Dec 15th 2014

Short Memories, Broken Politics, and the Coming Recession

by Daniel Wagner

 

Daniel Wagner is the founder and CEO of Country Risk Solutions and a widely published author on current affairs and risk management.

Daniel Wagner began his career at AIG in New York and subsequently spent five years as Guarantee Officer for the Asia Region at the World Bank Group's Multilateral Investment Guarantee Agency in Washington, D.C. After then serving as Regional Manager for Political Risks for Southeast Asia and Greater China for AIG in Singapore, Daniel moved to Manila, Philippines where he held several positions - including as Senior Guarantees and Syndications Specialist - for the Asian Development Bank's Office of Co-financing Operations. Prior to forming CRS he was Senior Vice President of Country Risk at GE Energy Financial Services. He also served as senior consultant for the African Development Bank on institutional investment.

Daniel Wagner is the author of seven books: The America-China Divide, China Vision, AI Supremacy, Virtual Terror, Global Risk Agility and Decision Making, Managing Country Risk, and Political Risk Insurance Guide. He has also published more than 700 articles on risk management and current affairs and is a regular contributor to the South China Morning Post, Sunday Guardian, and The National Interest, among many others. (For a full listing of his publications  and media interviews please see www.countryrisksolutions.com).

Daniel Wagner holds master's degrees in International Relations from the University of Chicago and in International Management from the Thunderbird School of Global Management in Phoenix. He received his bachelor's degree in Political Science from Richmond College in London.

Daniel Wagner can be reached at: daniel.wagner@countryrisksolutions.com.

The stock markets are frothy -- once again -- and it feels a lot like 2008. Just six years ago the markets were partying like there was no tomorrow -- ignoring the bubbles that had developed, having failed to learn lessons from the plethora of previous financial crises, and pretending that if they just kept saying everything was fine long enough, everything would indeed be just fine. Yet, after all that has happened, it appears that investors, the markets, voters, and Congress have learned little.

While Wall Street's natural inclination is to cheer the partial repeal of Dodd-Frank (the result of an 'add on' to the trillion dollar government budget passed by Congress over the weekend), exactly the opposite should be the case. Surely, Wall Street should know that it is in its own, as well as, the collective, interest to have legal boundaries in place to prevent it from succumbing to its historical propensity toward greed and excess. A gradual erosion of the remainder of Dodd-Frank under a Republican-controlled Congress after the New Year now seems inevitable. How can that be in Wall Street's, or the country's, long-term interest?

Four basic ingredients were required to allow the Great Recession to occur: greed, lax risk management, inadequate regulatory enforcement, and short memories. Greed certainly hasn't disappeared and, as is abundantly clear, people still have short memories. Although risk management procedures and regulatory enforcement mechanisms have definitely improved, the propensity to water them down has gained momentum as time has passed. So the stage would appear to be set for a recurrence of the precursors that led to the Great Recession.

Then, as now, we are our own worst enemy, with all pieces of the puzzle playing their predefined role. The bankers remain greedy. Lobbyists are trying to find ways to water down rules restricting the freedom of movement of their constituents. Risk managers are busy trying to figure out how they can remain in compliance at the very edge of the new rules. And voters continue to elect lawmakers who have a vested interest in perpetuating the system. The result is a polity that is rotten to the core, and getting worse. It is just a matter to time until the self-interest of Washington and Wall Street help propel us into another recession.

According to the National Bureau of Economic Research, which tracks recessions on a monthly basis going back to 1854, we are already overdue for another recession. From 1854 to 1919, there were 16 economic cycles, the average recession lasted 22 months, and the average economic expansion was 27 months. From 1919 to 1945, there were 6 cycles, recessions lasted an average of 18 months and expansions for 35 months. And the period from 1945 to 2001 saw 10 cycles, recessions lasted an average 10 months, and expansions an average of 57 months. So recessions got shorter and expansion periods longer over time.

Since the third quarter of 2009, the U.S. economy has expanded for 20 of the past 22 quarters (60 months), and is poised to continue the trend well in to 2015. Given that the U.S. economy is once again the de facto engine of the global economy (given China's slowdown), far outpacing Europe and most other developed economies, there would appear to be little reason to believe that two consecutive quarters of negative growth are in our near term future.

