Chartbook

Chartbook 449: Voldemort on Threadneedle street. The Bank of England and the "haunted house" of English politics.

Adam Tooze — Fri, 15 May 2026 07:04:26 GMT

Imagine the scene:

In some Harry Potter version of 21st-century London, a group of deathless UK Treasury officials gathered from across the last century huddle over warm pints and glasses of Chardonnay. Around the table there are officials from the 1920s, the 1930s, the 1970s, 2022 and today.

Inevitably, in May 2026, the subject of conversation is the disintegration of the current Labour government. Despite its huge majority in parliament, it has been reduced to tatters by catastrophic local election result. These exposed the fact that rather than having a government with a clear popular majority, the UK is like most other modern societies divided into 5 segments each of which commands between 26 and 16 percent of the vote.

Perhaps unsurprisingly, the leadership at Nos 10 and 11 Downing Street - where the Prime Minister and the Chancellor (Treasury Secretary) work - seem paralyzed. They are caught between mounting discontent over unfairness and the cost of living, and tough fiscal strictures that push them into making unpopular spending decisions.

In the London pub, the Treasury officials from across the ages, can barely hide their satisfaction at the latest display of democratic politics caught in the vice-grip of financial logic.

“Remember the mur d’argent and the banker’s ramp?”

“Just like yesterday!”

There are smirks around the table.

Then the representative of 2026 pipes up:

“One thing you have to say about the current lot (referring to the latest hapless Labour government), you don’t have to teach them about the bond market!”

There is a murmur of ascent from the Treasury Mandarins.

The trauma of the fiscal crisis of September-October 2022 sits deep.

Back then, in the final stages of Tory decay, a ‘mini budget’ that challenged fiscal orthodoxy led to a brief but fierce panic in one of the oldest government bond markets in the world (aka gilt market). Now all you have to do is to mention the “bond market” to hush debate.

“And the funny thing is”, the young man in the huddle continues, “they don’t even want to talk about … ”.

There is a sudden hush. Significant looks are exchanged around the table.

About?

One of the senior figures puts down his glass with a decisive “clink”.

He-Who-Must-Not-Be-Named has entered their thoughts.

Meanwhile, a few miles away in a grubby pub in Bloomsbury, two conspirators from the camp of Critical Macrofinance huddle over cans of low-alcohol IPA.

They look at each other and blurt out loud:

“The Bank!”

“Everyone in the bloody Labour party is talking about the bond market. But why aren’t they even mentioning … the Bank of England!?”

“Why is no one talking about Voldemort?”

In Paul Mason’s blogpost, after much chest-thumping about basic fiscal logic, the basic point about the Bank of England is buried in the fine print at #3 in his list of suggestions as to what a radical Labour government might actually be able to do!

Conflict & Democracy

Down with the bond market! Down with gravity!

It may seem unfair to focus on Labour MP Paula Barker for her off-the-cuff assertion that the bond market would have to “fall in line” with Andy Burnham, should he replace Keir Starmer as prime minister. But Burnham himself told the New Statesman that Labour had to “get beyond this thing of being in hock to the bond markets…

8 days ago · 100 likes · 3 comments · Paul Mason

Back in Bloomsbury they shake their heads and ask: “Didn’t we learn anything from the Eurozone crisis?”

Meanwhile, as if summoned to the conversation by some higher force, the “pink pages” announce:

“The days of ultra-cheap government borrowing have come to an end” and Martin “Whizzard” Wolf publishes the graph of the season

Look at the UK in 2026, perilously positioned on the upper edge of the pack. No wonder no one in London needs any lessons about the “bond market”.

But, look again. Imagine how they feel in Rome.

What is London’s nightmare in 2026? The nightmare is that you end up like Italy in the early 2010s during the Eurozone crisis. Once comfortably situated in the middle of the pack, watching with horror as your ten-year yields explode to 7 percent and “spreads” become a national nightmare. One of the largest economies in Europe, a founding member of the euro, stigmatized.

But the message of the Italian experience is ambiguous.

After all, the stigma didn’t last. In 2026, Italy borrows at rates lower not only than the UK but the US. The US, which, as everyone knows, enjoys the “exorbitant privilege” of being the issuer of reserve, safe asets.

What kind of magic is this? How did Italy, in the space of fifteen years, go from being good, to bad and back again?

Which brings us back to our dissident friends in their Bloombury boozer and their memories of the Eurozone crisis.

Italy never was Britain - with its ongoing fiscal deficits.

Without interest payments, on primary balance, from 2000 to 2020 Italy ran a tight fiscal ship. Even in 2008 it barely went into deficit and when it was being put on the rack in the early 20210s its primary surplus matched that of austere Germany.

So, what happened? How did it end up stigmatized?

Of course Italian politics didn’t help. Berlusconi was at the helm and he had legal issues.

But amongst friends in the Bloomsbury pub, Berlusconi is a sideshow, the name we whisper to each other is “Trichet”.

From 2004 to 2011 the ECB was headed by Jean-Claude Trichet, ex of the French Treasury, more German than the Germans. After 2009 as the news of the Greek fiscal disaster broke, the European bond markets wento into panic mode and Trichet began a brutal game of cat and mouse. Between 2009 and 2011, Trichet intervened in the bond market to help, only when he thought he had compliance with austerity. When he thought they were uncooperative, he withdrew. In the summer of 2011, he even made direct suggestions to his Italian counterparts in Rome, as to how Italy should be governed.

