Back in the 1970s the joke was that rundown Glasgow was Disneyland. “Aye, because this disnae work, and that disnae work . . . ” Well, we all live in “Disnaeland” now. You voted for Brexit? You ended up with Theresa May and now three options — her deal, no deal or some other deal (involving Norway), none of which has a majority in either the Commons or the country, implying another three options: another Tory leader, another referendum or another general election.
You voted for Donald Trump? You ended up with Nancy Pelosi back in charge of the House of Representatives and Robert Mueller rounding up the suspects.
You voted for Emmanuel Macron? You ended up with the gilets jaunes smashing up the Arc de Triomphe.
You invested in stocks? It didn’t work. Bonds? It didn’t work either. Bitcoin? That really didn’t work.
As 2018 draws to a less than happy close, it’s tempting simply to conclude that nothing works. Populism doesn’t work. Centrism doesn’t either. The same applies to investing. What 2018 offered you was a hundred ways to lose money.
What turned our planet into Disnaeworld? My answer to all democratic leaders is that you really cannot win — for seven reasons.
1) You can’t do anything about demographics, and for most democracies these are terrible.
2) You have inherited welfare states that transfer resources from younger to older voters, but the latter tend to be more numerous and turn out more in elections, so you can’t reform welfare and survive.
3) Your safety valve is that you can borrow from the bond market, and interest rates are very low, but that’s now changing and you can’t do anything about it because central banks are independent.
4) Your ageing population creates a demand for foreign labour and students, but immigration is politically unpopular, even when the immigrants come from northern Europe and genuinely ease skills shortages.
5) You might just be able to overcome these problems if there were a real external threat, but the truth is that ordinary people just aren’t that scared of Vladimir Putin or Xi Jinping, much less Kim Jong-un.
6) As for climate change, ask Macron how his proposed fuel tax is going.
7) Finally, social media have made it almost impossible for you to control the narrative. You can tweet to your heart’s content, but you are firing a water pistol into an ocean of extreme views and fake news.
So politics is a doomed venture. The best-performing democratic leader at the G20 in terms of longevity and popularity was Angela Merkel (13 years, 50% approval), the worst Macron (19 months, 26% approval and falling). That is because Merkel long ago learnt that the key to popularity is always to take the line of least resistance. She’s a strategic disaster but a tactical genius.
Can investors make money in a world of abject political failure? It’s not easy, I admit, but it’s not impossible.
First, don’t make the mistake of thinking authoritarian regimes are a better financial bet than democracies. Just look at G20 countries’ stock markets. True, in dollar terms the Saudi Arabian stock market has outperformed the others this year (it’s up 9%, which goes to show that investors care a lot less about royally ordered assassinations than journalists do). Russia has also done better than America. But Turkey has been the second-worst performer (down 43%) and China the third worst (down 27%).
The key is to buy the rumour and sell the news — or rather buy ahead of the hope and sell ahead of the reality check. Nearly every new government is given the benefit of the doubt by markets unless its leader is a raving Marxist. You should just assume that most glad, confident mornings will be over within one or two years of any election.
Brazil is a good illustration. The Sao Paulo stock market has jumped 15% in the past three months, buoyed by the election of the populist firebrand Jair Bolsonaro. Investors hope (as do I) that Bolsonaro’s Chicago University-trained finance minister, Paulo Guedes, will reform pensions, simplify taxes, slash red tape and stabilise the debt. The reality check — when these hopes encounter the swamp of Brazil’s Congress — lies ahead.
Can Bolsonaro avoid the fate of Mauricio Macri, who was the darling of the markets after his 2015 election victory in Argentina and now has a 35% approval rating and a nasty recession on his hands? Maybe, but he will deserve his nickname, “Myth”, if he does. In June 2017 I speculated that populism had a half-life of about a year. The cases of Messrs Macri and Macron show the same rapid decay also afflicts political centrism.
