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CITI: Everything you learned about how the world works is probably wrong

Jan 19, 2016, 21:25 IST

China's President Xi Jinping (front), Russia's President Vladimir Putin (2nd row), and U.S. President Barack Obama (3rd row) walk as they take part in an Asia-Pacific Economic Cooperation (APEC) family photo inside the International Convention Center at Yanqi Lake in Beijing, November 11, 2014. REUTERS/Kim Kyung-Hoon

It's time to re-think everything we know about how the world is ordered.

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Citi is out with a big new report on our current geopolitical order and maybe what happens next.

What the firm effectively argues is that the global order most of today's adults have come to know as "true" probably isn't so anymore.

At the heart of Citi's report is the idea that "Pax Americana" - defined as the "post-World War II global order that relied, to a large extent, on American military, economic, and diplomatic power to guarantee relative political stability and economic development" - is over. Ot at least, ending.

But the problem is that there's nothing coming up to replace Pax Americana.

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Thus we're facing what Citi calls a "Great Power Sclerosis."

The particulars and catchphrases, however, are far less important than Citi's broad message, which is that everything the people who basically run the world have come to know as true no longer is.

Here's Citi (emphasis added):

[M]ost political and business leaders and investors today have largely "grown up' in the post-1991 era, often described as the most peaceful and prosperous in human history and characterized by a host of pro-globalization developments and effective US hegemony. With this in mind, hopes for a reversion to the pre-global financial crisis mean, and with it, a return to some semblance of linear progress, may be misplaced [...]

In our view, political and business leaders will need to be more attuned to the new shape of global political risk, a paradigm shift that means that previous policies will fail to keep pace and uncertainty will remain high, with the potential to interact in unexpected ways. Among the key implications of this more fragile and interconnected risk outlook is that so-called Black Swan events - in this case, geopolitical events producing instability spanning several orders of magnitude - may be both more likely and more difficult for leaders and global financial institutions to resolve.

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So for investors the biggest takeaway is that all those charts showing pre-crisis economic growth, the resulting slow recovery path, and the so-called "output gap" are just illusions. Or maybe delusions.

FRED

There isn't, under this framework outlined by Citi, seemingly anything other than just a sort of hope that things will go back to the way they were: when the US was the world's police and Western-style capitalism brought peace and prosperity to all the world's people. (Of course, this was never really the case. But, you know, memory and all that.)

Citi roughly argues that the arc of history is - and has been - turning away from this Pax Americana state of affairs and towards, well, something else.

What else is the whole point of the exercise.

But as for the major things worth keeping in mind right now and going forward, here's Citi again, at length (emphasis ours):

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The United States, through diplomatic activism backed up by unrivaled military power, kept many regional conflicts under control (or pacified them), such as between Pakistan and India, North and South Korea, Israel and its neighbors, and the states of the former Yugoslavia. It did not dominate world affairs in a hegemonic way (which would have been impossible even for the US), but it served as the arbiter of last resort and the world's reserve power. After 1989, most nations buying into the post-Cold-War surge of economic globalization consumed US stability services around the world, even those who openly or clandestinely opposed America's relative dominance.

But this fortunate power structure has changed significantly over at least the last decade. The US position in global affairs has weakened. Other powers have gotten stronger. Some military interventions, such as the Iraq war, have eroded both US credibility and resources, an outcome supported by a host of global public opinion data. Less political capital is available in Washington to underpin America's global role, leading to a "leadership from behind" culture that is considered to be ineffective and widely perceived as US weakness. Inward-looking, isolationist leanings have gained political traction in America's political mainstream. The threshold of what constitutes US national interest has narrowed markedly in comparison to previous decades.

As a consequence, the international system is suffering from power sclerosis, compounded by absence of a replacement. The "Great Power Sclerosis" describes a situation in which Pax Americana has not been effectively supplanted by another system of global order, but in which its ability to resolve crisis, foster compromise, discipline rogue players, and defuse regional and local conflict is greatly diminished. In a situation of power sclerosis, the institutional framework of Pax Americana is still in place, but the effectiveness of these institutions has either been reduced, is being challenged, or is in doubt [...]

No global or regional power has emerged yet that is willing or capable to responsibly (or, thankfully, irresponsibly) fill the gap that America's relative decline has created. Europeans are currently too inwardly-focused and too disunited to tap their full potential, both at home, and globally. China, the only other potential step-in, limits itself, for the time being, to a mostly regional role. It is generally interested in global stability as it is one of the biggest beneficiaries of integrated markets, but its political agenda, especially in its immediate neighborhood, does not fully overlap with that of the US or the wider West [...]

As a net result of all of these trends and developments, local and regional crises around the world play out stronger and more intensively than they used to. Weaker cohesion and diminished disciplining power make escalations of small conflicts more likely and encourage rogue states and opponents of liberal order to assert themselves more self-confidently. Stability in the overall system is weakened and likely to further deteriorate incrementally. The assessment of political risk in and around Europe, and around the world, needs to be made against this backdrop.

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Read the full report from Citi here »

(h/t FT Alphaville)

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