is umami in chemical form.

Despite its Japanese origins, MSG’s notoriety in the west apparently originates from ‘Chinese restaurant syndrome’, a hoax affliction mentioned in a letter to the New England Journal of Medicine in 1968. Symptoms allegedly included headaches, flushing and sweating.

Despite MSG already being used at the time in tinned western food, the media jumped on the chauvinist bandwagon, creating a dog-whistle phobia which lasts to this day. Scientific bodies like the FDA and the WHO have in the meantime found no long-term health issues resulting from MSG consumption.

There is another naturally occurring substance found in small amounts which the press seems to love bashing. Like MSG improving the taste of food, research from the World Gold Council and others shows that portfolios containing an allocation of gold (not loads, more a flavouring amount) tend to outperform the average 60/40 portfolio over the long term. This is particularly true when central banks get printy at the same time as governments get spendy.

So while regression analysis suggests gold can be good for your long-term financial health, the tone in the media in the past year as gold has mogged pretty much every other asset class has veered from the sceptical via the unconvinced to the outright derisory.

Clearly, ‘assets’ like Fartcoin should get mocked in the press. But the tone around gold seems all the more peculiar when it is central banks, usually lauded in the press as the guardians of the financial system and high priests of neo-Keynesian intervention, who have been doing most of the buying. Officially, central banks bought 1,092 tonnes in 2024 and 863 tonnes in 2025. They have in fact been net buyers since 20101.

In a recent FT column, Robert Armstrong, while admitting he has been “loudly, persistently and hilariously wrong about gold”, still feels duty bound to continue questioning gold’s role as a hedge and ‘irreplaceable diversifier’ because evidence of debasement and inflation doesn’t exist in the bond market or the currency markets2.

He’s right of course, so long as one ignores CPI inflation since 2020, dismisses gold’s status as a currency cross and overlooks bond returns over the past 5 years (see graph below of the TLT Treasury ETF). The latter in particular show some big losses at the long end of the yield curve - that is the part reflecting economic growth and government creditworthiness.

Mr Armstrong’s FT colleague, Katie Martin, writes elsewhere that, “The beauty of precious metals, unencumbered by the usual valuation metrics like cash flow, dividends or interest payments, is that you can paint your own adventure on to them and construct a kaleidoscope of reasons to buy3.” There is clearly some wisdom here, and investors in gold often cite issues like inflation, debasement, geopolitical fears, sovereign risk, MOMO, FOMO and probably a few other things too.

While recent FT coverage seems driven by gold’s huge price move in the last year, clearly the knives were out for the precious metal on the lows as well. The headline above in the Wall Street Journal hasn’t aged particularly well, but that’s missing the point. Markets did badly in 2022 and gold went down. They did well enough in 2025 and gold went up. Recently it has become highly volatile. What is gold actually hedging?

Interestingly, just as gold’s big run began last autumn, the FT wheeled out a heavyweight in the form of Willem Buiter, former Bank of England monetary policy committee member, world expert on central bank mechanics and originator of the term ‘Grexit’, to persuade central banks to ditch the yellow metal4.

Mr Buiter doesn’t pull any punches. Describing gold as being in a 6,000-year-old bubble, he goes on to say it has no intrinsic value, that is has some utility as jewellery, a few industrial uses, and that it is volatile like bitcoin. Judging by last week’s price action, he is right on the last point. Overall though, it’s not much of an encomium, especially when he finishes by saying, “The world is a thoughtless prisoner of history when it treats gold as a store of value, particularly central banks.”

Perhaps Mr Buiter was thinking that once we got rid of gold, the new policies that central banks have been using since 1971 provided a better and more flexible set of tools than those that went before, resulting in a better chance not only of promoting economic growth, but also of avoiding deflationary cataclysms like the 1930s.

The Neo-Keynesian argument here implicitly contrasts the inflexibility of the classic gold standard with the adaptability of modern fiscal and monetary policy. It also reflects a genuine political change in the twentieth century. Official intervention to alleviate poverty and unemployment as well as to promote general social and economic wellbeing became both a moral and a political goal. Under the restrictions of the gold standard, such tasks were far harder to undertake.

This is of course a strong argument, so long as the monetary and fiscal tools are properly managed and the policies properly executed. Yet record gold buying, from central bankers of all people, is suggestive either of extreme monetary Stockholm syndrome (according to Willem Buiter), or that change is afoot.

Writing after the financial crisis, Dr Zhou Xiaochuan, then Governor of the People’s Bank of China, went on record calling for a reform of the international monetary system involving adopting a reserve asset bound by rules, stable yet flexible, while also ‘disconnected from [the] economic conditions and sovereign interests of any single country’5.

Clearly his criticism of ‘credit-based national currencies’ was a dig at the dollar and US post-financial crisis policy. Not only had the crisis revealed the shakiness of the US monetary system, but the subsequent bank bailouts and quantitative easing revealed an America first monetary policy that clearly didn’t mesh with the dollar as the principle reserve currency. China’s huge stock of US government debt was proof of the risk the country was now running.

