The global bear market that economists fear has certainly come closer

The global bear market that economists fear has certainly come closer
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"If we cannot end now our differences,” John F. Kennedy once said, “at least we can make the world safe for diversity." JFK already knew that a wholly liberal-democratic world would be unlikely, but he hoped to ensure that liberal democracies could live peacefully alongside other forms of government.

Today an expanding cohort of states are moving in an authoritarian direction and worrying the financial markets. After the Cold War, a kind of euphoria took hold: Capitalist democracy would be unstoppable. Now, China, Russia and others believe that conviction.


Earlier, it was often thought the populations of authoritarian countries would demand more freedom once a certain level of prosperity was reached. Mostly, this did not happen at all, or countries were caught by the middle-income trap before citizens started to worry about their liberties. Only 13 out of 101 middle-income countries in 1960 had become high-income economies by 2008. This phenomenon is increasingly important; five of the seven billion people on earth live in middle-income countries.

In many of these countries an implicit agreement between governments and people has applied (and often continues to apply) which dictates that the price for strong economic growth is political passivity, to put it mildly. Naturally, most regimes will not allow their citizens to abandon this “deal.”

There have been more and more signs in China recently that authorities are tightening the reins and restricting freedom (even further) for fear of the painful side effects — including sluggish growth — of stabilizing the credit system and transitioning from an export-oriented economy to a technologically advanced economy, powered by consumption.

Leaders in other countries are shifting toward “authoritarian regime” on the political spectrum. Leaders like Maduro in Venezuela and Erdogan in Turkey have put their countries in precarious positions with high foreign-exchange debts, sky-high inflation, very unusual monetary policies, irresponsible government spending on prestige projects, large twin deficits and the loss of international goodwill.

This takes us to the key trends around the world right now. Marian L. Tupy, connected with the libertarian think tank CATO, wrote the following while discussing a book by Jonah Goldberg:

“Our rule-based society … a staggeringly complex global economy that turns strangers from different continents into instant business partners, and a meritocratic system of social and economic advancement that ignores people’s innate features … is both very new and extremely fragile. … The forces of tribalism always linger just below the surface. … From Russia and China to Turkey and, to some extent, the U.S., the all-mighty chieftain is back in charge.”

It remains to be seen if the world that JFK envisioned — in which democratic and authoritarian countries coexist in relative peace — is viable. The Trumps and Erdogans of this world increasingly question the world order mainly devised by the West. Winner-takes-all capitalism, growing inequality, stagnating real wages and large cultural-social change play into their hands.

The period roughly until the 1970s is often referred to as “The Glorious Thirty,” an era characterized — especially in the West — by a bountiful combination of high economic growth, increasing productivity, rising real pay, robust technological progress and steady expansion of the welfare state. Clearly, this period is behind us, leading to public dissatisfaction, the emergence of populists and a more inward-looking mentality.

Various negative trends are coming to the fore: from democratisation to a focus on identity and culture; from a world of relative order to a world in chaos; from interdependence to decoupling.

From a political viewpoint, there is plenty of scope for bears. Already, financial and trade wars are damaging free trade and jeopardizing alliances. Growth, international production chains and other forms of globalization are under threat from identity politics, protectionism and the erosion of institutes that have underpinned safety and economic growth for seven decades.

Populists rule Italy, Austria, Hungary and Poland; right-wing populists lead the polls in Sweden and are runners-up in Germany. Intolerant nationalism, xenophobia and illiberalism are the hallmarks of most of these parties and politicians.

Let us not forget that Europe is more exposed than many realize. As an example, Hungary did well in the Freedom House index in 2005-2010 but went downhill from there; many Southern and Eastern European countries are fairly young democracies, still trying to navigate the liberal western world. Meanwhile, we see mounting tension between West and East Europe, in addition to previous North-South tension. Of course, Europe's borders are restive and there is huge pressure on the trans-Atlantic relationship.

We see upcoming nations taking a harder stance as they exploit any opportunity to play Western countries against each other. And the West should beware alliances between parties that were seen as incompatible before; significantly, China’s Xi Jinping and Russia’s Vladimir Putin have met 26 times since 2013.

The biggest fears for further weakening economic growth have focused on the implications of a trade war but a combination of trade conflicts, geopolitical brinkmanship and the weaponizing of global finance is the larger threat.

President TrumpDonald TrumpNoem touts South Dakota coronavirus response, knocks lockdowns in CPAC speech On The Trail: Cuomo and Newsom — a story of two embattled governors McCarthy: 'I would bet my house' GOP takes back lower chamber in 2022 MORE is not afraid to deploy trade and financial weapons, but his opponents are little inclined to bite the dust, either. Considering the size of the U.S. economy and bond market, as well as the power of the dollar, the most likely outcome is that America's adversaries eventually will throw in the towel. Yet, by then, a lot of damage may already have been inflicted.

The global bear market that economists fear has certainly come closer. Western countries increasingly will be hampered by aging populations and high debt; emerging economies also will find it increasingly hard to overcome high debts in foreign currency through greater economic growth while their populations become ever more demanding. On top of this is a growing chance of further political instability as more democracies move towards the twilight zone between democracy and autocracy.

Andy Langenkamp is senior political analyst at ECR Research and political commentator, who specializes in assessing the repercussions for the financial markets of economic and geopolitical events.