If we assume that 2015 will see at least 3, if not 4, quarters of positive growth, the most realistic prospect for the onset of a new recession will be in 2016, meaning that the current period of economic recovery will have lasted a minimum of 72 months. By post-War standards, by that time, the U.S. will have been overdue for another recession by two years. As things look now, it certainly appears possible, perhaps even probable, that a recession will either begin, or be well under way, in conjunction with the U.S. presidential election.

If so, both the Democrats and the Republicans will presumably be falling all over themselves to blame each other, pass the buck, and produce legislation aimed at reducing the pain on the American people, in an effort to demonstrate how guiltless and selfless they all are. In the process, they will no doubt end up adding in a significant way to the inexcusable size of the budget deficit, and digging us into an even deeper fiscal hole in the process.

If the Great Recession wasn't enough to change the hearts and minds of the bankers, legislators, lobbyists and voters, I really don't know what would be. We bear collective responsibility for perpetuating a terribly broken system. Each actor much play its part in order for the system to keep operating in this way. What we need are more brave politicians -- like Elizabeth Warren - to stand up and speak the unvarnished truth. If someone as brave, honest and fearless as her were to become president, there is hope the vicious cycle can be broken. But don't count on that. As Jack Nicholson said in A Few Good Men, we can't handle the truth.




Daniel Wagner is CEO of Country Risk Solutions and author of "Managing Country Risk". For Country Risk Solutions, please click here.