Fast forward to 2026, and given the protectionist direction in which the US is currently heading, China is buying gold rather than US Treasuries. The neutrality of gold seems even more important after Russia’s foreign exchange holdings were seized in 2022. Gold’s strong performance in the past few years becomes much more explicable in this context.

China has been regularly adding to its gold holdings, and now officially holds 2,306 tonnes. Unofficially, it may hold a lot more. The FT reported back in November 2025 that China’s real purchases could be ten times as large as the official figures6.

What is even more interesting is considering China’s interest in gold in the context of the recent changes to the convertibility of yuan into gold on the Shanghai Gold Exchange (SGE) on the one hand, and of the growing use China’s Cross-Border Payment System (CIPS) as an alternative to the SWIFT trade settlement system on the other.

While Dr Zhou’s 2010 missive doesn’t mention gold as his clear choice, one can see how it does tick some of his boxes, particularly if it were wrapped in a more modern, digital garb than the classical gold standard.

As the world seemingly trends towards a multipolar and mercantilist future, under Chinese direction gold might be re-emerging as a trade settlement currency via the yuan. For central banks concerned about the balance of payments and currency stability, holding gold in reserve makes more sense in this context. The rising gold price might just reflect its growing importance.

Back in 2022, Market Depth discussed the idea of gold making a monetary comeback (see link above). Missing or refusing to believe one’s eyes when it comes to monetary regime change - a once in a century event - could prove to be a bit embarrassing. Disapproval isn’t a great justification.

Fortunately for the press, the radical and perhaps unnatural price volatility that precious metals have displayed recently means their role as hedges and havens can still legitimately be questioned. But it would be remiss to overlook the steady and ongoing flow of bullion from west to east, and what this may mean for the future.

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Who better then to face the economic and market challenge of an alien invasion? Helen McCaw, a former financial security analyst at the BoE, is reported to have written to Mr Bailey ‘urging him to organise contingencies for the possibility that the White House may one day confirm we are not alone in the universe.’2

Against ray guns and the like, it is most likely that the BoE would cut interest rates, buy gilts, and offer liquidity to the UK banking sector. This is what it always does when something goes wrong, man-made or otherwise.

Founded in 1694, the BoE only regained the right to set interest rates in May 1997 when New Labour finally made the central bank ‘officially’ independent. Between these two dates, Britain started the industrial revolution, led the world into the scientific age, helped stop fascism and fight communism in the twentieth century, and for good or ill built one of the largest empires in history. All this with a central bank that wasn’t always independent by modern standards.

While the British story may suggest modern notions of central bank independence aren’t the be all and end all of national success, central bankers have nonetheless rallied around Jay Powell, Chair of the US Federal Reserve, following a subpoena from the US Department of Justice about cost overruns on a $2.5 billion renovation project at the Fed’s headquarters in Washington3.

The joint statement from the central bankers read, “The independence of central banks is a cornerstone of price, financial and economic stability in the interest of the citizens that we serve,”, and was signed by Andrew Bailey and his counterpart at the European Central Bank, Christine Lagarde, amongst others4.

The main task which demands central bank independence is the conduct of monetary policy. Pretty much all central banks are mandated to ensure price stability, while certain institutions have additional roles; the BoE is also tasked with supporting the government’s economic policies, the Fed with ensuring maximum employment and so on.

Nowadays, price stability means keeping inflation at or around 2%. This odd definition of stability was agreed upon by central bankers in the developed world in the 1990s, yet in recent years, this figure hasn’t even acted as a floor let alone a target.

Between 2020 and today, US CPI inflation has aggregated around 25%. The graph below shows US CPI over a longer time frame. Should we lionise an independent Fed when it has so singularly failed to keep inflation in check, let alone achieved its stated policy goals? Maybe not, but the problem is that price stability isn’t the Fed’s only job.

Often vilified as giving in to President Nixon on monetary policy and ensuring the 1970s was a disaster of dollar weakness and inflation, Arthur Burns (Fed Chair 1970-78) gave a speech in 1979 after his departure from office entitled ‘The Anguish of Central Banking’ in which he eloquently addressed the different directions in which central banks are pulled with respect to the conduct of monetary policy5.

In it, he describes how America’s tradition of the individual living independently of government intervention was shattered by the events of the 1930s (the great depression) and the 1940s (the second world war). He went on to describe how Americans,

“were persuaded during the depression that the federal government should help the unemployed….Under the compulsion of war, the government had demonstrated it could assure gainful employment for every willing hand.”

This trend culminated in the Employment Act of 1946, which started to modify the Fed’s mandate towards ‘full employment’ as well as price stability, although its current ‘dual mandate’ was only formalised in the Humphrey-Hawkins Act (1978).