It was this cat and mouse game that drove the bond markets crazy and exposed Italy to a violent squeeze.

When Mario Draghi took over the ECB at the end of 2011 and declared “whatever it takes”, the pressure on Italy, gradually eased. It is that starring role that has made Draghi into the towering figure in European politics that he remains today.

So now you see why voices in London hush when it comes to the Bank of England.

“The bond market” isn’t an irresistible objective force like the weather or an avalanche.

It can appear like that. But that depends on the way it is being handled, or not handled by the central bank.

Which is why the silence about the Bank of England in London right now is so significant.

If you think this all sounds a bit fishy, coming from a left-liberal Keynesian like myself, well, let me introduce you to Robin Brooks, who, to put it mildly, plays on a different quidditch team to me. Here, from the position of a fiscal hawk is Robin’s celebratory account of the Bank of England’s role since 2022;

In October 2022, at the height of the bond market blow-up in the UK, something incredible happened. Governor Andrew Bailey told British pension funds the Bank of England would end its support program for the country’s fragile gilt market, drawing a line under how much help the central bank was willing to give to exposed pension funds and - implicitly - the government. By the end of that week, Kwasi Kwarteng - the finance minister - had resigned. Prime Minister Liz Truss would soon follow. This episode is so incredible because it contrasts with what happened in the Euro zone earlier that year. Bond markets in Spain and Italy were under pressure amid high inflation and rising interest rates. In the middle of this, Mario Draghi - Italy’s Prime Minister - resigned, compounding pressure on bond markets of high-debt countries on the Euro periphery. Unlike the Bank of England, the ECB caved. It bought Italian and Spanish government bonds in an effort to cap yields and introduced a new tool that signaled to markets it might do such caps more frequently going forward. Faced with pressure on bond markets, the ECB capitulated to political pressure from high-debt countries like Italy and Spain. The Bank of England stood its ground and toppled the Truss government. This kind of thing has long-lasting consequences. It means markets price a higher probability of yield caps in the Euro zone, which keeps Italian and Spanish yields artificially low, while markets feel free to push up UK yields without fear of central bank intervention. As I flagged in yesterday’s post, this means you really can’t compare UK yields to those of other high-debt countries. The UK looks worse, but only because its central bank isn’t interfering with markets.

There’s more to this than just that 2022 episode. The Bank of England has also been much more aggressive in its quantitative tightening (QT) than other central banks. If one motivation for quantitative easing (QE) is to lower bond yields - especially longer-dated ones - then it stands to reason QT pushes yields up. The left chart above shows a four-quarter moving average of UK government debt issuance (black line) in percent of GDP and which sectors absorb this issuance, including the Bank of England (blue bars). The right chart above compares the Bank of England’s accumulation or run-off of government bonds (blue line) with that of other central banks, where this blue line is the same as the blue bars in the left chart. The Bank of England was quicker and more aggressive than other central banks in downsizing its bond holdings, so UK yields will have risen more than elsewhere also for this reason, not just because of Governor Andrew Bailey’s remarks in October 2022.

Back in October 2025, after a conversation in New York with friends in British politics, my sense of dysphoria was such that I raised the issue of the Bank of England openly in the FT

Since 2008, the UK has slid into a deep economic and political predicament. Growth has stagnated to a degree far worse even than in the 1970s. The Tory leadership’s wager on the Brexit referendum spectacularly backfired, leaving the UK isolated from Europe and at the mercy of its special relationship with the US, many of whose political class regard the UK as a basket case. After years of austerity, the Labour party lurched to the left and then back to the centre. The Tory party has been eclipsed by the populist nationalism of Reform. Any British government should be worrying first and foremost about how to restart growth. Instead, Keir Starmer is beset by shades of the gilt market panic triggered by the Liz Truss government in 2022. The debt level is higher than in recent years, but there is no cause for panic. UK debt is at far from critical levels and of long duration. Whether you want to “take back control” or launch progressive economic policy, a democracy dogged by fear of bond market vigilantes is unhealthy. In a country that is a monetary sovereign, this climate points to one thing: a disconnect between the government and the central bank. Since 1997, the independence of the Bank of England has become a sacred cow. But independence is what you make of it. And in the wake of the gilt market crisis of September 2022, relations between the Bank of England and the UK government need a reset. In normal times, there is no doubt that an inflation-targeting independent central bank can serve a country well. But since 2008, the UK and other advanced economies have not had the luxury of such simple problems. To their credit, central bankers around the world have not stood on orthodoxy. After 2008, the US Federal Reserve rescued the global banking system and, through quantitative easing, it stabilised the Treasury market in the face of huge deficits. In Europe, things were trickier. Both the Bank of England under Mervyn King and Jean-Claude Trichet’s European Central Bank played cat and mouse with national governments. This was a high stakes wager that between 2010 and 2012 escalated bond market tension and triggered a disastrous turn to austerity. Shaken by the impact of those shocks, their successors, Mark Carney and Mario Draghi adopted a more protective stance (assuming you were not the government of Greece). Recall that Draghi’s legendary slogan, “Whatever it takes”, was uttered to face down the City of London’s bond vigilantes. In 2015, Draghi launched QE — financial repression by another name. In 2016, Carney used the authority of the Bank of England to stabilise markets following the vote for Brexit, an exemplary demonstration of how central banks can underpin democratic choice, even when those choices are wrong headed. All these were independent central bankers steeped in the best practice of the 1990s, who recognised that historic crises demanded radical action. It was the price surge of 2021-2023 that poisoned the atmosphere. Though the shock came mainly from the supply side, central banks ended up in the dock. Nowhere more so than in the UK. The Bank of England reacted with aggressive normalisation. Faced with a cost of living crisis, the governor called for workers to accept real wage cuts. In early 2022, as gas prices were at record levels and Russia’s army was poised to invade Ukraine, the Bank adopted a stringent programme of quantitative tightening, elevating interest rates. When the Truss government got itself in trouble, the Bank took almost a week to come to the rescue. Rather than enacting a charade of normality, it is time to recognise that in 2025 the UK faces a period of historic transition. To meet this challenge, what is needed is a new concordat with the Bank. This should not ignore inflationary pressures or the long-run trajectory of debt, but should affirm the priority of reviving investment-led growth. One could follow Donald Trump in demanding interest rate cuts. The Bank could shadow the ECB in its commitment to capping Eurozone yields. But the top priority should be to lay the ghost of September 2022. The Bank’s slowing of QT last month was a concession. An immediate and complete end would send the right signal. Such a concordat will not by itself restore sanity to politics, solve the housing problem or rebuild the NHS. But it would help to lift the fear of bond market crisis, which is paralysing the effort by democratic politicians to answer the fundamental questions facing the nation.