All political lives end in failure, Enoch Powell once said. These days, it seems, failure comes long before the careers end. The least popular leader at the G20 last weekend was the outgoing Brazilian president, Michel Temer: after less than 2½ years in office, he has a 7% approval rating.
Mrs May is not the only dead politician walking. To persevere in politics today you need to be like Glenn Close in the final scenes of Fatal Attraction. You keep coming at the electorate, wild-eyed and apparently unkillable. Boris Johnson thought he had drowned you in the bath, but no.
How was it possible to make money in 2018? The answer: load up on healthcare stocks. If all you did in January was invest in that sector and sell the rest, your total return to date has been 19%. This makes sense. The most extraordinary trend of recent years has been the deterioration of life expectancy and health quality in America. The opioid epidemic is only the most shocking manifestation of this crisis. Not only is the American population ageing; it is ailing.
True, many households lack adequate insurance or savings to cover their costs in the event of serious illness. But most individuals will gladly economise on everything else if it will enable them to buy treatment and medication for themselves or a loved one. In other words, when everything else has gone belly up, you can be sure that the last dollars in the last pockets will be going to the health insurers, healthcare providers and drug companies.
It did not need to be this way. Democracies could have learnt from one another, copying and sharing the Swiss system of decentralised government, the New Zealand system of prudent public finance, Japanese healthcare, Canadian immigration, German energy efficiency and so on. Future historians will wonder why best practices did not spread in that way.
Perhaps they would have, if the brightest people in my generation had gone into politics rather than finance. Without quite meaning to, the bankers contrived to make one thing easier than it had ever been before: government borrowing. Vast global markets for government debt and interest rates at truly unprecedented lows — that was what enabled the political class to duck all difficult decisions, leaving the next generation to sort it out. Now the bankers wonder why their children are all socialists.
Well, sooner or later they’ll get the chance to vote for socialism. And then they’ll find out the true meaning of Disnaeland. Because believe me, kids: nothing disnae work quite like socialism.
Niall Ferguson is the Milbank Family senior fellow at the Hoover Institution, Stanford
At the Congress of Vienna in 1815 the delegates danced almost as much as they negotiated. As the Prince de Ligne put it: “The congress dances a lot, but it doesn’t make progress.” The dancing was a distraction. What mattered was that the monarchs of Europe — or, to be precise, their ministers — established a new order in Europe. After the upheavals of the French Revolution and Napoleon’s short-lived and unruly empire, five great powers combined to limit the threats posed to monarchy and aristocracy by liberalism and nationalism.
It was not a perfect order, but it made the 19th century a great deal more peaceful in Europe than the 17th, the 18th or the 20th. Actually, the congress did make progress.
Something similar can be said about this weekend’s meeting of presidents, prime ministers and central bankers in Buenos Aires: the G20 dines a lot, but it doesn’t make progress. In reality, it matters little whether Donald Trump rekindled his bromance with Xi Jinping last night or poured a bowl of soup over his head. The real question is: will the G20 change the balance of power in the world?
Trump’s critics are ready with their answer. In a pre-emptive strike, my old friend Fareed Zakaria argued last week that the summit would represent “peak America”. He wrote: “Nothing animates the Trump administration more than its opposition to multilateralism of any kind.
“And so, as the world gets more chaotic, the forces that could provide order are being eroded. And as is so often the case, China simply watches quietly and pockets the gains.”
As I said last week, we’re certainly beyond peak Trump. But peak America?
Let’s remind ourselves when and where all this “G” business began. It was 45 years ago — on March 25, 1973 — that the US secretary of the Treasury, George Shultz, met his counterparts from Britain, France and West Germany in the White House library. That group added Japan soon afterwards and Italy in 1975, by which time two of the original participants (Helmut Schmidt and Valéry Giscard d’Estaing) were heads of government. In 1976 Canada joined to produce the G7.
