In the slew of corporate earnings and macro-economic data released in the past week, two developments struck me, both of which indicate geopolitical tectonics pushing against each other.
First, the number of children born in the United States in the past year has caught up with the EU — close to 3.6 million babies, though the EU has a much bigger overall population. For comparison, Nigeria, with a population that’s less than half of the EU, welcomed 7 million babies last year.
Second, the trend rate of consumer inflation in Japan in recent months has surpassed that of the US for the first time in decades, signaling a shift in the Japanese economy that has been accompanied by a rise in long-run bond yields — a potentially critical development for the international financial system.
These two examples will give a sense of the rise and fall of nations that is accelerating since the fall of globalization, which I date to the effective end of democracy in Hong Kong.
This rise and fall – think of countries like sports teams – is also associated by an unravelling of the world order. For example, in a recent note ‘Atlas Shrugging’, we detailed how the independence of the Federal Reserve was being undercut by the White House, and the attempt to remove Lisa Cook from the Fed’s rate setting committee confirms that President Donald Trump wants to direct the Fed as an engine of his economic policy (as a giant bond buying machine, I suspect).
The independent Fed has been one of the pillars of the globalized world system of the past 40 years — and the snuffing out of its independence heralds the unravelling of that system. In the same way that the period of globalization was characterized by low inflation and the absence of major wars — the presence of inflation and conflict today, is a sign that we are moving into something else.
In that context I find myself playing a mind game that I call the Unravelling Rule. Very simply, it is to identify the principal factors that have supported globalization, and that are positive outcomes of it, and identify if and how they are unravelling. The crisis of democracy is one such trend (the Economist Intelligence Unit’s Democracy Index has fallen to its lowest level in twenty years).
Other certainties are also unravelling — notably the assumption that the United Staes is an unflinching ally of Europe and many Asian countries, and the possibility that it could even actively undermine them. In this regard, the fact that the Danish government had to summon the US ambassador over the conduct of three Americans in Greenland is troubling and reflects very badly on the White House.
The danger with my Unravelling Rule is that in a chaotic world, it is tempting to see unravelling everywhere. It is more obvious though in the case of world institutions — the United Nations, IMF, World Bank and World Trade Organization, who are frequently ignored by the very large economies, and sometimes badly undermined by them (the WTO is an example). These institutions need to be recast, most likely for the benefit of the populous emerging economies.
On a more speculative basis, there are at least four trends that have marked the past forty years, and that are now worth watching for a change of course.
The first is poverty. It is an underestimated facet of globalization that it helped a billion people rise out of poverty, according to the World Bank. My concern is that in a world where the major economies (2/3 of the world’s GDP) have debt to GDP ratios above 100%, economic precarity may return, and this time to developed countries. We have already noted (The Road to Serfdom) the extremely high level of inequality in the US and broad economic vulnerability. In Europe, British and French policymakers conjured the spectre of IMF intervention in their economies (it would have to be a new, bigger IMF – which under this White House is unlikely). In that respect the growing disparity in incomes in the UK regions (relative to London) bears watching.
A second is corporate governance and the rule of law as it extends to international business. We have not seen a rule of law or broad governance crisis in sometime, but the rise of decentralized finance (i.e. crypto), the new idiom of the art of the deal in the US, and the geopolitically tinged trade relationships that China is developing worldwide. As a global ‘way of doing things’ gives way to more regional or localized approaches, the watertightness of contracts and the oversight of business relationships is something that businesses will need to consider more carefully.
A true litmus test of the Unravelling hypothesis will be the role of US multinationals in the world economy. Described as the ‘B-52s’ of globalization in the late 1990’s by a prominent trade economist, they have shaped the world economy and come to dominate financial markets. I have lost count of the number of charts circulating that declare that Nvidia for example is worth more than the major European stock markets together. Whilst cash rich, they now face a number of challenges – the difficulty of selling into China as it broadens its technological self-sufficiency, and the collateral damage to overseas sales from the Trump trade and foreign policies, and the rise of more specific local tastes in markets like Africa and India.
A final unravelling, and one I would welcome, is for the EU to unleash its nasty side. In the past forty years the successes of the EU – enlargement, holding the euro together and the creation of a European identity (based on borderless travel the Erasmus program for example). The likes of Poland and Estonia have benefitted greatly from this, and it is fair to say that the UK would be better off in than out. But the emphasis has been largely on soft rather than hard power, and in a harder world, the EU will need to take a tougher stance in terms of how it projects itself.
There are many challenges but three in particular are the potential exclusion of existing and prospective member states like Hungary and Serbia who habitually refuse to act in accordance with EU values and interests, a specifically more aggressive approach to countering sabotage by Russia (and at times China and Iran) in Europe, and then a retaking of the narrative as to what Europe stands for.