Just in time for the new year, Ian Bremmer and Nouriel Roubini have delivered a 4,000-word thumbsucker on the global political economy. Essentially, they take Mohamed El-Erian’s idea of a “new normal” and start getting very specific about where and how it’s going to fall apart. And it’s hard to disagree with things like this:
G-20 heads of state will gather in Seoul in November, and there will be plenty more such summits in years to come. Yet policy responses to transnational problems will continue to be improvised and incomplete. U.S. negotiators will resist any institutional framework that allows foreign leaders to impose binding rules on Washington. China will stoke growth to create new jobs, managing development to try to prevent crises that could provoke the kind of social unrest the state can’t contain. Russian leaders will continue to try to attract foreign investment while extending state control across strategic sectors of the domestic economy and using the country’s energy resources as geopolitical leverage. India will pursue trade liberalization at its own pace. Brazil will try to use its newly discovered offshore oil to enable state-run oil company Petróleo Brasileiro to become an ever-more useful tool of economic policy. Saudi Arabia will use its still-considerable reserves to help manage oil prices and will act as producer and lender of last resort when it finds good value for its money. Efforts to move these governments toward harmonious and effective policy responses to problems that extend beyond the financial crisis — collective security, counterterrorism, climate change and global public health emergencies — will fall short.
The result is that the historical guardians of prosperity and growth will shrink in importance, to be replaced by mechanisms which are much more likely to fail.
State capitalism will produce a reversal in the trade and capital account liberalization of the past several years as protectionism breeds more protectionism…
The emergence, virtually overnight, of the formerly obscure G-20 as the world’s preeminent economic policymaking body provides a glimpse into a more chaotic future. It also suggests that the old levers of hegemonic stability and influence exercised so expertly by the British in the first golden age of globalization (roughly 1880 to 1914) and by the U.S. in the second (1989 to 2008) will have far less purchase in the new, postcrisis age.
By the time that Bremmer and Roubini work out what this all means for markets, the line of hypothetical causality is long and therefore no prediction can carry any great degree of certainty. But there’s no good reason why this shouldn’t be true:
The reopening of the fire hoses of credit and capital that occurred during the bubble years will happen again and intensify the boom-and-bust cycles. Driven by ever-more- desperate policymakers in the U.S., Europe and Japan, these cycles will both shorten and magnify. Political, policy and regulatory uncertainty will increase, and as a result, financial crises will become more frequent and costly, while risk aversion, volatility and uncertainty will rise. The illusions of the Great Moderation — a phrase coined by Harvard University economist James Stock to describe the two-decade period that started in the late ’80s, with its quasireligious embrace of market efficiency and infinite American power — will have created the era of the Great Financial Instability. And nothing could hasten the decline of American influence more than another self-inflicted catastrophe of global market capitalism.
Investors don’t even need to believe this; they just need to protect against it in order for it to start becoming self-fulfilling. The dot-com crash came from people taking too much risk, and was relatively harmless. The recent financial crisis was a consequence of too much risk-aversion — everybody piling into paper carrying the magical “AAA” branding. That kind of crisis is much more damaging. And risk-aversion is at least as prevalent now as it was during the Great Moderation: just look at the disconnect between fluffy bond prices and modest stock prices.
In order for capitalistic animal spirits, especially in fast-growing economies, to rescue us all from a series of horrible financial earthquakes, everybody’s going to have to become a lot less risk-averse. And I don’t see that happening any time soon.