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I will be away with my family in Iceland for the next 10 days and will be turning over the blog to my colleagues for that time. We have some very interesting pieces lined up, and I expect you will find them both entertaining and useful. But before I go, here is one last post—a book review!
The world is changing
As you might remember, Iceland collapsed financially in 2008. That collapse was, relative to its economy, the largest in history. The country has since recovered, of course, and that is not why we are going there. But it is interesting in light of the developing situation in Turkey. Compared with Iceland and 2008, one of the takeaways from the Turkey crisis is that things may really be different this time. I know that statement is usually a prelude to an assertion that no, they aren’t. In this case, however, there are real signs that the world is changing.
The difference is not that an emerging market has gotten into financial trouble, as we have seen that multiple times. The difference is that the U.S.—the superpower—has deliberately chosen not to help and to prioritize its own interests by actually making the crisis worse. That is different. That difference has also come through since the election in the abrogation of trade agreements, the confrontational nature of U.S. policy, and the deliberate choice to focus not first but solely on America’s interests. Clearly, the world really has changed in significant ways.
As investors, we have to pay attention to what this change means. I wrote yesterday about what it might mean for emerging markets, but the changes will extend well beyond those markets. What we need is a vision of what a world without U.S. leadership looks like.
A bold vision
The Absent Superpower, by Peter Zeihan, offers just such a view. This is a unique book. While most books on geopolitics implicitly assume some basic continuation of current conditions, Zeihan starts by asserting that the entire geopolitical structure of the world has changed, driven by the shale oil revolution here in the U.S. He then proceeds to work out what that structure means for the rest of the book. This is a remarkably bold and comprehensive vision—one that is outside the bounds of most commentary I am familiar with.
The key idea here is that, with the shale oil revolution, the U.S. will soon be energy independent and, with that, will have little need—and even less desire—to engage with the rest of the world. While this idea is inconsistent with the post-World War II period, it is consistent with prior American history. It is certainly consistent with what we see happening today.
If true, things certainly would be different this time. Zeihan takes that idea and runs around the world with it. If the U.S. does indeed pull away from the world and becomes an absent superpower, what does that mean?
What happens if the U.S. pulls back?
His big point is that U.S. involvement was, and is, the foundation of the international economic and trading system. The U.S. underwrites and protects all countries’ ability to trade. Absent that foundation, everything else is called into question.
Without the U.S. policing the seas (see Southeast Asia or the Persian Gulf), trade becomes problematic. Without the U.S. as the buyer of first resort, exporting powers (which includes all of the emerging markets and most of the developed ones) don’t have a business model. Without trade and exports, any economy that is not large and sophisticated enough to support itself (which is almost every one except the U.S.) will revert to where it was in, say, the early 1900s. In other words, without the active involvement of the U.S., we are economically back a century—when most of the world was more isolated and considerably poorer than it is right now. It is more complex than that, of course, but that is the core of the story. As the U.S. pulls back, the rest of the world gets more isolated and poorer.
This is not the message you get from most geopolitical analyses. Frankly, I am not sure I agree with it. It is, however, a unique and plausible view and one worth considering. I think of it more as a premortem, a term I have used before to describe thought experiments around how things can go wrong. By seriously considering the implications of the events that Zeihan discusses, we can be better prepared for whatever does happen.
A cautionary tale
In many respects, this book is the opposite of Connectography. That book preached the bright future of unlimited globalization and, as I noted at the time, was quite possibly an indicator of peak globalization. Similarly, Zeihan’s book looks at not just the decline but at the explosive crackup of globalization. Just as with Connectography, you can read this as a guide to what is and what might be. You can read it, if nothing else, as a cautionary tale for isolationists. You can read it as a road map to trouble ahead. You don’t have to agree with it to take it seriously.
Think outside the box
I recommend this book for people who are interested in seeing what a really outside-of-the-box premortem looks like. It’s also great for those who believe the old word order is breaking down and want some help thinking through what that might mean. It is plausible, entertaining, and at times horrifying. It might not be beach reading, perhaps, but definitely worth taking a look.
See you in a couple of weeks!
