CITI: Everything you learned about how the world works is probably wrong
Myles Udland
10h
It's time to rethink everything we know about how the world is ordered.
Citi is
out with a big new report on our current geopolitical order, and maybe what happens next.
What the firm argues, effectively, is that the global order most of today's adults have come to know as "true" probably isn't so anymore.
At the heart of Citi's report is the idea that "Pax Americana" — defined as the "post-World War II global order that relied, to a large extent, on American military, economic, and diplomatic power to guarantee relative political stability and economic development" — is over. Or at least ending.
But the problem is that there's nothing coming up to replace Pax Americana.
So we're facing what Citi calls a "Great Power Sclerosis."
The particulars and catchphrases, however, are far less important than Citi's broader message, which is that everything the people who basically run the world have come to know as true no longer is.
Here's Citi (emphasis added):
[M]ost political and business leaders and investors today have largely "grown up' in the post-1991 era, often described as the most peaceful and prosperous in human history and characterized by a host of pro-globalization developments and effective US hegemony.
With this in mind, hopes for a reversion to the pre-global financial crisis mean, and with it, a return to some semblance of linear progress, may be misplaced [...]
In our view, political and business leaders will need to be more attuned to the new shape of global political risk, a paradigm shift that means that previous policies will fail to keep pace and uncertainty will remain high, with the potential to interact in unexpected ways. Among the key implications of this more fragile and interconnected risk outlook is that so-called Black Swan events — in this case, geopolitical events producing instability spanning several orders of magnitude — may be both more likely and more difficult for leaders and global financial institutions to resolve.
For investors, the biggest takeaway is that
all those charts showing precrisis economic growth, the resulting slow recovery path, and the "output gap" are just illusions. Or maybe delusions.
Citi is pretty sure the whole "potential" thing has changed. Significantly.
There isn't, under this framework outlined by Citi, seemingly anything other than just a sort of
hope that things will go back to the way they were: when the US was the world's police and Western-style capitalism brought peace and prosperity to all the world's people. (Of course, this was never really the case. But, you know, memory and all that.)
Citi roughly argues that the arc of history is — and has been — turning away from this Pax Americana state of affairs and toward, well, something else.
What else is the whole point of the exercise.
But as for the major things worth keeping in mind right now and going forward, here's Citi again, at length (emphasis added):
The United States, through diplomatic activism backed up by unrivaled military power, kept many regional conflicts under control (or pacified them), such as between Pakistan and India, North and South Korea, Israel and its neighbors, and the states of the former Yugoslavia. It did not dominate world affairs in a hegemonic way (which would have been impossible even for the US), but it served as the arbiter of last resort and the world’s reserve power.
After 1989, most nations buying into the post-Cold-War surge of economic globalization consumed US stability services around the world, even those who openly or clandestinely opposed America's relative dominance.
But this fortunate power structure has changed significantly over at least the last decade. The US position in global affairs has weakened. Other powers have gotten stronger. Some military interventions, such as the Iraq war, have eroded both US credibility and resources, an outcome supported by a host of global public opinion data. Less political capital is available in Washington to underpin America’s global role, leading to a "leadership from behind" culture that is considered to be ineffective and widely perceived as US weakness.
Inward-looking, isolationist leanings have gained political traction in America’s political mainstream. The threshold of what constitutes US national interest has narrowed markedly in comparison to previous decades.
As a consequence, the international system is suffering from power sclerosis, compounded by absence of a replacement. The "Great Power Sclerosis" describes a situation in which Pax Americana has not been effectively supplanted by another system of global order, but in which its ability to resolve crisis, foster compromise, discipline rogue players, and defuse regional and local conflict is greatly diminished. In a situation of power sclerosis, the institutional framework of Pax Americana is still in place, but the effectiveness of these institutions has either been reduced, is being challenged, or is in doubt [...]
No global or regional power has emerged yet that is willing or capable to responsibly (or, thankfully, irresponsibly) fill the gap that America’s relative decline has created. Europeans are currently too inwardly-focused and too disunited to tap their full potential, both at home, and globally. China, the only other potential step-in, limits itself, for the time being, to a mostly regional role. It is generally interested in global stability as it is one of the biggest beneficiaries of integrated markets, but its political agenda, especially in its immediate neighborhood, does not fully overlap with that of the US or the wider West [...]
