How To Spend It

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How to spend it

Back in the UK this was my favourite magazine which came with the Weekend Financial Times. A super glossy rag on simple ways to waste enormous sums of money on things you don’t need. It was egregious and fun and nobody followed any of the suggestions because they were intentionally over the top. As part of the general collapse in quality of the FT they rebranded in 2022. It became “HTSI”, which as well as sounding like a disease, represented a deeper tragedy which was laid bare by the editor at the time. 

The magazine’s editor said the change was necessary to “reflect a world with deeper sensitivities” and “the irony with which the title was first conceived has sometimes failed to land”.

All is not lost though because the UK’s Prime Minister stepped up this week to show Britain once again, How To Spend It.

I’m not necessarily against this course of action. Britain is a large exporter of weapons to the rest of the world and has historically proved to be highly skilled at turning a blind eye to whoever the purchaser is. The main issue I have with the PM’s claim is that “it will put more money in people’s pockets”. How will it do that? 

In this case the defence spending is not for export. It's actually for defence and so there are no inbound funds as a result. He will literally have “Spent It”.

This is a straightforward case of Guns or Butter. Keir has chosen Guns, he might be right to do so but he can’t have butter too. There simply is no economic theory in which a country spends a great deal of money on weapons for itself and is enriched by the process. BlackRock’s Tom Becker wrote about this back in 2023 in an article which now seems prescient.

There are going to be a lot of “rich” countries selling a lot of bonds quite soon. Britain, Germany, France, the United States and Japan all among them. 

“Strategic” Reserve

Back in October we had the view that “on balance, Trump is preferred”.

It might have seemed obvious but the nuance was always the “balance”. 

The good we know. Excessive regulatory enforcement, outright bans, disaster scenarios are off the table. Given the outcome in the election we also benefit from the fact that negative stances against the industry are now known vote losers. We are vaguely experiencing the same vibes in the Australian election.  

The bad we couldn’t really predict. First we had TRUMP and MELANIA coins; both now down some 90% from their highs. They were fun for a weekend but unseemly. Then week we had the Strategic Reserve announcement which was frankly, botched. 

There were better ways of doing this. Simply saying “we are not selling the Silk Road Coins” would have been sufficient. That way tax payer funds are not used to buy assets. The government simply has them already (albeit views may differ on the manner of the seizure). 

Are we really saying that United States taxpayer dollars are going to be used to buy Cardano? 

I’d go a bit further and say they shouldn't be exit liquidity for anything. Perhaps sense will prevail here and a more measured approach will be used but the announcements are unhelpful when they happen like this. 

Consumption taxes

This extract from a slightly longer conversation on methods of taxation and incentives. It seems to be obviously true that as labour takes a smaller share of the overall pie (as it continues to do); personal income tax revenues will fall. They are not the majority source of government income in Australia although they are the largest individual piece. At Australia’s nose bleed rates of income tax you would think this number will start to fall. 

Consumption taxes, at least give you a choice on whether in fact you wish to consume the item (and pay the tax) or not. No such option exists for income taxes.  

The shift in the method of taxation was another meta-trend predicted in the Sovereign Individual, which I love to harp on about. It proposed that personal mobility of both people and digital assets would mean that the taxation of income would become increasingly difficult. Essentially, countries would need to compete for the best talent by charging the lowest fee to host them. America, the Middle East and Singapore have done this well and grown spectacularly as a result. Europe has done a terrible job of it, with predictable results. 

What the book did not specifically consider was the impact of Artificial Intelligence on the earnings of labour. This seems likely to simply accelerate the shifting taxation trend. Some countries have to contend with not just a falling share of labour income, but also a declining population too. It will be a hyper accelerated decline in income tax. 

Take Balaji Srinivasan’s “Network School” which launched in late 2024. In a recent post he describes the path to creating ‘cloud countries’, in his estimate some 10 years away. 

It sounds ridiculous but they were oversubscribed 50x in their first cohort. If they have even a moderate amount of success you can easily see this taking off. Use a decentralised currency, provide services to each other. We are talking about highly skilled or at the very least highly motivated young people. They won’t sit still and accept a 45% income tax rate when asset prices are allowed to accelerate away from them through seigniorage. 

Heads are in the sand across the Western World about this trajectory. The tax base is going collapse before our eyes.  

Euro-Trash

Following the train-wreck that was the Trump-Zelensky meeting, Europe has decided to leap into action. 

The unelected President of the EU, Ursula von der Leyen is now urging a massive increase in European Defence spending. Arguably overdue, but at what level will this occur? Will individual nations pay for it and then pool resources into the Euro-force? Will they bring back conscription across Europe? They may have to because do we seriously think that young Europeans who already queue up to leave will want to sign up to some pan-national army? It seems very unlikely. 

The Economist had this to say about the richest (and still) the most industrially capable country in Europe.

 Germany’s election victor must ditch its debt rules—immediately

The only country that could meaningfully shift the dial on defence spending in Europe is Germany. To do so they would need to borrow the money and this will require a change in their borrowing rules.  The proposal is already drafted. Any defence spending that exceeds 1% of gross domestic product will not be counted towards Germany's debt brake. The brake limits government borrowing to 0.35% of GDP, meaning defence spending will no longer be capped. “Will not be counted”. 

You can see too how this might be exploited, with all manner of pet projects being labelled “defence spending”. German borrowing costs rose by the most in 17 years on the announcement. The 10-year Bund rose 0.21 percentage points to 2.69 per cent; which  seems incredibly low all things considered. 

German economist Holger Zschaepitz points out below that Germany, despite its massive economy, has fewer soldiers than South Sudan. 

One wonders who it will be that joins Ursula’s armed forces? How will they be paid for and where will the war machine be built?

From a purely economic perspective, this is not likely to be terribly good for the Euro. There are all sorts of precedents for this sort of borrowing historically. Victory bonds, patriot bonds, that kind of thing. I am sure it will be far more subtle this time though. I quite like the German approach of just “not counting it”. It’s rather like being on holiday in an expensive country and deciding not to convert to your home currency. Far easier to consume the $12 cup of coffee that way.  

Niche Links

We’ll try something new for a few weeks. Niche links will send you to corners of the internet on both our sector and (perhaps) related topics.

First up: Nick Bostrom whose book I recommended last week is here explaining what to focus on in a post AI world. Slightly nuts because he is musing quite a long way out.

Next: Same interviewer but this time Tyler Cowen of Marginal Revolution. MR is a good blog itself but the podcast I think is slightly more relevant to our current point in time. 

Only 9000 views for this one which is a surprise. The paper talks about Microsoft’s Phi family of AI models. I have ignored any Microsoft products for about nine years because of the corporate mental illness they inflicted upon me. These models are good and worth following. They are small and focussed and it's quite possible that they become leading models at specific tasks. Microsoft is focussing on mathematics and coding at the moment but they will turn their hand to money pots when ready. Health springs to mind. 

It’s quite possible Microsoft loses money on its OpenAI investments but this to me seems like their hedge. You might recall Microsoft CEO saying this last year with regard to open AI. We are "below them, above them, around them". The Phi models seem to be the output of that.

Finally, Bitfinex Alpha, my favourite round up of our sector. The Macro section is probably the best and the whole thing is refreshing since more effort is given to content than presentation. 

Niche links will be judged on clicks. We’ll start low and if there are 200 or more it will live on. 

Enjoy the weekend.  

Further information

Our February 2025 report to investors can be found here.