Now, that call for a new concordat between government and Bank of Englands seems more urgent than ever. The problem is that in October 2025, Starmer still had some authority. Today the government is in tatters. And when you are the “under the harrow” - to echo a phrase of Montagu Norman’s from the 1920s - it is the worst possible time to consider institutional change. To make general arguments at a time of crisis can only seem like special pleading rather than a general argument for long-term change.

The same, unfortunately, is also true for the other basic institutional reform that Britain urgently needs i.e. the abolition of the out-dated first past the post electoral system and its replacement by a moderated form of proportional representation.

And thirdly - whilst we are saying the quiet parts out loud - Britain needs to reopen the question of EU membership. What the local election results of 2026 show is that this remains a key issue. And what they also show is that there is a clear majority that would favor a return.

Until these basic features of Britain’s political economy are addressed the country will carry on its politics as though in a haunted house, governed by governments that lack actual majorities, conjuring up false constraints whilst ignoring the real ones.

This one is for DG and MI.

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Chartbook 448 Price controls, nationalization, financial repression, fiscal-monetary coordination - embracing the Four Horsemen of Heterodoxy

Adam Tooze — Mon, 11 May 2026 15:48:34 GMT

If the current state of the world economy is marked by stark cognitive dissonance, if what is not sustainable cannot be sustained, then what comes next?

One answer was given at the weekend in a piece in the FT by Gita Gopinath who recently returned to Harvard after stints as first deputy managing director and chief economist of the IMF:

Policymakers would do well to use this period in which stock markets seem disconnected from heightened risk to craft a new playbook for crisis support that is both fiscally sustainable and supportive of long-term growth. The experiences of the pandemic and Ukraine war provide a valuable lesson in what that should look like: support targeted to the vulnerable; bailouts only to companies that are liquidity constrained but otherwise viable — and whose failure poses systemic risks; and co-ordinated fiscal and monetary policy so they do not work at cross-purposes. If a new course is not charted, governments constrained by fiscal space may rely on heterodox measures, including broad-based price controls, financial repression, nationalisations, and pressure on central banks to absorb fiscal risk. None of this would be good for the economy with synchronised sell-offs across stocks and bonds as markets realise that the backstop they were counting on is no longer there.

Yesterday I read Gopinath in terms of the pervasive cognitive dissonance of our current moment. Today I want to draw attention to Gopinath’s terse denouement. To repeat:

If a new course is not charted, governments constrained by fiscal space may rely on heterodox measures, including broad-based price controls, financial repression, nationalisations, and pressure on central banks to absorb fiscal risk.

What Gopinath sees as being at risk are the last guard rails of what used to be called the “Washington consensus”. But should we be anathematizing these options, or embracing them?

I am encouraged to return to Gopinath’s op ed by this tweet by macrofinance comrade Daniela Gabor. Daniela, too, highlights Gopinath’s final warning.

As Daniela asks: against the backdrop of our current disorder, what is the alternative What is the scenario?

Say we are in a new age of “polycrisis” or “permanent crisis” (Meadway), or “overlapping emergencies” (Weber et al) compounded by the disintegration of US hegemony. In other words it is not by accident that we face shock after shock - COVID, Ukraine, Straits of Hormuz etc etc.

Say that, in the face of such crises, centrist politicians are driven, against their will, to the realization that such shocks can only be managed by large-scale and coordinated monetary and fiscal policy of the kind argued for by “heterodox” left-Keynesians (the argument of my book, Shutdown). It is not by accident, therefore, that debts are rising in stepwise shocks.

Say that centrist politicians believe they have no alternative to such experimentation, not because they actually embrace the radical political potential of such policies, but because they are threatened by the rise of right-wing populism and feel they need to “do something”.

But assume also, that they lack any real agenda of progressive politics. At the first whiff of trouble they retreat to “fiscal rules” and subservience to conservative central bankers. Then, in political terms, we will be caught in the nasty charade of reformism that is epitomized by the UK’s government under PM Keir Starmer.

