Economic Turmoil Begets Geopolitical Risks

The economic turmoil roiling world markets right now brings with it plenty of pain. Jobs are being lost, people’s savings decimated, retirement plans/goals thrown out the window, etc. Hard times bring with them harsh consequences. However, it is perhaps useful to be mindful of the geopolitical risks that accompany economic dislocation. Many analysts are eager to compare the difficulties now confronting the global economic system with those of the Great Depression. While I do not believe that the world is facing a second Great Depression, it might be worthwhile to recall from history that the Great Depression spawned geopolitical turmoil that lead to the Second World War. The incoming Obama administration—and Democratic members of Congress who talk of implementing massive defense cutbacks—may want to remember the lessons of the past as they stand on the threshold of power.

Geopolitical RiskThe hardship and turmoil which impacted the world during the Great Depression provided fertile ground for the rise of fascist, expansionistic regimes in Germany, Italy and Japan. Hard times also precluded the Western democracies from a more muscular response in the face of growing belligerence from these countries. The United States largely turned inward during the difficult years of the 1930s. The end result was a global war of a size and scale never seen by man either before or since. Economic hardship is distracting. It can cause nations to turn their focus inward with little or no regard for rising global threats that inevitably build in tumultuous times. Authoritarian regimes invariably look for scapegoats to blame for the hardship affecting their populace. This enables them to project the anger of their citizenry away from the regime itself and onto another race, country, ideology, etc.

Looking at the world today, one can certainly envision numerous potential flashpoints that could become problematic in a protracted economic downturn. Pakistan, already a hotbed of Islamic extremism and armed with atomic weapons, has been particularly hard hit by the global economic crisis. An increasingly impoverished Pakistan will be harder and harder for its new and shaky democratically-elected government to control. Should Pakistan’s economic troubles cause its political situation—always chaotic—to spin out of control, this would be a major set-back in the global war on terror.

Russia, whose economy, stock markets and financial system have literally imploded over the past few months, could become increasingly problematic if faced with a protracted economic downturn. The increasingly authoritarian and aggressive Russian regime is already showing signs of anger projection. Its invasion of Georgia this summer and increasing willingness to confront the West reflect a desire to stoke the pride and anger of its people against foreign powers—particularly the United States. It is no accident that the Russians announced a willingness to deploy tactical missile systems to Kaliningrad the day after Barack Obama’s election in the U.S. This was a clear “shot across the bow” of the new administration and demonstrates Russian willingness to pursue a much more confrontational foreign policy going forward. Furthermore, the collapse in the price of oil augers poorly for Russia’s economy. The Russian budget reputedly needs oil at $70 per barrel or higher in order to be in balance. Russian foreign currency reserves, once huge have been depleted massively over the past few months by ham-fisted attempts to arrest the slide in both markets and the financial system. Bristling with nuclear weapons and nursing an ego still badly bruised by the collapse of the Soviet Union and loss of superpower status, an impoverished and unstable Russia would be a dangerous thing to behold.

China too is threatened by the global economic downturn. There is no doubt that China has emerged during the past decade as a major economic power. Parts of the country have been transformed by its meteoric growth. However, in truth, only about a quarter of the nation’s billion plus inhabitants—those living in the thriving cities on the coast and in Beijing—have truly felt the impact of the economic boom. Many of these people have now seen a brutal bear market and are adjusting to economic loss and diminished future prospects. However, the vast majority of China’s population did not benefit from the economic boom and could become increasingly restive in an economic slowdown. Enough economic hardship could conceivably threaten the stability of the regime and would more than likely make China more bellicose and unpredictable in its behavior, with dangerous consequences for the U.S. and the world.

Economic hardship invariably has consequences that can dwarf the original impact of those troubles. With the U.S. already at war and facing an increasingly troubled world, it is probably not a good time to make large reductions to the defense budget. With the U.S. government carrying massively greater amounts of debt now as a result of the financial carnage of the past few months, there will be increased pressure to wring savings out of almost every element of government. However, given past experience in tough economic times, it would be wise for our new government to understand the dire need to maintain a strong national defense.

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