Not until 1994 was Russia represented at such meetings, only to be ejected in 2014 after the annexation of Crimea. Not until 1999 was the G20 created to provide a more representative group of big economies. It’s a motley crew. The EU is represented in its own right; Spain, Holland and Switzerland are excluded, despite being top 20 economies, to make way for the EU, Argentina and South Africa. Yet a clear majority of participants — 16 — are democracies. The autocracies — China, Russia, Saudi Arabia and Turkey — are there only because they have signed up to the various global institutions created by the US and its allies after the Second World War.
True, China would very much like to exploit Trump’s personal unpopularity with other world leaders. Under Xi, the People’s Republic has mounted a highly ambitious effort to expand its global influence, not only by exploiting its economic power through trade and investment agreements, but also by attempting (in the words of a startling report published last week) “to penetrate and sway — through various methods . . . [best] summarised as ‘covert, coercive or corrupting’ — a range of groups and institutions, including the Chinese-American community, Chinese students in the United States and American civil society organisations, academic institutions, think tanks and media”. Such efforts are not confined to the United States.
The free world is waking up to this, and with good reason. I’ll believe it’s peak America when China signs a trade pact with two other G20 members that has a clause comparable to the one in the new US-Mexico-Canada agreement (USMCA) — signed on Friday — which states that if one of the three partners enters a free trade deal with a “non-market” country, the others can exit USMCA and form their own bilateral trade pact. The non-market target of that clause is of course China.
Though Argentina is the host of this year’s G20, the biggest Latin American economy by far is Brazil. You will look in vain for evidence of peak America in Sao Paulo, where I spent most of last week.
Northern hemisphere media coverage of the right-wing populist Jair Bolsonaro’s election victory in Brazil in October has been overwhelmingly negative, focusing on his military background, his inflammatory language and his political resemblance to Trump. “Jair Bolsonaro’s climb to power has been marked by divisive rhetoric and offensive speech,” tut-tutted The New York Times. “Our planet can’t take many more populists like Brazil’s Bolsonaro,” lamented The Guardian. “How did a far-right, pro-torture, dictatorship-praising populist become Brazil’s president-elect?”
In truth, the resemblances between Bolsonaro and Trump are superficial. Both men certainly expressed socially and culturally conservative sentiments that had long been taboo in elite political circles. Both directed their fire at corrupt and failing political establishments. And both certainly understood better than their opponents how to exploit the political power of social media. But there the resemblances end.
First, Bolsonaro’s focus is on law and order, not immigration. Brazil saw more than 60,000 murders last year, as many as China, the US and Mexico put together. Second, Bolsonaro has joined forces with the Chicago University-trained free-market economist Paulo Guedes, whereas Trump’s one and only principle is protectionism. Bolsonaro’s vision is of a country rejuvenated. By contrast, Trump has appealed to the nostalgia of older voters.
The incoming Brazilian government is committed to fiscal consolidation, the privatisation of state companies, tax simplification and market liberalisation. This is the kind of economic reform Brazil desperately needs. It has the ninth-largest economy in the world, but ranks 125th in the World Bank’s ease of doing business index, behind Iran. What Guedes is talking about hardly sounds like the Chinese model — more like Margaret Thatcher does the samba. And indeed Bolsonaro was openly hostile to China on the campaign trail, declaring: “The Chinese are not buying in Brazil. They are buying Brazil.” He even visited Taiwan.
All over the world, from big Brazil to tiny New Zealand, countries are having to choose sides as the Sino-American antagonism escalates from trade war to cold (or cool) war. It’s not such a difficult decision, however squeamish you feel about “Individual 1” (the codename special counsel Robert Mueller has given Trump). For the difference between Trump and Xi is that the former is the temporary representative of a constitutional democracy, while the latter is the emperor for life of a one-party state.
The G20 dined a lot in Buenos Aires rather than danced. Regardless of the diplomatic chatter, it didn’t signify peak America. Many people also thought America was over the hill when the G4 first met back in 1973 (another difficult year for the presidency). They were wrong then. They are wrong now.