To make matters worse, as Gopinath argues, the financial markets will likely begin to anticipate such policy reactions and the markets will consequently become increasingly blind to mounting systemic risks. An additional measure of financial risk will then be overlayed on top of the emergencies of the polycrisis and the blowback from the meltdown of US hegemony.

This sequence of crisis & crisis-management - emergency intervention & recovery - recovery & half-hearted retrenchment can continue for a while. But, increasingly, governments when facing the next shock and the next round of rescue measures will face fiscal constraints. This at least is what Gopinath imagines. Alarmists may argued that the UK is rapidly approaching that point. The “moron premium” doesn’t help.

So what now? A retreat to inaction is not an option. History won’t allow it. You might imagine, therefore, that anyone thinking constructively would begin to consider other forms of crisis-management that do not involved loading up the public balance sheet with more liabilities.

The main options are precisely those that Gopinath lists:

Price controls to prevent opportunistic profit-taking and gouging.
Nationalization to ensure investment and capital discipline.
Coordinated action by central banks and treasuries to ensure that expanded borrowing can be met without bond market panic.
Financial repression - negative real interest rates - to ensure that the financial legacy burden is distributed in a socially acceptable way.

But that, of course, is not Gopinath’s point. She is worried. Her last line is somewhat ambiguous. “None of this would be good for the economy … “. Why it would be bad news, she never spells out. In fact, of course, it depends. It depends on the setting and how the specific policies are implemented.

But what Gopinath actually focuses on is the question of expectations:

None of this would be good for the economy with synchronised sell-offs across stocks and bonds as markets realise that the backstop they were counting on is no longer there.

So the most urgent problem as far as Gopinath is concerned is the one that she started with: cognitive dissonance. Financial markets are priced for the continuation of a generous and ad hoc crisis-management regime. If you follow Gopinath’s argument and the urgings of those of us in the progressive camp, this regime cannot long continue. The risk is that when the penny drops, we are in for a nasty financial-market shock. Simultaneous selling of stocks and bonds, the unhinging of the market’s own balancing system, would be bad news.

The answer from the left is presumably “prepare, prepare, prepare”. The crisis management and the political constraints under which it must be conducted are not of our own choosing. It is a matter of realism to acknowledge the challenges ahead and to consider all the possible policy options. One cannot expect financial markets to welcome such a horizon. But nor would they actually want governments that simply ignored emergencies and let crises unfold. And it is unclear whether they would actually welcome a serious effort at fiscal consolidation. Did the eurozone prosper in the 2010s? Hardly! If anyone has a better idea for redressing the current fiscal imbalances than a sustained dose of financial repression (with inflation settling at 3 percent or more and financial regulations in place to prevent avoidance), let them make the case. In a world of second- and third-bests, you have to be willing to consider every option.

Perhaps this is a moment to return to the discussion five or six years ago to which Gopinath herself was a contributor, in which analysts associated with the IMF and the BIS attempted to lay out a new integrated framework for monetary, exchange rate, and financial stability policy. What the IMF and the BIS were then trying to come to terms with was the ramifying impact of the 2008 crisis and its aftermath. The shock to financial stability from the US and Europe and the ensuing wave of central bank intervention (QE) had left major emerging markets facing volatile capital flows. hey had responded creatively and effectively by stretching the boundaries of the Washington consensus. They adopted previously anathematized heterodox policy measures to respond both to immediate shocks and persistent structural features of the dollar system. And the response of the IMF and the BIS was, somewhat surprisingly, to embrace this reality and to seek to rationalize it.

As Claudio Borio put it in June 2019 for the BIS:

Emerging market economies (EMEs) have adopted inflation targeting but combined it with FX intervention rather than free floating - in contrast to what standard textbooks would prescribe. Practice has moved ahead of theory. Moreover, EMEs have complemented such monetary frameworks with macroprudential measures. The choice reflects EMEs' high sensitivity to capital flows and exchange rate fluctuations. This gives rise to potential policy trade-offs: it can make it harder to stabilise output and inflation at the same time and to reconcile macroeconomic stability today with macroeconomic stability tomorrow. FX intervention and macroprudential measures can improve these trade-offs. The frameworks have served EMEs well, although more work is needed to put the frameworks on a stronger analytical basis and to develop their implementation. The direction of travel is clear. And theory needs to catch up.

In 2020, Gopinath and her co-authors doubled down:

Our work is motivated by two observations. First, the empirical evidence is inconsistent with some of the assumptions underlying the Mundell-Fleming framework regarding both trade and finance. Many emerging markets have dollar invoicing shares above 80 percent. This empirical fact implies that we need to consider a dominant currency pricing paradigm where export prices are sticky in a dominant currency, which is most often the dollar and in some cases the euro. Similarly, on the financial side, a vast literature establishes an array of imperfections in international and domestic capital markets. Foreign currency borrowing is prevalent, and generates a link between the exchange rate and the macroeconomy through currency mismatches and external borrowing constraints. Financial intermediaries operating in foreign exchange markets generally have limited appetite for taking on emerging markets’ currency exposure and hence, the uncovered interest parity condition breaks down. Those countries which intervene heavily in foreign exchange markets during depreciation episodes tend to be the countries where balance sheet concerns prevail, and where financial markets are not deep enough to provide hedging opportunities. In addition, imperfections in domestic financial markets, particularly in the housing sector, are well-established for both emerging and advanced markets. The second observation is that many small open economies adopt more eclectic approaches than standard interest rate se‹ing and ƒloating exchange rates to cope with shocks. For example, during the ongoing COVID-19 epidemic, many emerging markets faced capital outƒlow pressures and used multiple tools to achieve macroeconomic stabilization, with some variation across countries. While most countries lowered policy rates and eased macroprudential regulation, some complemented it with sales of foreign exchange reserves to lean against the depreciation. At the same time, a few countries relaxed their restrictions on capital inƒlows. Given their frequent and often heterogeneous use, one of the objectives of this paper is to better understand these alternative tools: what they do, how they interact, the trade-offs involved, and the characterization of policy counterfactuals. In other words, this paper aims to establish under what conditions the standard prescription of ƒlexible exchange rates still holds, and when it may instead be optimal to rely on other tools. Doing so requires going beyond the Mundell-Fleming framework. the novelty of our analysis is that we develop an integrated model that jointly considers the role of monetary policy, capital controls, foreign exchange intervention, and macroprudential regulation in small open economies.1 We characterize the use of these policy instruments as a function of shocks and both real and nominal frictions. … the objective of our analysis is then to map the combinations of shocks and country characteristics to the optimal policy mix, listed in the box at the bo‹om of the diagram.

Or as Gopinath and her co-authors put it in an accompanying blog post:

“Our analysis suggests that there is no “one-size-fits-all” response to capital flow volatility, nor is it a case of “anything goes” or that all policies are equally effective.”

This is the pragmatic spirit with which we should also approach our current moment.

Personally, I am hesitant about price controls. I can see a role for targeted nationalization, or at least the thresat of such measures. I see no good alternative to both financial repression and increased central bank-treasury coordination. Others may disagree. In any case, this is not a moment to give preemptive obedience to the diktat of financial markets or to anathematize the “Four Horsemen of Heterodoxy”. This is a moment for constructive and empirical analysis to figure out what combination of policies offers the best chance of conducting progressive and democratic economic policy in the face of huge shocks repeatedly impacting the world economy.

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Chartbook 447: The US economy in May 2026 - How much cognitive dissonance can you handle?

Adam Tooze — Sun, 10 May 2026 16:29:48 GMT

Open your favorite business paper or news site right now and you will be confronted with a scene of spectacular cognitive dissonance.

We have a historic disruption to energy supplies and profound uncertainty about the future of the order in the Middle East. Brent crude is hovering around $100 and there are real fears about the supply of diesel and jet fuel, with worse to come. And yet the S&P 500 is reaching new records.

The complacent view peddled by the Trump administration is that the dissonance is false. The Straits of Hormuz are a passing storm. America’s economy is going strong. The AI boom is real. In their “heart of hearts” American consumers actually feel great.

Another source of complacency is the talk of the TACO trade - “Trump Always Chickens Out”. As bad as things look, there will be some way out of the looming energy crisis.

By contrast, harsher critics conclude that America’s elite just don’t care how things actually are. They care only about the bottom line and, right now, AI makes that look good. As if echoing David Dayan in the American Prospect, the FT’s report from this year’s Milken Institute conference was titled, “Blissful ignorance”:

Milken elite bask in glow of roaring markets Financiers at the Beverly Hills gathering brush aside concerns over Iran conflict and private market strains … Despite war and tariffs driving worries about US affordability, attendees at this year’s Milken Institute conference were notably untroubled — gliding between Spago dinners, a speech by Tom Brady and parties at billionaires’ Bel Air homes. Many of the investors, bankers and corporate chieftains who took over the Waldorf and Beverly Hilton this week have become desensitised to President Donald Trump’s whims. … Financiers largely brushed off concerns that have dominated conversations on Wall Street in recent months, including the war with Iran, which has driven up petrol prices across the US and is now dividing policymakers at the Federal Reserve over whether they can eventually cut interest rates. “Does anyone really care if the Strait of Hormuz is open?” one high-powered banker posited. … The mood at the Milken conference remained relatively buoyant even as the tectonic plates of geopolitics continued to shift thousands of miles away … “They might not like a lot of what’s happening in Washington, but at the end of the day, everyone’s focused on their own investment portfolios, especially here,” said Ted Koenig, chief executive of Monroe Capital. … “People are glossing over the war with Iran,” the head of one private credit firm said. “They’ve become desensitised to it. …. The outward-facing optimism was belied by private comments from financial executives and investors who described the “weird” schism between the record-setting stock market and broader consumer sentiment. “The stock market doesn’t care about the war,” said one executive based in the Middle East. … One London-based hedge fund manager said the conference had crystallised how relatively removed the US has been from the conflict’s effects, despite being an active participant in the war. “No one in Europe has this level of optimism,” he said. “There is enthusiasm based on the greater adoption of AI and positivity about the economy. In Europe, the tone is at best cautious optimism or healthy scepticism.” … “The room was half empty most of the time,” the person said. “People were only tuning into Jensen Huang or Tom Brady.”

The next question is whether this fecklessness is ultimately down to cynicism or foolishness.

Of course, the looming market debuts for SpaceX, Anthropic and OpenAI are exciting. But you might think that even on the basis of narrow self interest, a boom sustained by only a handful of stocks ought to be worrying.