As a net result of all of these trends and developments, local and regional crises around the world play out stronger and more intensively than they used to. Weaker cohesion and diminished disciplining power make escalations of small conflicts more likely and encourage rogue states and opponents of liberal order to assert themselves more self-confidently.
Stability in the overall system is weakened and likely to further deteriorate incrementally. The assessment of political risk in and around Europe, and around the world, needs to be made against this backdrop.
http://www.businessinsider.com/citi-on-pax-americana-end-2016-1
Read the full report from Citi here »
GLOBAL POLITICAL RISK
The New Convergence Between Geopolitical and Vox Populi Risks, and Why It Matters
2016 has begun, as 2015 ended, amid a significant worsening of the global political climate and along with that, considerable volatility in financial markets. Investors and businesses are increasingly aware of the need to understand the drivers and the implications of a greater level of event risk exacerbated by shifting social patterns.
INFORMATION INSIGHTS
Tina Fordham, Citi's Global Chief Political Analyst, has already warned that the latest events may mark a turning point in the political landscape as rising geopolitical tensions and shifting socio-political trends converge in an increasingly interconnected world. In this publication, Tina and co-author Jan Techau, Director of European think tank Carnegie Europe, explain how weakened global elites and fast evolving social trends have created an increasingly unstable political environment that threatens to bring unprecedented commercial challenges on a global scale.
There is an increasing likelihood that new transmission mechanisms are evolving that could lead to political risk having an impact on economic forecasting models, changing the way that companies do business and driving a secular, or even structural, increase in risk premia in financial markets.
Until now, financial markets have taken a relatively sanguine view of political events, treating them as regionalized and idiosyncratic. However political risk can quickly and meaningfully alter return expectations across asset markets where transmission mechanisms are established in economic channels.
Political events and social trends are becoming increasingly interconnected; links can easily be made between tensions in the Middle East, terrorist attacks around the world and the migration crisis, between migration and European politics, and between tensions in Europe and politics in the UK. With shifting political sands in the US creating a vacuum in global governance, there is an increasing risk that a negative feedback loop is forming as previously comfortable sectors of society feel increasingly vulnerable and less financially secure.
Hitherto, geopolitical events have largely been addressed through diplomatic channels but, as Tina and Jan point out, diplomacy is ineffective against a rising sentiment of injustice and inequality among increasingly diverse social groupings. The result is an increased incidence, on one side, of non-diplomatic measures such as sanctions, protectionism, aggressive regulation, border disputes and armed conflict, and on the other of anti-establishment sentiment, protests, violent demonstration and terrorist activity. All of these can deliver a direct economic cost that could be changing the business and investment landscape.
There are several channels through which political events could become a driver of financial markets: Sharply higher or lower commodity prices are surely one. Sanctions are another as they will normally have an impact on the economic prospects of an affected country. There may be an offset to this; when exports from a sanctioned country fall, there is likely to be a substitution effect in another producing economy. Overall, however, a combination of more sanctions and increased protectionism is likely to result in lower levels of trade and this, with reduced comparative advantages in production, is likely to weigh on global growth and commerce.
One of the main factors insulating markets from geopolitical risk has been abundant liquidity provision by central banks. As the Fed begins to raise rates, that support will begin to wane. For most of 2015 markets were transfixed by two main drivers; Fed policy and China's economic outlook. 2016 and beyond may prove to be the era in which politics rather than economics comes to the fore. To address this, we have brought together leading experts on geopolitical and socio-economic risks (Tina Fordham and Jan Techau) energy (Ed Morse) and economics (Ebrahim Rahbari) who believe he contours of a new post-Cold War, post-Lehman paradigm are emerging.
If they are right, or even partly right, and these changes are structural, we may be entering a new paradigm, where policy-makers, including Central Banks, have less power to mitigate risks. This suggests a whole host of previously assured assumptions could be in the process of becoming obsolete.
https://www.citivelocity.com/citigps/ReportSeries.action?recordId=48&src=Home
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