Niall Ferguson is the Milbank Family senior fellow at the Hoover Institution, Stanford
Thanksgiving is a wonderful festivity. Unlike the great British Christmas, the American Thanksgiving has somehow eluded commercialisation. The formula remains the time-honoured one: get your family together, eat turkey, be thankful.
Yes, but thankful for what? The originators of the tradition, the early British settlers in Plymouth, were thankful for the survival tips the Wampanoag tribe had given them after the harsh winter of 1620-21. When George Washington proclaimed a day of thanks in 1789 it was to express gratitude to God for “affording [the people of the United States] an opportunity peaceably to establish a form of government for their safety and happiness”.
President Abraham Lincoln formalised Thanksgiving as a national holiday to thank the Almighty that, amid all the upheavals of the Civil War, “peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict”.
Asked on Thursday what he was thankful for, President Donald Trump replied he was thankful “for having a great family and for having made a tremendous difference in this country. I’ve made a tremendous difference in the country,” he went on. “This country is so much stronger now than it was when I took office that you wouldn’t believe it.”
Now not everyone in the United States thinks this ludicrous. In the most recent Economist/YouGov poll, 40% of respondents said they approved of the way Trump was handling his job as president. Among Republicans in the same poll, 62% expressed strong approval. He still has his base.
Yet it is impossible not to sense a change in the air. On the day that Brett Kavanaugh was confirmed by the Senate as the newest Supreme Court justice — a day many Republicans celebrated as a tremendous victory over their Democratic opponents — I offered the following thought to my wife: “This is peak Trump.” That was on October 6. Nothing that has happened since has led me to change my mind.
First, take another look at the results of the congressional mid-term elections. Now that all but a handful of races have been settled, it is clear that this was a serious defeat for the president’s party. In the House of Representatives, the Democrats gained 37 seats, more than enough to give them control for the next two years.
The most concerning trends for Republican strategists must be their poor performance with women, particularly those with college degrees, and younger voters. According to exit polls, clear majorities of voters aged 18-29 (67%) and 30-44 (58%) favoured the Democrats. Partly because of these demographic differentials, Republican candidates lost in key districts in two of the states that decided the 2016 presidential election in Trump’s favour: Michigan and Pennsylvania.
Second, let’s talk about the economy. By most standard measures, it’s in robust health. The International Monetary Fund expects that growth this year will be just under 3%, the highest since 2005. The official unemployment rate is 3.7%, the lowest since December 1969, when Richard Nixon was president. (More about him later.)
Yet only Republican voters give Trump any credit for the economy’s strength. According to the polls, about 70% of Democrats disapprove of his handling of the economy. That helps explain why the economy didn’t help Republican candidates. Immediately before the vote, pollsters found that healthcare beat the economy into second place as the most important issue. You may recall the Republicans’ epic failure to reform or repeal Obamacare.
Now ask yourself what would happen if the economy took a turn for the worse. For investors in both stocks and bonds, that has already happened. The Standard & Poor’s 500 closed on the day before Thanksgiving at just under 2,650, 1.3% below where it began the year. Bond yields have risen significantly this year, from below 2.5% to above 3%, inflicting losses on bondholders.
It is hard to see where respite could come from. The Federal Reserve seems on course to keep raising interest rates and unwinding the expansion of its balance sheet that occurred in response to the financial crisis. If, as most economists believe, quantitative easing mitigated the post-2008 contraction, it seems unlikely that quantitative tightening would not now have an equal but opposite effect on the recent expansion.
The Republicans gave the economy the fiscal equivalent of a sugar rush with the tax cuts they passed this time last year. The glucose level in the bloodstream is now falling and the full scale of the fiscal irresponsibility is beginning to sink in. The most recent Congressional Budget Office projections are eye-popping. Federal debt held by the public is now at its highest level since just after the Second World War: 78% of gross domestic product. If current laws are unchanged, it will be 100% by the end of the next decade and 152% by 2048 — a number without precedent even in time of world war.