Private equity boss Marc Rowan likes to quip that America has levered its entire retirement system to the performance of Nvidia. With the chipmaker sporting a market capitalisation of more than $5tn, the Apollo Global Management chief executive is not entirely wrong. What’s more, Big Tech’s heft is obscuring emerging weaknesses elsewhere. According to a recent UBS analysis, 42 stocks are driving the bulk of the S&P 500’s returns; typically, around 100 do. The index is up 12 per cent since the end of March on the back of AI-fuelled tech blue-chips, which also include Alphabet, Microsoft, Apple, Meta Platforms and Broadcom

Of course a boom is nice. But can a K-shaped economy be sustainable? As we discussed on Ones and Tooze this week, America’s economy and society are increasingly divided (the Thatcher segment is good too!):

Consumer staples like Planet Fitness, Shake Shack and Whirlpool are all ailing.

And, if the predictions of the AI boosters come true, the polarization is only set to intensify. AI will make a few rich but the majority will face unprecedented adjustment shocks. The graph of the moment, which has now appeared in numerous outlets, was, to my knowledge, first published by the Dallas Fed in the summer of 2025. It shows the US economy either spiraling to infinity or collapsing to extinction.

We go to the moon (or to Mars) or we collapse to the stone age. It could be one or the other, and no one even flinches. It is as though we were living through the Cuban missile crisis and no one even notices. Is it not time to wake up? At this point even OpenAI is calling for a new industrial policy to meet the challenge.

And can the predictions of giant AI-driven transformation possibly be real? Lift the lid on the black box of the AI boom and the cognitive dissonance only deepens. As Robin Wigglesworth points out, the entire big tech-AI nexus is self-feeding to an extraordinary degree. It does not take rocket science to figure out that the balance sheets of players like Alphabet and Amazon, newly stressed by the hundred-billion demands of hyperscaling, are being propped up by the inflated valuations of AI players, who are in turn the biggest customers of their sponsors’ cloud businesses.

Alphabet, for example, booked $37.7bn of “other income” in just the first three months of the year, accounting for over half the company’s net income over the period. Amazon reported “other income” of nearly $16bn in the first quarter, up from $2.7bn in the same period last year. That was nearly half its overall net income for the three months. … Accounting nerds and other clever readers will probably have guessed from the pattern what constitutes “other income” in this case: the ebb and (mostly) flow in the valuations of their sizeable private investments in companies like OpenAI and Anthropic. Alphabet is the biggest investor in Anthropic, and Amazon is one of the biggest. Thanks to their slugs of money, Anthropic’s valuation has vaulted from $183bn in September to $380bn today, according to PitchBook (and there’s another mammoth funding round in the works right now). This has then allowed Alphabet and Amazon to mark up the value of their existing stakes. … As Goldman Sachs analysts said in a note last week: “The hyperscalers’ earnings growth this quarter was boosted by an unusually large contribution from equity stakes in private companies. Alphabet and Amazon generated “other income” totalling $53 billion in Q1 2026, which accounted for nearly 60% of those two companies’ income in Q1 and 34% of the total $155 billion in income this quarter across the five largest hyperscalers. This represents the group’s largest collective share of earnings attributable to “other income” in at least a decade. Of this $53 billion in “other income,” $49 billion was explicitly due to equity stakes in private companies.” … Not only have private investments and increasingly engorged funding rounds become a meaningful driver of the hyperscalers’ aggregate earnings, but the money the hyperscalers have pumped into the likes of Anthropic and OpenAI has allowed the AI companies to sign huge computing deals with Alphabet’s Google Cloud, Microsoft’s Azure and Amazon Web Services. In fact, The Information has crunched the numbers, and OpenAI and Anthropic now make up about half of the entire cloud computing order books at Oracle, Alphabet, Amazon and Microsoft.

So, the money is going around and around.

Perhaps what is at play is the old adage that if the music is playing you have to dance.

Or perhaps. as Gita Gopinath argues, it is all down to moral hazard. The markets don’t actually have to believe that all is well. They just need to believe that if something does go wrong they will be bailed out - the so-called “bliss trade”. COVID, Ukraine and now Hormuz may all be symptoms of polycrisis, or what James Meadway calls “permament crisis”. The idea that the world ever “returns to normal” may be naive. But what has also changed is the response function of policy. To each successive crisis since 2020, as Gopinath points out, fiscal policy has reacted with “big lasting state support”. At some point this is priced into the market:

Such a belief is consistent with government actions over the past several years, actions that have driven public debt levels ever higher and expanded central bank balance sheets. Global public debt is now projected to reach 100 per cent of GDP by 2029. During the pandemic, the balance sheets of households and firms were not just rescued but boosted by very large government support that averaged 25 per cent of GDP for advanced economies, including assistance in the form of equity injections, loans and government guarantees to companies. This boost has buoyed consumer and business finances for several years. When Russia’s invasion of Ukraine set off an energy crisis, governments in Europe spent 2.5 per cent of GDP in energy support in the form of broad-based price-suppressing measures when it would have required only 0.9 per cent of GDP to fully compensate the bottom 40 per cent of households for the entire rise in energy costs. Germany, Italy and Spain have all reactivated price-distorting taxes and subsidies to insulate people from the current energy price surge. There are plenty of good reasons for the state to provide support in a crisis. However, the past several years of government support have gone against sound fiscal advice by being large and lasting instead of targeted and temporary. … The urge to rush to the rescue, regardless of merit, was recently evident in President Donald Trump’s attempts to bail out the US budget carrier Spirit Airlines as he mused “I’d love to be able to save an airline”. While the bailout ultimately did not go through, it does not take much imagination to predict that in a real crisis, government support in the US would be excessive. Moreover, while Taco is idiosyncratic and dependent on the psychology of the US president, Bliss is structural. Research shows that political parties of all stripes, from socialists to conservatives, all now favour higher government spending, and fiscal restraint has few champions.