You can follow Daniel Wagner on Twitter: www.twitter.com/countryriskmgmt


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Apr 13th 2022
EXTRACTS" "Ukraine and Russia produce a substantial amount of grain and other food for export. Ukraine alone produces a whopping 6% of all food calories traded in the international market. At least it used to, before it was invaded by the world’s largest nuclear power." ...... "When it comes to cereals like wheat, corn, rice and barley, the big players talk about millions of metric tonnes, or MMTs. A single MMT of wheat contains about 3.4 trillion food calories,." ....."Ukraine produced about 80 MMT of grain (a category that includes wheat, corn and barley) in 2021, and is expected to harvest less than half of that this year. A shortfall of 40 MMT is enough missing calories that a country like the UK could only make it up by having everyone stop eating for three years. That’s the thing about tonnes of grain: a million here and a million there and pretty soon you’ve got a real issue on your plate."
Apr 11th 2022
EXTRACT: "I don’t even know the little girl’s name. All I do know is what a friend of a friend wrote on Viber: that her relative, a senior nurse in one of Kyiv’s hospitals, “saw in the morgue a child with 20 varieties of sperm on her small body.” Since this information was conveyed in a private conversation, there is no reason to doubt its veracity."
Apr 8th 2022
EXTRACT: "Russian society has so far failed to stop Putin, just as German society failed to stop Hitler. And so, like a poisoned chalice, that task has fallen to the West, as it did in 1939. The West must now treat Putin and his regime the same way that Winston Churchill treated Hitler: Don’t talk to him, just defeat him. Dead-enders such as Putin are too fanatical and desperate to be reliable negotiating partners."
Apr 3rd 2022
EXTRACT: "From 1807 to 1814 on the Iberian peninsula, Napoleon had to fight Spanish, Portuguese and British armies while beset by ubiquitous, ferocious insurgents. He described this war as his “bleeding ulcer”, draining him of men and equipment. It is the west’s aim to make Ukraine for Putin what Spain was for Napoleon. In the absence of a negotiated settlement, Ukraine and Nato will continue to grind away at Russia’s army, digging away at that bleeding ulcer and prolonging Russia’s agony on the military front, as the west continues its parallel assault on its economy. If Putin’s plan is to proceed with the Korea model, he will fail. There is a strong possibility that Putin has only a limited idea of how badly his army is faring. So be it – he’ll find out soon enough that there is now no path for him to military victory."
Apr 1st 2022
EXTRACTS: "Policymakers expected that the country would be able to secure its energy supply entirely from renewable sources, so they resolved to phase out coal and nuclear energy simultaneously. The last three of Germany’s 17 nuclear power plants are set to be shut down this year." ---- ".... the share of wind and solar power in Germany’s total final energy consumption, which includes heating, industrial processing, and traffic, was a meager 6.7%. And while wind and solar generated 29% of the country’s electricity output, electricity itself accounted for only about a fifth of its final energy consumption." ----- "If Germany suddenly halted Russian gas imports, gas-based residential heating systems – on which half the German population, approximately 40 million people, rely – and industrial processes that rely heavily on gas imports would break down....."
Apr 1st 2022
EXTRACT: "For Putin, the past that matters most is the one the dissident author and Nobel laureate Aleksandr Solzhenitsyn exalted: the time when the Slavic peoples were united within the Orthodox Christian kingdom of Kievan Rus’. Kyiv formed its heart, making Ukraine central to Putin’s pan-Slavic vision. ---- But, for Putin, the Ukraine war is about preserving Russia, not just expanding it. As Russian Foreign Minister Sergei Lavrov recently made clear, Russia’s leaders believe that their country is locked in a “life-and-death battle to exist on the world’s geopolitical map.” That worldview reflects Putin’s longstanding obsession with works of other Russian emigrant philosophers, such as Ivan Ilyin and Nikolai Berdyaev, who described a struggle for the Eurasian (Russian) soul against the Atlanticists (the West) who would destroy it. ---- Yet Putin and his neo-Eurasianists seem to believe that the key to victory is to create the kind of regime those anti-Bolshevik philosophers most detested: one run by the security forces. A police state would fulfill the vision of another of Putin’s heroes: the KGB chief turned Soviet General Secretary Yuri Andropov."
Apr 1st 2022
EXTRACTS: "Ukraine, known as the breadbasket of Europe, is struggling to export last year’s harvest, and may be unable to produce much this year either. In addition, the war has caused a global fertiliser shortage, which will push up food prices around the world too. Coming at a time when the global pandemic had already increased food insecurity and depleted resources around the world, many countries may not be resilient to a major food crisis brought on by the war. Back-to-back global catastrophic events like this have not happened for close to 100 years." ----- "Another useful analogue is the case of Germany during the first world war. When war broke out in 1914, the German authorities had anticipated a short conflict – not too dissimilar to Russian assumptions a few weeks ago. Just like in Ukraine now, the first world war severely disrupted German farming."
Mar 31st 2022
EXTRACT: "The horrors of World War II – the death camps, slave labor, and inhumane experiments on people – produced a global commitment never to permit such crimes to be repeated. This began a transformation of international politics whereby appreciation of the value of every person’s life and dignity ensured that even most authoritarian governments at least paid lip service to human rights.  ----- But the Soviet Union and many of its successor states, particularly Russia, never internalized this change. More than three decades after the USSR collapsed, most post-Soviet countries are still governed according to the old “imperial” paradigm. So, it should come as no surprise that we are now witnessing a clash between fundamentally different sets of values and ultimate goals for statehood."