Mr Burns was reflecting on how the Federal Reserve, dependent as it always was on Congress for it powers, was carried along by the changing approach to governance that America experienced in the twentieth century, and how rising living standards, the expectation of progress and the trust in government to deal with problems shifted public expectations and with it, the Fed’s role within the economy.

In the context of what Mr Burns called the “philosophic and political currents that changed and transformed economic life” in the US and elsewhere, fixing a working definition of independence for the central bank might seem like an impossible task, given the evolution of politics, economics and society at large. In fact, it is really quite easy. You just have to look at examples of where it goes wrong.

In his analysis of twentieth century hyperinflations, Peter Bernholz makes a number of general observations about periods of very high inflation: first, that governments propensity to spend generates inflation; second, fiat (as opposed to metallic monetary) regimes tend to suffer inflation more readily; and third, inflationary situations take hold much more readily when the central bank is subservient to the executive6.

Given the context of the Arthur Burns speech above, it is clearly point three that markets and other central banks are concerned about, not least because the US dollar is the world’s trading currency and its de facto reserve asset too.

Bernholz goes on to say that the slide into hyperinflation usually occurs when the money printer finances very large deficits (15% of GDP or more) on a consistent annual basis7. If this isn’t the case now, surely there’s nothing to worry about?

Following the Fed subpoena news, the dollar weakened and gold spiked, but markets in general were fairly non-plussed. Trump clearly knows what is at stake - his Secretary of State for the Treasury, Scott Bessent, is reported to have told him the dangers of messing with the Fed with respect to the dollar and markets in general.

There is a case to be made that the Fed now has a third, unofficial mandate - that of keeping the US bond market from collapsing. The continued functioning of global markets, themselves ultimately dependent on the functioning of the dollar as a reserve and trading asset, is a reality from which the Fed clearly isn’t independent in any meaningful sense. It is also a reality which the Fed is complicit both in creating and cultivating.

The market is taking some succour from Trump’s hints that he’d like Fed chair candidate Kevin Hassett to stay in the White House rather than take over from Jay Powell later this year. Given recent events though, it’s hard to imagine that any successful candidate could now be fully free of the taint of being Trump’s creature.

Bond and equity markets are used to shrugging their shoulders at political events in recent years. Crises always result in monetary easing, so all’s good - buy the dip. Monetary inflations are great fun for all asset holders when they start, but it is in the end game that the real issues of currency debasement and value destruction start to emerge.

The 1970s was the last decade in which the Fed was viewed as subservient to the executive, and both bonds and equities were a horror show in terms of real returns. While the 2020s set up is clearly different, and while President Trump’s willingness actually to see things through is always moot, the alarm bells are certainly ringing right now for the dollar.

The normally sober Barry Eichengreen, writing in an op-ed in the FT, in fact suggests that the 1930s is the analogue to which we should refer “where governments compromised the autonomy of their central banks, spawning financial instability and causing global liquidity to implode”8. Getting massive deflation is clearly as bad if not worse than massive inflation.

Walter Bagehot’s advice in his 1873 ‘Lombard Street’ was that in times of crisis, central banks should lend freely to solvent firms against good collateral but at penalty rates. Nowadays, central banks do lend freely, but to almost anyone, against any old collateral, and often at subsidised rates. The financial world of 2026 is one of the central bankers’ creation. If it unravels, due to Trump or some other event, the bankers may well struggle to stay independent of blame. Perhaps that’s why they are all really in a flap.

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If the globalisation trend of the post-cold war era was characterised by falling bond yields and falling inflation, it seems that the advent of a more state-orientated and multi-polar system has been marked by rising yields and rising inflation.

So far, global equity markets have faired pretty well despite a central bank rate-hiking cycle. Precious metals have been on a tear, and some of the base metals, notably copper, have also been flying recently.

In the bond market, the era of negative rates seems like a distant and fanciful memory. Bond prices fell sharply as central banks hiked rates from 2022 onwards in response to pandemic-driven inflationary pressures.

In Japan, the birth place of zero interest rates, the return of inflation is starting to cause the government and monetary authorities some serious difficulties. This is ironic, given several fruitless decades spent desperately trying to reflate the economy. Is 2026 the year when Japan’s failures since the 1990 crash start to spill out into global markets?

Japan has a problem. In August 2021, Japanese CPI inflation was negative 0.4%. From that point onwards, it has been positive. The first peak was in January 2023 at 4.3%, with a second peak of 4% in January 2025. The latest reading (November 2025) was 2.9%, down slightly on October’s figure.

With CPI inflation having hit 9% in the US and higher still in the UK, one might think Japan has got away quite lightly. Japan though has another problem - its massive government debt which stand at 237% of GDP (according to the latest IMF data from 2024).

This huge stock of debt is the result of the socialisation of losses from Japan’s long period of deflation and corporate balance sheet repair following the credit crunch in 1990. Rising inflation has led to rising government bond yields. From a low of negative 0.24% in 2021, the 10yr JGB yield has risen to a multi-decade high of 2.08%. The 30yr has risen from 0.13% in 2021 to a current high of 3.51% (see graph below).

