Belmont Club

The New Year

The perennial question at the end of each year is ‘what will next year be like?’  Nobody actually knows but pundits are predicting an interesting next 12 months, either very good or very bad. You choose.  Many pundits are monitoring the effect of oil prices on international security and  the global economy.  Others are looking to see whether Japan and Europe can continue to pump money into the system after the Fed tapers off.

They are watching the usual things. Overall, the Atlantic believes Russia and Europe will decline, Moscow plummeting along with oil prices and Europe under the weight of a renewed currency crisis. China could go either way depending on whether it can get corruption under control. The United States may face a “debt reckoning”  or a period of self-sustaining growth, depending on who you believe.

Christopher Whalen, Senior Managing Director and Head of Research at Kroll Bond Rating Agency expects the oil price fall not only to crash Russia and Venezuela but to create financial trouble for the world at large as banks who bet on high oil prices find themselves backing the wrong horse.  “The magnitude of the losses on loans to energy companies closely approximates the decline in the price of petroleum, but we all have seen this movie before. The oil price bust of the 1970s resulted in the failure of large banks. ” What will pop the trapdoor is “leveraged loans to companies in the petroleum sector, as well as the banks that make these loans”  to the tune of $1 trillion.

Set against these dire predictions is the reassurance that since none of the bad things that have already happened have killed the global economy, then nothing can hurt it now. Bill Adams, senior international economist for PNC Financial Services notes that “for years now, euro showdowns, and Middle East quagmires were supposed to threaten the global recovery, and in hindsight have had little impact”.

Thus, when the Verisk Maplecroft Company predicts a 2015 full of political risk, nobody seems too worried.  “An increased threat from militant Islamism, aggressive Russian foreign policy, rampant global corruption, and elections in restive countries such as Myanmar and Nigeria” is probably going to happen, but ‘so what?’. The year 2014 has made us feel a little like the character Max Klein in the 1993 movie Fearless.  Max walks out of a plane crash without a scratch. At that point you conclude that either your fears are exaggerated or it’s already too late.

Carla Rodrigo: You told me I was going to be safe with you.

Max Klein: You’re safe. You’re safe because we died already.

Suppose geopolitics ain’t what it used to be or is merely an historical construct intellectuals create to torture themselves with?  Reuters journalist John Kemp  actually dismisses political risks as literal figments of our imagination, no more substantial than smoke. Kemp writes:

Geopolitical risk has become a convenient catch-all to describe problems overseas. It can encompass everything from wars, insurrections and sanctions to recessions, debt defaults, expropriations, financial crises, epidemics and more. …

Policymakers like to talk about geopolitical risk in the same way central bankers invoke “uncertainty” to explain economic underperformance and why they are unsure about their forecasts.

Perhaps president Obama has been correct all along in asserting he had no need for a George Kennan — just the CIA. A president criticized for geopolitical illiteracy might reasonably argue he needed  neither army nor strategy if political risk can effectively be ignored.  That would be happen if globalization has imposed a nearly unbreakable stability to world governance. Like a highly stable ship momentarily tilted to one side, suppose globalization imposes an automatic returning moment which works to right the state of affairs.  Putin tries to upset the apple cart, but he can’t.  It’s too heavy. Thus, Putin’s expansionism is defeated not by Obama but by the American frackers, or failing that the Canadian ones.  They beggar him and that’s the end of that.

If long term stability is guaranteed then only short term fixes matter because in the long run the world takes care of itself. The New York Times’ Mark Mazzetti writes that the White House thinks it can get along with one tool in its workshop: the intelligence agencies.

During the presidential campaign in 2008, Mr. Obama railed against the agency’s use of torture and secret prisons during the Bush administration, and shuttered the detention program during his first week in office. But he has empowered the agency in other ways — including allowing its director, not the White House, to make the final decisions about drone strikes in Pakistan.

“Many presidents tend to be smitten with the instruments of the intelligence community. I think Obama was more smitten than most,” said one former senior Obama administration official, speaking on the condition of anonymity to discuss classified intelligence matters. “This has been an intelligence presidency in a way we haven’t seen maybe since Eisenhower.” The C.I.A. had shifted from capturing and interrogating terrorism suspects to targeting them with armed drones even before Mr. Obama came to office….

For the C.I.A., there were far fewer political costs associated with killing terrorists than with capturing and interrogating them. …

And as America’s spying apparatus has grown larger, richer and more powerful than during any other time in its history, it has become ever harder for those keeping watch over it.

“We are 15 people overseeing a $50 billion enterprise,” said Senator King, speaking of his fellow members on the Senate Intelligence Committee.

“I can’t tell you I know with certainty every intelligence program this enterprise is engaged in.”

A system in extreme stability doesn’t roll deeply from side to side but exhibits a jitter of  frequent but non-lasting change.  In such a system the intelligence agencies would act like a damper more than an actual force for order; there to smooth out the ride for the comfort of the passengers. The rest of the tools go into storage. Maybe the president couldn’t tell you what intelligence programs are afoot either, but if the globalized world is truly in stable equilibrium right now then Obana is as helpless to upend it by incompetence or profligacy as Putin is. The best and highest use of Obama’s time may actually be to play golf in Hawaii.

But even if the globalized economy was currently in stable equilibrium, it could not remain so forever, because over the long term trends are changing. The nature of the global economy is itself evolving.  Therefore risk is still there, only the better alternative to the Verisk Maplecroft  crystal ball is the McKinsey and Company report on disruptive technologies.   For it is disruptive technologies that affect the global economy fundamentally and rather than focusing on the impact of militant Islam or Putin perhaps the following count for more:

1. Mobile Internet;
2. Automation of knowledge work;
3. Internet of Things;
4. Advanced robotics;
5. Cloud computing;
6. Autonomous or Near-Autonomous Vehicles;
7. Next-generation Genomics;
8. Next generation Energy Storage;
9. 3D Printing;
10. Advanced Materials;
11. Advanced Oil and Gas Exploration and Recovery;
12. Renewable electricity.

This is a much more interesting list of risks and opportunities than the standard political risk matrix.  Developments in these fields will remake political coalitions, empower or reduce the influence of ethnic groups.  It will beggar some nations and enrich others.  It will create opportunities for terrorism in some cases and reduce it in others.

More to the point, almost none of it is under the control of the CIA.  None of this can be directly changed from the presidential golf cart. This suggests that most of our risk is actually unmanaged risk.  We’re not in control.  The trends and forces that will will affect 2015 will come with all the force and spontaneity of the weather.

Whether you believe in predictable political risks or trust in the stability of the global economy which in turn is the plaything of disruptive technologies, the conclusion is the same: we don’t really know what 2015 holds.  One thing hasn’t changed. Each New Year’s Eve we bid goodbye to the familiar and say hello to the unknown, not without a little worry but also with a fair degree of hope.

That’s the way it has always been.  We should try to remember what someone said to the character Max Klein in the movie. “You can’t save everybody, Max, you gotta try taking care of yourself.”  Try taking care of yourself and with any luck we’ll make it to 2016.


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