Mar 26th 2022
EXTRACT: "Referencing past legacies as a justification for present-day political decisions is often effective – such appeals trigger emotional reflexes and contribute to thinking about politics in terms of rivalry and defence. The irony within the tragedy of the current situation is that Putin will assuredly go down in history as the figure that did more to unite the Ukrainian people (albeit against Russia) than any other in recent memory."
Mar 24th 2022
EXTRACT: " Despite the death and destruction that Russia rains down daily on them, the vast majority of Ukrainians are bullish about the future: 77% believe the country is moving in the right direction, 93% think they can beat back Russia, and 47% expect to win in the next few weeks.  Ukrainian policymakers are no less bullish, driving a hard bargain in negotiations with the Russians. Several factors account for this remarkable optimism."
Mar 21st 2022
EXTRACT: "As Russia’s war in Ukraine continues, China’s role has been thrown into sharp relief. Prior to the war, some commentators suggested that China would openly side with Russia or seek to act as a mediator – so far Beijing appears to have resisted doing either. As Qin Gang, China’s ambassador to the US, wrote recently in the Washington Post, Beijing has nothing to gain from this war, arguing “wielding the baton of sanctions at Chinese companies while seeking China’s support and cooperation simply won’t work”. Ambassador Qin also stressed that Beijing had no prior knowledge of the conflict,...."
Mar 17th 2022
EXTRACT: "The second source of Russian power is of course the world’s largest nuclear arsenal. Nuclear weapons would not deliver victory in a conventional war, but they could destroy a country in the blink of an eye. This brings us to a terrifying question: What will Putin do when he realizes that he cannot win his war in Ukraine by conventional means?"
Mar 17th 2022
EXTRACT: "An influential Shanghai-based academic commentator on international affairs, Hu Wei, recently advanced a cautionary argument that has been circulated widely in Chinese-language publications. In his commentary, which is unlikely to have been published without the approval of some of Xi’s senior courtiers, Hu wondered how Chinese communists would react if the war escalated beyond Ukraine, or if Russia was clearly defeated." ------- "For Hu, the answer for China’s leaders is simple. They should wash their hands of the relationship with Putin, ....."
Mar 12th 2022
EXTRACT: "Meanwhile, Xi seems to have realized that Putin has gone rogue. On March 8, one day after Chinese Foreign Minister Wang Yi had insisted that the friendship between China and Russia remained “rock solid,” Xi called French President Emmanuel Macron and German Chancellor Olaf Scholz to say that he supported their peacemaking efforts."
Mar 7th 2022
EXTRACTS: "........Russia has been isolated by draconian Western sanctions that could devastate its economy for decades,...." ---- "Russia’s prospects are bleak, at best; without China, it has none at all. China holds the trump card in the ultimate survival of Putin’s Russia."
Mar 3rd 2022
EXTRACT: "Although Ukraine’s armed forces are outnumbered by those of Russian President Vladimir Putin invading our country, we take heart from the growing support we are receiving from friends abroad. Nobody should forget that this is not just an unprovoked invasion of Ukraine; it is an assault on the free world. ---- Putin has been at war with the free world for decades. "
Mar 2nd 2022
EXTRACT: "Moreover, with China sharing the Kremlin’s interest in containing the advance of liberal democracy around the world, Putin could count on the Chinese to provide an additional economic lifeline by purchasing Russian gas. But this new relationship will not be costless. As the world continues to divide into separate technological and economic blocs, Russia will become even more dependent on China, implying a loss of strategic autonomy. Russia may have a powerful military; but with a GDP similar to that of Spain and Italy, it is far from being an economic power."
Mar 1st 2022
EXTRACT: "The financial measures just announced against Russia are unprecedented for a country of its size. This of course means it’s impossible to predict exactly how their impacts will reverberate around the Russian – and global – economy. And we still need to see the exact details of the plan. But on their face they threaten the collapse of the Russian ruble, a run on Russian banks, hyperinflation, a sharp recession and high levels of unemployment in Russia, as well as turmoil in international financial markets."
Feb 26th 2022
EXTRACT: "Putin apparently assumes that China will back him. But while he launched the invasion just weeks after concluding something akin to an alliance agreement with Xi in Beijing, Chinese officials’ reactions have been very distant with calls for “restraint.” Given Putin’s near-total reliance on China for support in challenging the US-led international order, lying to Xi would have no political or strategic advantage. That is what is so worrying: Putin no longer seems capable of the calculations that are supposed to guide a leader’s decision-making. Far from an equal partner, Russia is now on track to become a kind of Chinese vassal state."
Feb 25th 2022
EXTRACTS: "Russia’s ascent to global power in the nineteenth and twentieth centuries resulted in numerous tragedies not only for the neighbors it subjugated and gradually absorbed, but also for its own people. China’s current leaders, in particular, should be mindful of this history, considering that imperial Russia seized more territory from China than from anyone else." ----- "Putin is taking Russia hurtling back toward the nineteenth century, in search of past greatness, whereas China is forging ahead to become the defining superpower of the twenty-first century. While China has achieved unprecedentedly rapid economic and technological modernization, Putin has been pouring Russia’s energy-export revenues into the military, once again cheating the Russian people out of their future."