The sharp rise in long-term yields in recent months has followed the Bank of Japan’s (BoJ) tightening cycle. The BoJ hiked rates to 0.75% in December in the latest part of a process that started with a 20 basis point rise to 0.1% in March 20241. With inflation at just under 3% and 10yr JGB’s yielding around 2.1%, real rates are still negative, hence the weakness of the yen. The weak yen is helping to fuel inflation (especially of food stuffs), hence rising yields and central bank tightening. A doom loop of sorts, especially for an indebted country like Japan.

The BoJ has also been reducing its balance sheet. Back in September 2024, it announced that it would start to unwind the equivalent of $250 billion of equity exchange-traded funds that it had acquired over the previous decades of its quantitative easing (QE) policy2. Since the announcement, the Nikkei stock index, which had been doing pretty well, has basically flat-lined.

After decades of expansion, the BoJ’s balance sheet is falling. The graph below shows the central bank’s assets having dropped ¥70.2 trillion year-on-year to the end of 2025, and sitting some 10.4% below the March 2024 peak.

At the same time, the new Japanese government is continuing to spend through deficit financing, although it claims that it will show responsibility with respect to debt levels. The budget for the fiscal year starting April 2026 is ¥122.3 trillion, up from ¥115.2 trillion the prior year3. Hardly surprising then that the yen is struggling and that inflation is still alive and well, both of which are helping to push up bond yields.

So what does this all mean for markets? With brief oil-price driven interludes, Japan has for decades run a current account surplus. These earnings have in part been invested abroad, with the Japanese Ministry of Finance’s (MoF) latest figures (FY 2024) suggesting a total of $2.25 trillion in Japanese-owned foreign assets.

In addition, there is a carry trade - lending in yen to borrow in higher yielding currencies abroad. While some estimates have the total of this carry trade in the trillions of dollars4, the reliable Hyun-Song Shin of the Bank for International Settlement puts the figure at a still-substantial $270 billion5.

As Japanese yields rise, so the relative attractiveness of carry trades diminishes, and with it the leverage in foreign assets (including the almighty US stock market which has been a major beneficiary of foreign capital flows in the past decade and a half).

Rising yields at home may also start to attract Japanese capital back, and there is always the potential for the BoJ and MoF to lean on savings and pension institutions to repatriate money to prop up the yen and domestic debt markets.

What remains to be seen in 2026 then is how capital flows from Japan, including leveraged lending (carry trades) as well as foreign direct investment in bonds and equities, starts to affect international markets as the domestic drivers of those massive, long-term trends go into reverse.

The BoJ hiking policy rates to 0.75% may seem like small beer in comparison to special forces ops in Venezuela or the cost of Greenland, but events in Japan are of a similar if not greater magnitude for markets since they directly affect often overlooked assumptions about the most deep-rooted parts of the architecture of the global financial system.

Since they rely on debt leverage, carry trades are by their nature a bet against volatility. Japan has for decades been not just the poster child of low rates and the financial leverage that ensue from them, but also their origin and lodestar. If nothing else, Japan may be in the process of resetting the base line for long-term global yields, with all the implications this has for borrowing worldwide.

2026 seems to be shaping up to be another humdinger, so investors would be wise to look east and ask how much of the great moderation and its associated asset price inflation actually came from Japan. This has implications not just for global borrowing costs but the idea of asset repatriation as a financial counterpoint to the explosion of geopolitical state-craft that seems to be kicking off the new year.

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Contrary to popular fears, these reparations didn’t cripple France. The newly-formed Third Republic instituted a serious of domestic reforms which super-charged GDP growth. The money was paid, and France went on to prosper in the Belle Epoque.

If anything, it was the huge influx of cash into Germany which caused the problem, creating a property bubble that ended in a crash. It also marked a shift in Germany from silver to gold-backed money. For historians, 1871 usually marks the start of classic gold standard era, even though the US Coinage Act, which demonetized silver, was only signed in 1873.

With the French Third Republic replacing the Second Empire in 1870 following the fall of Napoleon III after his loss at the battle of Sedan, so the Prussian victory lead to the inauguration of the German Second Empire, with Wilhelm I being declared Kaiser in the Hall of Mirrors in Versailles in 1871 (see illustration below). Both victor and vanquished were transformed politically, socially, culturally and economically by the conflict.

Fast forward to 1919, and the next chapter of European conflict drew to a bitter and unsatisfactory end with the Treaty of Versailles (see photo below). This time around, the victorious French led the way in punishing the loser Germany.

Destabilised by revolution in 1918, the reparation sum of 132 billion gold marks proved crippling for Germany, which was already hamstrung having financed the war through deficits and money printing. The story of the 1920s hyperinflation and the rise of the Nazis in the following decade can all be traced back to the First World War, its massive debts and the difficulties Germany had in paying them at the same time as trying to fulfil its reparation obligations.