Third, Trump and his inner circle are set to be hit not just by the report of special counsel Robert Mueller, but also by a barrage of attacks from congressional committees soon to be chaired by Democrats. Control of the House gives Trump’s political foes two powerful weapons. First, congressional committees have an arsenal of investigative tools that the majority party can wield. The key one is Congress’s subpoena power to compel the production of documents or the sworn testimony of witnesses in furtherance of a congressional investigation.
Moreover, owing to a 2015 rule change pushed through by the Republicans, most House committees can issue subpoenas on the authority of their chairmen or women alone, without consent from the minority party. That includes three of the committees most likely to go after Trump: oversight, intelligence and foreign affairs. Second, Congress has the power to make public the results of any investigation. In short, you can expect 2019 to feel a lot like 1973, as every liberal legislator and journalist sets out to re-enact Watergate, casting Trump as Nixon.
For a time, it seemed to me Trump might be able to transcend all these threats with foreign policy successes based on his primal, intuitive grasp of the relative weakness of America’s foes. I no longer believe he has the discipline or patience to exploit this advantage. Policy on North Korea is a mess: Kim Jong-un openly flouts the constraints that were supposedly placed on him in Singapore. Policy on Iran is an even bigger mess: the administration’s cack-handed defence of its Saudi ally’s murder of Jamal Khashoggi has been shameful. And policy on China may well become a mess if the president opts for a photo opportunity over meaningful concessions on trade this week when he meets Xi Jinping in Buenos Aires.
Finally, a caveat. I have called “peak Trump” before and been wrong. In January 2016 I foolishly predicted that he would flop in the Republican primaries. So I could be wrong again. One of the things that makes me thankful to live in America is that this country is so wildly unpredictable. Except, that is, on Thanksgiving.
An updated edition of Niall Ferguson’s book The Ascent of Money will be published early next year.
‘A failure of British statecraft on a scale unseen since the Suez crisis.” You might think the former transport minister Jo Johnson’s parting shot at Theresa May stood a fair chance of attaining immortality in the A-level history exams of the future.
Martin Wolf, of the Financial Times, attempted the question. “Comparisons with the 1956 Suez crisis do not get close to the mark,” he opined last week. “This is a far more significant mess than that.”
But what could be worse than Britain’s humiliating withdrawal from the Suez Canal zone in 1956? The answer, according to David Keys, of The Independent, is the Munich agreement of 1938.
Exchanging the acrid, smoke-filled air of northern California for the damp, foggy miasma of London was something of a relief . . . until I started listening to the chatter about Brexit. Suez? Munich? These are wildly inappropriate parallels. In 1956 Britain invaded Egypt and was forced by American financial pressure to withdraw. Sir Anthony Eden’s blunder was to think he could challenge Gamal Abdel Nasser without clearing it first with Dwight Eisenhower. Failure exposed Britain’s post-imperial weakness and dependence on Washington.
In 1938 Britain sacrificed Czechoslovakia rather than risk confronting Adolf Hitler. Neville Chamberlain’s blunder was to believe that the time he bought at Prague’s expense was not equally available to Hitler. Failure condemned Britain to fight Hitler a year later with no possibility of help from the USSR because of the August 1939 Nazi-Soviet pact.
Brexit is quite different. As I have argued, the British people’s majority vote in the June 2016 referendum was a vote for divorce. It more closely resembles Henry VIII’s decision in 1532 to leave the Roman Catholic fold, with the electorate now in the role of the king. Both divorces faced bitter opposition, at home as well as abroad. Henry’s was both complicated and protracted. Indeed, it was very nearly overturned by his daughter Mary I. Yet in the end the English Reformation stood. Despite challenges by Habsburgs, Bourbons and Jacobites, Great Britain emerged as a pillar of Protestantism.
My guess is that Britain’s departure from the EU will be just as complicated and protracted but will have a similar eventual outcome. So long as the political elites in France and Germany aimed at a Bundesrepublik Europa, Brexit was both inevitable and necessary. Now that we are leaving, however, European integration has ground to a halt. With the election of populist governments — not just in Hungary and Poland but this year in Italy, a founding member of the EU — it may even be going into reverse. The Holy German Empress, Angela Merkel, is fading from the scene.
