Comparing Old and New Realities: Are We Going Forward to the Past?

Past causes of megaconflict Economic volatility Ethnic disintegration Empire(s) in decline Eastern resurgence

Economic volatility

Ethnic disintegration

Empire(s) in decline

Eastern resurgence

1. Economic volatility

2. Ethnic disintegration

3. Empires in decline

4. Eastern resurgence

Future causes of megaconflict? Middle East volatility? Ethnic meltdown in Iraq US empire in decline? Iran and China advance

Middle East volatility?

Ethnic meltdown in Iraq

US empire in decline?

Iran and China advance

1. No shortage of vol. in ME Source: World Bank

2. Iraq: Insurgency to civil war Source: Brookings

3. America’s overstretched ‘empire’

4. The descent of the West Source: Goldman Sachs NB US/China per capita income ratio forecast to fall from 23 to 6

So where’s the financial fear? Source: MSCI NB Of BRICs + N-11 (15), 9 are in the bottom third of the world as ranked by the Global Peace Index, and 3 are in the bottom 10.

Where’s the political risk premium?

Are we being fooled by liquidity?

… and the joy of “Chimerica”?

Have we been here before?

Long-term rates were low …

Credit spreads narrowed … “ The Sterling Carry Trade”

Stock markets trended upwards

… and volatility declined

—despite rising energy prices

British savings c/w Asian today

But then … The Times , July 22, 1914, p. 19 (Note: Assassination of Franz Ferdinand June 28)

August 1, 1914 The Times , August 1, 1914, p. 13 (Note: Britain declares war on Germany, August 4)

What might have happened? London reopens: January 4, 1915

What did happen

Emergency markets

The price of imperial decline? Source: Global Financial Data

Looks familiar?

The big problem A “low probability, high-impact event” like a major war (or revolution) is less improbable than we assume … But like all “black swans” it’s impossible to predict with any accuracy … So it’s easier to ignore, because if it happens we’ll all go down together

A “low probability, high-impact event” like a major war (or revolution) is less improbable than we assume …

But like all “black swans” it’s impossible to predict with any accuracy …

So it’s easier to ignore, because if it happens we’ll all go down together

That’s no bell curve

That’s no bell curve

The limits of history I can’t promise you a Third (or Fourth) World War The First World War was unexpected The Second World War was expected, but came later than investors feared The Third World War was expected, but didn’t happen (or only in the Third World) A Great Middle Eastern War is more likely today than a World War I can’t advise you on the optimal wartime portfolio, so don’t ask

I can’t promise you a Third (or Fourth) World War

The First World War was unexpected

The Second World War was expected, but came later than investors feared

The Third World War was expected, but didn’t happen (or only in the Third World)

A Great Middle Eastern War is more likely today than a World War

I can’t advise you on the optimal wartime portfolio, so don’t ask

The limits of history I can’t promise you a Third (or Fourth) World War The First World War was unexpected The Second World War was expected, but came later than investors feared The Third World War was expected, but didn’t happen (or only in the Third World) A Great Middle Eastern War is more likely today than a World War I can’t advise you on the optimal wartime portfolio, so don’t ask

I can’t promise you a Third (or Fourth) World War

The First World War was unexpected

The Second World War was expected, but came later than investors feared

The Third World War was expected, but didn’t happen (or only in the Third World)

A Great Middle Eastern War is more likely today than a World War

I can’t advise you on the optimal wartime portfolio, so don’t ask

Conclusion: They do exist © Niall Ferguson 2007