The problem with the Versailles Treaty was clear to some even before it was signed. Many of the issues which went on to plague Germany and its former enemies in the post-war period were anticipated and brilliantly explained by John Maynard Keynes in his ‘Economic Consequences of the Peace’ (1919). On seeing the terms of Treaty, Marshal Foch, French Generalissimo during the war, said it wasn’t a peace but an armistice for 20 years. Sadly, his prediction was accurate to the very year.

The settlement after the catastrophic destruction of the Second World War was a rare example of diplomats and politicians realising that the mistakes of the previous generation in punishing Germany at Versailles in 1919 had to be avoided in order to preclude another cycle in Europe’s brutal history of conflict.

Led by the US, and with an eye to ensuring European economic recovery to avoid any more countries ‘going red’, the London Debt Conference of 1952 saw Germany’s pre-war debts cut by 50% and war-related compensation put off until Germany was re-united1. A pretty good deal for Germany, all things considered.

To the backdrop of a booming economy and a growing current-account surplus, Germany ended up paying around 10% of GDP in reparations - this compares to around 200% of GDP for the London Schedule of 1921 after the First World War. Given the post-war German economic miracle, it was a small price to pay, especially if it meant no more nazism, no communism and no more war.

Politically and geographically though, Germany remained divided until 1989. The end of cold war saw another political and economic revolution in Europe, with hyperinflation engulfing Eastern Europe as it said goodbye to communism and hello to democracy. The same period was marked by war, genocide and economic dislocation in the Balkans. Croatia for example struggled with a 22-month hyperinflation that peaked at a rate of 300 million percent per month. Plus ça change…

With respect to Ukraine, peace does seem to be closer, but it already feels likely to be an unsatisfactory one. The US clearly wants out. It’s 28-point plan hints at post war economic cooperation between itself and Russia, which says something of America’s needs and capabilities these days. The US may hope this happens to the detriment of China, however unlikely that may be given recent Sino-Russian chumminess.

To this backdrop, the EU’s decision to freeze €210 billion of Russian assets ahead of the conclusion of peace talks is a stand out event2. By invoking article 122 of the Treaty on the Functioning of the European Union (TFEU), the EU conveniently avoids a vote in the European parliament. It also requires only qualified majority voting, thus avoiding a veto say from Belgium, where Euroclear, the custody entity holding Russia’s assets, is located.

Belgium has reason to be worried. Clause 122 was put in place to deal with ‘natural disasters or exceptional events’ for EU members, but its use to fund loans for Ukraine, which isn’t even an EU member, is legally dubious to say the least. Russia has filed a domestic lawsuit in response, which may in turn lead to European assets in Russia being seized.

Regardless of one’s views on the Ukraine war and the ethics of supporting a country that’s been attacked as Ukraine has, this is a bad look for the EU. Seizing banking assets, especially those invested in EU sovereign debt, is terrible in terms of the optics of a jurisdiction from a financial security and rule of law perspective. Quite what this means for future foreign direct investment or sovereign bond purchases is unclear, but it’s clearly not positive.

By seizing the very assets the current US peace proposal is based upon, not only is the EU likely alienating the US even more , but the flappy way it is being done shows up Europe as weak, ineffective and increasingly irrelevant as a political entity. Chancellor Merz’s recent raging against America first and the end of the ‘pax Americana’ is a vocal reflection of this3.

In history, the winner decides upon and receives reparations, not the loser. It seems odd in the extreme therefore that the EU is seizing Russia’s assets at this stage. This is especially so when the war has yet to end, and when it’s not even clear if Europe is on the winning side.

As such, the whole decision makes the EU look desperate, especially if it is being driven by the need to prop up the banking system by paying back a guarantor of a previous loan for example. This last possibility has particular salience given the ECB has recently refused to backstop loans to Ukraine as it would amount to the monetary financing of deficits which is illegal under ECB rules4.

The brief historical survey above shows major European conflicts always lead to radical political and economic change. In monetary terms, European war has seen the start of the gold standard (1871) as well as its end (1914), and then the birth of its replacement in the dollar-based Bretton Woods system (1944). The end of the cold war and the reunification of Germany ushered in the euro, which finally became the Euro area’s official currency in 1999.

Were Europe to end up on the losing side of the Ukraine war, and with the issue of the future of NATO at stake as a result of this, some outcomes are on the table that would have been largely unthinkable even five years ago. This may explain the manic nature of European diplomacy at the moment.

If Europe is having to pick Russia’s pockets just to stay in the fight, should investors legitimately be entertaining questions such as the future of the EU and with it the euro currency itself, however heretical that sounds? Not exactly an economic prediction for 2026, but a fat-tail outcome that European history shows can happen more often than many of Europe’s leaders would ever like to admit.

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His article acknowledges that it is the weak position of the Chancellor, Rachel Reeves, and the Prime Minister, Keir Starmer, that has forced the Treasury to hike taxes on business and the wealthy to fund an increase in welfare spending. Unable to control their rabid back-bench MP’s, the Labour party leadership has had to go all in on tax-and-spend to avoid further rebellions and disruption.