Of course, a policy of crisis-management is better than none. But in a model of moral hazard each bailout results in a build-up of ever greater risks. Speculators are more irresponsible and financial leverage builds up. And it is the public balance sheet that absorbs the hit. As Gopinath points out:

The Bliss trade is reflected in the divergence between the prices of stocks and government bonds. While equity markets have held up surprisingly well, government bonds have suffered even as long-run inflation expectations have stayed mostly anchored. Since the start of the Iran conflict, long-term government bond yields have risen across major economies including the US, Europe and Japan. This divergence has become a pattern over the past several years. Term premia on 10-year US treasury yields are now close to 100 basis points higher than they were before the pandemic, driving up the interest rate bill. … The IMF predicts that in a severe scenario, the Iran conflict could cause global growth to fall to 2 per cent (instead of the reference forecast of 3.1 per cent) and global debt could rise past 120 per cent of GDP. … As compared to before the pandemic, the scope to deliver on fiscal largesse is limited. Even in advanced economies, the sensitivity of borrowing costs to debt issuance has increased, which then spills over into emerging and developing economy borrowing costs. Even as bond prices have declined, markets may be too sanguine about the consequences of rising debt on fiscal health.

To say that the inherent fragility of the system is not addressed is an understatement. Deregulation being pushed by lobby groups and their friends in the Trump administration is opening the door to all manner of risk-taking. Meanwhile, the underlying problems, whether that be the disorder in US politics, the unresolved tensions in the Middle East or the possible impacts from AI go completely unaddressed or denied. Indeed, in the Middle East, the US is fully backing the all-out disruption being pushed by Netanyahu’s government.

Gopinath urges that

Policymakers would do well to use this period in which stock markets seem disconnected from heightened risk to craft a new playbook for crisis support that is both fiscally sustainable and supportive of long-term growth. The experiences of the pandemic and Ukraine war provide a valuable lesson in what that should look like: support targeted to the vulnerable; bailouts only to companies that are liquidity constrained but otherwise viable — and whose failure poses systemic risks; and co-ordinated fiscal and monetary policy so they do not work at cross-purposes.

But this kind of systemic, holistic risk management looks increasingly like a pious fiction, out of touch with reality. That for Gopinath risks an escalating unmooring of once conventional policy norms:

If a new course is not charted, governments constrained by fiscal space may rely on heterodox measures, including broad-based price controls, financial repression, nationalisations, and pressure on central banks to absorb fiscal risk.

A progressive might welcome such outcomes. Financial repression and Treasury-central bank cooperation are topics to which we should definitely return. But it would be dangerous to assume that financial markets will take the same view. For now, the bond vigilantes may be in abeyance. But don’t count on it. As Gopinath warns, if investors wake up with a start to the world they are actually in the reaction could be nasty.

None of this would be good for the economy with synchronised sell-offs across stocks and bonds as markets realise that the backstop they were counting on is no longer there.

In short, the complacency of the current moment may morph into something far more unstable and potentially dangerous.

All this is the fruit of reading just a few days of coverage in one newspaper - admittedly the world’s best ;).

So here is the question in the spring of 2026: How much cognitive dissonance can you handle?

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Chartbook 446 Soft power with Chinese characteristics? Notes on Chinamaxxing.

Adam Tooze — Fri, 08 May 2026 11:02:52 GMT

Chinamaxxing is a bit of a thing in the Anglosphere right now.

I’m far from immune to the enthusiasm.

In the salon series that Wang Qing and I host at Accent Society bookstore, I recently had the pleasure of talking with Dan Wang and Iza Ding about the phenomenon. It turned out to be a fascinating conversation very much energized by our sell-out audience.

Though the panelists disagreed in their assessments of the dynamics of Chinese culture in the current moment, there was general agreement that this is not in a time of particular vibrancy. So, the current vogue for China in the West is not plausibly explained by an exciting cultural efflorescence going on in China itself.

The most likely explanations are to be found in the sheer fact of China’s rise on the one hand, the increasing sophistication of its consumer and online culture and the contrast to the sense of the malaise in the Anglosphere and the exhaustion of the glamor of Western brands.

To be more specific, from our conversation one could distill at least seven vectors of China-Maxxing in the current moment.

#1 The most obvious is technocratic envy - Dan Wang’s thesis in Breakneck, that China is a society run by engineers, bent on “engineering the future”.

#2 Then there is the shock of the encounter with Chinese reality on the part of visitors to China - whether those visits are stage managed by official tourist agencies, or not.

#3 Another dimension of enthusiasm is retro-authenticity - street scenes from Beijing on Chongqing as reminders of a lost world of “down to earth” life.

#4 There is a lot of interest in Chinese ways of wellness

#5 The West has discovered that Chinese netizens have a great sense of humor.

#6 Chinese popular culture is one of the great generators of the styles and paraphernalia of “cuteness”.

#7 The erotic realm: recurring rumors of epidemics of “Yellow fever” sweeping the dating scene.