True, the divorce terms that Mrs May has brought home from Brussels are awful. “Leave” voters wanted to “take back control” in the belief that Brexit would restore British sovereignty, particularly on immigration and trade policy. But the draft withdrawal agreement consigns the UK to a limbo of an unknowable duration. The 21-month transition period may be extended by mutual agreement but the backstop for the Irish border could keep the entire UK in a customs union with the EU indefinitely.
During the transition the UK will cease to be a member of the EU, but it will not be wholly sovereign. It will be subject to the EU-UK joint committee overseeing the execution of the agreement. In case of disputes, a five-person panel of judges appointed by this joint body will rule. However, any issue pertaining to EU law will be referred to the Court of Justice of the European Union.
Article 6 establishes a single customs territory between the UK and the EU. “Accordingly Northern Ireland is in the same customs territory as Great Britain.” As I read it, Northern Ireland will in fact be in the EU customs union. Unless and until the Irish border issue is resolved, the UK will remain subject to EU trade rules, as well as current and future environmental rules, labour and social standards and state aid rules. (This last restriction would heavily circumscribe the policies of a future Labour government.)
Mrs May has repeatedly said that no deal would be better than a bad deal. Well, this is not a bad deal: it is a terrible deal. It is a divorce agreement that gives the UK’s former spouse powers that no divorcée would tolerate, including the power to prevent the UK from forming any other relationship during a potentially interminable transition period. Northern Ireland is a kind of child hostage, ensuring there can be no final break without the ex’s consent.
But what did you expect? Did the Pope make life easy for Henry VIII?
So what now? Mrs May likened herself last week, improbably, to the cricketer Geoffrey Boycott. Well, it is time to bowl her out. I would guess there are by now at least 48 letters from Tory MPs calling for a vote of confidence, and I would hope she will lose such a vote, triggering a leadership contest.
Her successor must learn from her mistakes. From the moment article 50 was triggered, Britain was in a weak position. That position only got weaker because Mrs May declined to plan for a no-deal scenario. She refused to explore the possibility of an Anglo-American free trade agreement (FTA), even when Donald Trump floated it — as I have it on good authority he did. Nor did Mrs May resist when the Europeans inserted the Irish border issue into the negotiations.
The best explanation of her conduct is not that, as a “remainer”, her heart was not in Brexit. The draft withdrawal agreement bears not her fingerprints but those of Oliver Robbins and the other civil servants who have negotiated it, clause by clause, with their European counterparts. It is vintage Sir Humphrey Appleby: under its terms Britain leaves the EU in order to remain in it; it exits so as to stay.
Mrs May’s successor cannot credibly propose to renegotiate the divorce, because the Europeans will just say no to that. Nor can her successor credibly offer to repudiate it, because the preparations for a no-deal scenario have not been made. The Tories must avoid a second referendum, as a vote to exit Brexit — which is not inconceivable — would estrange at least a third of British voters from their party for a generation. A general election would be no better: whatever the polls say now, Labour would sweep to victory when voters were asked to judge the woeful record of the May years.
The only option is therefore to play for time. This terrible agreement will be voted down in the Commons. The new prime minister can seek an extension in the wake of that. At the same time, the planning for a no-deal outcome must supersede all other business. The negotiation of the US-UK FTA is the next item on the agenda. It would not hurt, at the same time, to revive once lively relations with the Chinese, whose large investments in the UK were another source of leverage spurned by Mrs May.
Henry VIII was famed for his ruthlessness. Ministers who failed him were disposed of much like his wives. Yet his greatest talent was for playing the long game. “Leave” voters need to learn from his example. The prize for Mrs May’s successor is not trivial: “A success of British statecraft on a scale unseen since the Reformation.” Discuss.
Niall Ferguson is the Milbank Family senior fellow at the Hoover Institution, Stanford