Mr Heath’s ire reaches its zenith over the new tax on high-end properties, describing it as a “quasi-authoritarian reopening of settled property rights” which “begins to abolish freehold property, turning yeoman-owners into leaseholders, with politicians the ultimate landlords”.

Powerful stuff, and clearly an affront to those with houses worth £2 million or more. Yet is this really anything new?

The tory press was equally outraged in April 1895 when then Chancellor of the Exchequer, the liberal radical Sir William Harcourt, abolished Estate, Probate and Account duties and replaced them with a uniform Estate duty that put a hefty 8% tax on estates over £1 million when the owner died.

The Liberals’ unstated aim was to break up the great estates, thereby undermining the power of those landed interests that had ruled England for a thousand years. Harcourt’s predecessor as Chancellor, the tory George Goschen, thus described the move as “a strong form of fiscal robbery” as well as being “socialistic” and bearing “no principle of justice”2. A bit like Ms Reeves’ mansion tax.

Yet despite all the thunder in the press, reaction in the bond market has been positive. The yield on 10yr UK gilts finished the weak nearly 10 basis points lower at 4.45%, while the pound finished the week higher by nearly a percent at $1.32.

The equanimity of the financial markets seems all the more peculiar when one considers the controversies that have surrounded the role of the Office of Budget Responsibility (OBR) in last week’s events.

The early release of market-sensitive budget data on the OBR website, a fillip to Labour’s parliamentary opponents, can be put down to mere incompetence. The OBR’s continued record of terrible forecasting (and the Labour government’s blind reliance on it for deciding fiscal policy) is the issue which really ought to concern investors.

The OBR’s record this year is poor to say the least. In March, it forecast the 2024/5 fiscal deficit as £137 billion when it turned out to be £150 billion. Unable even to calculate this year’s figures correctly, it should hardly be a surprise that six months on, the OBR has had to restate its 2025/6 deficit forecast (up from £117 billion to £138 billion) and likewise its figures for 2026/7 (with the projected deficit rising from £97 billion to £112 billion).

Such chopping and changing provides context to the unedifying public spat between the OBR and the Treasury in the last few days. The OBR claims it informed the Treasury of revisions to the fiscal headroom calculations early enough that there are now accusations that Chancellor Rachel Reeves misled not only parliament but also the nation and the markets with her fiscal black hole chat. It is now alleged a dire but incorrect fiscal picture was used as cover to hike taxes to increase welfare spending. There is even speculation that the Financial Conduct Authority (FCA) might be asked to investigate market manipulation3.

So far we have learned that the Labour party is socialist, that politicians lie, that bureaucrats can be incompetent and that it’s difficult to forecast the future. Perhaps this ‘nothing new under the sun’ wisdom is why the bond market shrugged last week.

Yet the OBR constantly increasing its deficit forecasts even as growth slows should terrify bond holders, especially with September UK CPI inflation still at a hefty 3.8%. Ms Reeves’ budget saw short-term spending promises rise by £9 billion with long-term taxes increasing by £26 billion. This comes on the back of a £40 billion tax hike last year.

Tax will have increased by 5% to 38% of GDP since 2019. OBR growth forecasts (for what they are worth) have also been revised lower . Business is groaning and households are struggling to keep things together. This is not exactly a bond-friendly combo.

What of the credit ratings agencies? A cautious thumbs up from all three of the big guys, with Moody’s being quoted as saying, “While the government’s willingness to bring public finances back in line with its targets is positive, execution risks remain high”4.

This is quite an understatement. Even the Guardian, usually a staunch advocate of increased welfare spending, described it as a ‘live now, pay later’ budget which increased overall risks to the economy5. Given Labour’s dire poll ratings , perhaps later will be someone else’s problem.

What of investors? The Financial Times quotes Ales Koutny, head of international rates at Vanguard (the world’s second largest asset manager) as saying his firm is happy to dive right back into the UK’s debt markets6. “We feel comfortable to come back to the UK market and add gilt exposure….The event risk itself was something to be fearful of. Just getting through that seems like a positive”.

You first mate. Something doesn’t seem quite right here.

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The ballooning wealth gap that has emerged in the US since the global financial crisis has in part been attributed to the effect of quantitative easing, low rates and the like on inflating the price of financial assets. This is the Cantillon effect in action.

This has led to the emergence of what is described as a K-shaped economy: great at the top, especially right now for equity holders riding the AI boom, but with a simultaneous cost of living crisis for many of those not in the 1%.

During the financial crisis, McDonalds (ticker MCD) was one of the few stocks that faired well even as the banking system collapsed. However tight family budgets were, people needed to eat, hence the robust sales at the golden arches.

So when you see the equity of a US family favourite like Wendy’s (WEN) down by nearly 50% year-to-date, should we be thinking macro (food price inflation, income inequality, the K-shaped economy), micro (a company struggling with strategy and senior personnel changes) or something else more structural?