Whatever prognosis one has about the durability of this convergence, or its individual components, as Iza Ding remarks in a recent piece on the “grinning defiance of Chinese soft power” for the Ideas Letter, it should put paid to the common liberal conception that China, under CPC control, cannot be a generator of soft power.

Whether or not this enthusiasm for things Chinese can be utilized by Beijing is quite another matter. Official China is not oblivious to the phenomenon of Chinamaxxing. I heard it referred to several times from the rostrum at the China Development Forum in Beijing in March. But, on the Accent panel there was was skepticism that the current vogue would be skillfully exploited for propaganda purposes. The idea that there are cultural grand strategists at work in Beijing to compare with the CIA and its support for abstract expressionism in the 1950s seems far-fetched.

The current moment of Chinamaxxing may be intense but it is not without precedent.

What came to my mind was the moment of global enthusiasm for Maoism and the cultural revolution in the late 1960s and early 1970s. “Mao-maxxing” had far more dramatic political implications than the current social media hype.

Then there was the era of Hong Kong-Kung Fu enthusiasm, embodied by celebrities such as the ubiquitous Jackie Chan.

East Asian developmentalism has long had is Western admirers. Today’s technocratic China-Maxxers are often reminded that China is following in the footsteps of Japan, and South Korea and Taiwan.

“Cuteness”, into which Labubu dolls have exploded, was prefigured by Japanese and South Korean precedents.

So, not only is today’s vogue for China-Maxxing driven by China’s new economic strength and power. It is overdetermined by this wider context of global economic, political and cultural development.

The view strongly urged by Dan Wang was that the question we should be asking is not why Chinamaxxing is a “thing” but why, given China’s spectacular development, it is not even more dramatic. In his view, Beijing’s repression of free cultural activity has the effect of minimizing and dumbing down China’s cultural exports, thus undermining their overall impact. A freer China would be more influential.

Imagine the possibilities if Kaiser Kuo is right in his exciting prediction that China is on the “cusp of a genuine cultural renaissance”.

Such questions are, of course, speculative. But they are interesting in raising the question of what, in a multipolar world of uneven and combined development, one should expect to be the degree of lateral and cross-cutting influence. Japan was a developmental triumph whose influence in Europe and the US is present but hardly hegemonic. Brazil is a huge, middle-income country. India is a giant developing country. In both cases cultural intercourse is relatively uninhibited, but their presence in either European or American culture, let alone in other emerging or developing countries, is limited to particular sectors - food, football and particular segments of the workforce (tech in the case of Indian migrants to the US).

What is the benchmark to which we are comparing these kind of partial and sectoral interactions? Is this, once again, a demonstration of the historical singularity of America’s pervasive cultural, technological, political and geopolitical footprint from the 1940s through to the early 2000s? In an increasingly polycentric world can we even imagine a similar convergence of macroeconomic, geopolitical, mass media, cultural and political forces? How do we (re)imagine the working of soft power beyond hegemony?

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Chartbook

Top Links 1107 How Asia trumped the petrodollar. Ethiopia's debt troubles. The Fall of Victory Day in Kazakhstan & China's goodreads.

Top Links 1106 Missiles made in Arkansas. More houses more babies? The Ebola emergency & smart talk about ugly feelings.

Top Links 1105 America’s dependence for Rare Earths. Russia's Wartime Economy. ASEAN Energy & the German SPD

Top Links 1104 Target balance within the Eurozone. Veblen babies. potato blight of the 1840s. US troops in Germany.

Top Links 1103 Biofuel boom. A plague of deer. Writing in the age of AI. Trajectories of the neo-gothic.

Chartbook 449: Voldemort on Threadneedle street. The Bank of England and the "haunted house" of English politics.

Top Links 1102 AI circularity. Egypt's land monetization. Young people quitting Beijing & the BJP's triumphant march.

Top Links 1101 Will "gas" hit $5? Capitalists =/= capitalism. "After Order" & the hidden charms of the "London system".

Top Links 1100 Big tech's investment spending. Selling India. The first Red Flag. The revolution in tactical medicine.

Chartbook 448 Price controls, nationalization, financial repression, fiscal-monetary coordination - embracing the Four Horsemen of Heterodoxy

Top Links 1099 Lopsided stock boom. Why UAE exited OPEC. Mexico and Brazil cutting the working day. How the Guardian responded to the General Strike.

Chartbook 447: The US economy in May 2026 - How much cognitive dissonance can you handle?

Top Links 1098 Shrinking the Federal government. European convergence. Cod and the new Cold War, plus the origins of desert blues.

Top Links 1097 Tariffs really are bad for your economy. The complacency of the US elite & the lost paintings of an Ethiopian master.

Chartbook 446 Soft power with Chinese characteristics? Notes on Chinamaxxing.

Top Links 1096 America's AI import boom. The pushback on Chinese pea protein. Rethinking the industrial revolution & what are "material interests"?

Top Links 1095 Running out of fertilizer. Why not to worry about space constraints on data centers. Yellow filtering the world.

Top Links 1094 Scaling tech layoffs. Why to run the economy hot. Money doctors from Japan & Hobsbawm's biography.

Top Links 1093 The GOP-tax problem. The SF consensus. The genesis of the modern state & literature after Auschwitz.

Top Links 1092 Big oil is not coming to Trump's rescue. Tanzania's gas play. Metal Weber & "Origin Story".