When Wendy’s reported it’s Q2 earnings in August, revenues had fallen 1.9% with US same-store sales falling 3.6%. The conference call revealed that July US like-for-like sales had fallen 5-6%. Given robust sales growth and new openings outside the US, and with economic data in the US showing slowing employment and the like, the K-shaped economy narrative seems to make sense when viewed from the 30,000 foot level.

For those following Wendy’s stock more closely, there are of course many other explanations. There has been some turnover in the C-suite in the past few years, especially with CEO’s coming and going. An investor day back in March this year pushing the ‘next chapter of growth’ clearly didn’t allay fears that the company has lost its direction and that its restaurants and brand are a bit tired.

For a consumer cyclical stock trading on a trailing 1-year price to equity (P/E) ratio of 28x as Wendy’s was at the end of 2022, you really need to execute on your growth story. The stock was then trading at $23.85. At the end of last year, trading at $19.66, the P/E ratio had de-rated to 20x. With full year 2025 company earnings guidance at $0.82 to $0.89 per share, Wendy’s is currently trading on just 10x 2025E earnings. Investors are clearly no longer buying the growth story.

One of the funny things about a company like Wendy’s is that its quarterly earnings calls are a bizarre discussion of white chicken breasts, crispy crumbs and indulgent morning drink offerings. The analysts covering the stock seem to play along with this, rarely asking questions about dull stuff like free cash flow or the balance sheet.

Clearly, rising beef prices (see graph above) provide headwinds to customer affordability in a burger business. It is also true that Wendy’s has had problems at a management level, an issue which easily weighs on sentiment when a company is trading on an earnings multiple which reflects a blue-sky growth outlook as was the case a few years ago.

Yet when it reported its Q2 results, despite falling revenues and lower free cash flow, Wendy’s net income per share actually went up year-on-year ($0.29 in 2025 vs $0.27 in the equivalent quarter 2024).

This was to some extent made possible by the company buying back $61.9mm of stock in the quarter, reducing the number of shares outstanding. A smaller denominator is always helpful in goosing earnings-per-share growth, although even this sort of sleight-of-hand has not helped Wendy’s this year.

When one takes a look at Wendy’s balance sheet (a topic that never seems to be raised on the company’s quarterly earnings calls), the long-term effect of financial engineering becomes even clearer, and this is where a real question starts to emerge.

At the end of 2024, the company’s net debt to EBITDA ratio was 5.1x - pretty high, but not crazy. The interest coverage ratio was steady at around 4.6x in Q2 2025. So the company is quite highly geared. What about the assets against all this borrowing?

Of an asset base of $4.9 billion, the company has $0.9 billion of property and $281 million of cash, the latter down from $450 million a year ago1. A sharply deteriorating cash balance is never a good sign. The rest of the assets are comprised of financial and operating leases, goodwill and other intangibles. There is over $2.7 billion of long-term debt against this.

When one is calculating the tangible net asset value (NAV) of a company, one takes total assets and deducts not only current and long term liabilities but also goodwill, as the latter is an accounting entry and not a ‘real’ asset (hence tangible NAV).

For Wendy’s, such a calculation leads to a tangible NAV of negative $659mm vs a current equity market capitalisation of $1.6 billion. A harsher calculation removing all intangible assets would create a figure of negative $1.84 billion. Not ideal.

All this is the legacy of a decades-old strategy employing lots of balance sheet leverage to increase revenue and earnings growth. A great strategy in an era of falling interest rates and low inflation, but less so when inflation makes a comeback, negatively affecting both consumer spending power and the cost of balance sheet financing.

For now, Wendy’s credit looks ok. The 5yr credit default swap, a measure of credit market stress, is currently trading at a spread of just over 200, so wide but not crazy. It peaked at 300 in April this year, but this is more likely the product of market gyrations relating to President Trump’s liberation day rather than an idiosyncratic issue such as credit investors rejecting the Wendy’s management's investor day pitch.

So while management and equity analysts can still play the narrative game of breakfast offerings and special sauces, under the hood, Wendy’s sadly looks like a financialisation poster child with a business model which may well struggle in an age of higher rates and higher inflation. Sadly it’s often during recessions and slowdowns that the full effect of past management decisions comes to light, and that increasingly seems to be the case with the Wendy’s equity de-rating story.

(This discussion is for illustrative purposes and should not be taken as trading or investment advise.)

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In the same way microwaves and convenience food have changed the way we eat, so has digitalisation not only changed the way we trade various assets, but most likely how we value them too. We no longer have to call up a broker who then directs an order to a market maker on the exchange. Everything can be done at the press of a button on one’s mobile device. Instant gratification.

Critics have pointed out how short-termism has unleashed speculative forces and how this is dangerous for retail investors, especially if margin borrowing is involved.

Yet not all the short-termism is technologically driven. Paid in share options, CEO’s obsess over quarterly earnings, and this in turn has led to criticism that companies are now managed on more immediate issues rather than long-term factors relating to growth and productivity from capital investment and research.

With quarterly reporting supposedly a major driver of management short-termism, one might expect a call by President Trump for US companies to move to twice-yearly reporting to be welcomed2.

2025 being 2025 though, a cacophony of opposition has been voiced, mostly around disclosure issues for investors and how this will adversely affect the efficiency of capital markets3. Clearly, fascists prefer semi-annual reporting.

Investors should be looking more closely at accounting, and especially how the accounting process feeds into valuation, but the faff over quarterly reporting is a bit of a distraction.

The veracity of company accounts is driven by the process of revenue recognition, which in practice means adherence to the matching principle. This involves a realistic and honest approach to the timing of revenue bookings in relation to the actual receipt of customers’ cash.

With US unemployment ticking up and a number of other indicators suggesting parts of the US economy may be struggling, focusing on changes to sales is the key for investors to monitor how a company is trading in a potential slowdown.

Problems with sales first appear in the current assets section of the balance sheet. Cash and equivalents start to drop, inventories tend to rise (especially with respect to days sales outstanding), while the asset turnover ratio starts to slow. The cost of goods sold tends to rise as a proportion of revenues, while cash conversion (free cash flow divided by EBITDA) drops.

Investors should start to get a little more itchy when receivables start to grow as a proportion of revenues and when cash flow from operations as a proportion of income drops due to the ratio of alleged sales to actual cash received from customers getting bent out of shape.

The slide into actual fraud is a subtle one, and it usually happens when customer cash has dried up but management tries to keep the earnings growth story going in order to prop up the share price.

One of the best fraud surveys available is Howard M Schilit’s 2002 masterpiece ‘Financial Shenanigans’ which documented the accounting violations that characterised the end of the dotcom boom. These included, but were not limited to, bogus revenues, rising one-off charges, changes to expensing practices and amortization schedules and so on. Most notable though from a sales point of view was the rise in unbilled receivables, related-party transactions and the financing of customers, all of which ended up with fraudulent violations of the matching principle resulting in fake sales and thus fake earnings.

For those with long memories of the ‘round tripping’ sales scandals of the dotcom era, the last few months’ developments in the AI / chip / datacentre world will of course have raised a few eyebrows.

OpenAI made $4.3 billion of revenue in the first half of 2025, yet has ‘signed’ deals worth around $1 trillion so far this year4. This isn’t strictly a revenue recognition issue in pure accounting terms, but it is getting close, especially if one looks at how the share prices of listed companies involved in this bonanza are behaving.

When Oracle (ticker ORCL) announced some $300 billion of OpenAI contracts stretching out over the next half decade, the stock price surged 36%5. A few weeks later, Oracle stock fell sharply as poor margins on its Nvidia cloud business were revealed6. Reality and expectation are clearly not the same.

Elon Musk has christened this the ‘infinite money glitch’. Investments by OpenAI drive up the share prices of the companies involved in AI datacentre build-out which creates the impression of funding the infrastructure deals (eg: Oracle buying chips from Nvidia) through cross-holdings of one company in another (eg: Nvidia in AMD and Intel) and so on.

Yet without revenues from OpenAI, this arrangement eventually falls foul of the old revenue recognition issue - if no cash changes hands there are no revenues, and no sales revenue means no earnings, and the extraordinary growth being priced into the equity valuations in the AI sector becomes suspect. If the spending boom is to continue (and grow - especially on the energy and grid side of things), where does the new cash come from?

A recent Global Technology Report by Bain & Co suggests that to reach a projected 200GW of required capacity in 2030, annual revenues in the AI sector will need to hit $2 trillion, and even with AI-related savings, an $800 billion shortfall is anticipated, a hole which clearly needs filling from elsewhere7.

Clearly the numbers don’t really stack up, and people seem to be starting to admit not only that there is a bubble, but that behind it is what Goldman describe as a ‘circular revenue’ issue not entirely dissimilar to accounting issues that have characterised previous market peaks.

What makes 2025’s AI bubble so odd is that people not only seem to acknowledge it as a bubble, but think that this time it’s a good one. No less a tech luminary than Jeff Bezos said recently,

“This is kind of an industrial bubble as opposed to financial bubbles…the banking bubble, the crisis in the banking system, that’s just bad, that’s like 2008. Those bubbles society wants to avoid…the ones that are industrial are not nearly as bad, they can even be good. Because when the dust settles and you see who are the winners — society benefits from those inventions.”8

He may not be wrong. The massive overbuild in fibre optics in the early 2000s certainly was good for the growth of e-commerce later on, and that may be the case again for AI in the 2030s. But that long-term internet story provided no succour for investors who experienced the collapse in tech stocks from 2000 onwards.

In the meantime, investors should keep a very close eye on the ‘current’ part of the corporate balance sheet and how company revenues tie up with cashflows. Dull but sensible, but at least if Trump gets his way, it’ll only have to be done twice a year.

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