November 17, 2022

The world is facing a myriad of interconnected challenges, or “megathreats”, that threaten to topple global stability. Geopolitical conflict is exposing and exacerbating the weaknesses in both domestic and global economies, which as a result has turned the world away from globalization and inward toward protectionist policies. However, to stave off these megathreats, international cooperation and brave leadership are required. This week we examine these megathreats and explore two primary sources of great power conflict – Putin and Xi – who are taking lessons from the past and applying them to today’s challenges in an attempt to consolidate their power.

Worrying signs in US Treasury markets

The cracks in the US Treasury bond market

Kate Duguid, Tommy Stubbington, Financial Times

The Fiscal Cost of Quantitative Easing

Daniel Gros, Project Syndicate

Due to weakening liquidity and central banks’ actions during the pandemic, analysts have concerns about the U.S. Treasury market. At the start of the pandemic, the US Treasury bond market experienced drops in prices and liquidity due to fears about a global economic collapse. Almost three years later, facing sticky inflation and a looming recession, the bond market is once again showing worrying signs. Liquidity and market depth are at their lowest since March 2020, and the Fed may even restart its quantitative easing program if the situation is dire enough. However, some analysts claim that the bond-buying programs were a significant mistake, causing a great deal of financial risk. The Fed projects that the value of their bond holdings will drop up to $670 billion by the end of the year, and the central banks of the eurozone project similar losses. The liquidity problem of the market reflects faltering demand, recursively making the bond market more volatile, and engendering more worry. A disruption in the US Treasury market would not only have a detrimental effect in the United States but would in fact have a global impact.

As Russia crumbles, Putin looks to Stalin

Russia’s Road to Economic Ruin

Konstantin Sonin, Foreign Affairs

Putin’s Stalin Phase

Andrei Kolesnikov

Given Russia’s economic woes and Putin’s increasingly autocratic rule, Russia seems to be sliding backward in time. While the war rages in Ukraine, international sanctions have been doing long-term damage to the Russian economy. While there has been no spectacular collapse, analysts claim that Russia will be hurt in the long run. Russia’s car manufacturing fell by 90%, along with a drop in aircraft and weapon production. Backdoor import channels, which Western policymakers feared would allow Russia to go-around the sanctions, have not materialized. Also, Moscow already had a history of heavy interference in the economy before the war, but that intervention has only grown larger in scale. Since February, the government has given itself the right to close businesses, dictate private-sector production, and set prices of manufactured goods. This state interference, only comparable to the economies of Cuba or North Korea, stifles innovation and decreases market efficiency.

As Russia’s economic disaster looms, Putin looks to Stalin for inspiration. Stalin has been promoted on national holidays and criticism of his reign has been repressed. Putin is modeling his rule after the Soviet leader – he has made sure decision-making relies on him alone, he’s gained control over his country’s elites, and he even spends an increasing amount of time bunkered away in his private estates. Like Stalin launching the Winter War of 1939 against Finland when the Finns refused to make a territorial concession, Putin launched his invasion of Ukraine, citing the same pretext: ethnic minorities within the country were being persecuted. Putin also erred like Stalin, believing that their invading forces would be greeted as liberators, not as invaders. Putin has now come to resemble Stalin in the Premier’s later years. Putin has held power for over 20 years, presided over the attempted assassinations of political opponents, and has begun a devastating war. Even if a reformer takes power, as they did post-Stalin’s death, it will take years for Russia to return to the quality of life and economic well-being that it experienced just a year ago.

The “megathreats” challenging global stability

The Age of Megathreats

Nouriel Roubini, Project Syndicate

The Trilemma of Central Bank Digital Currencies

Barry Eichengreen, Project Syndicate

We are living in an age of “megathreats” that threaten to derail the global economy and spiral geopolitical competition into war. On the geopolitical front, Nouriel Roubini believes we are enduring a period of geopolitical depression in which four revisionist powers – China, Russia, North Korea, and Iran – are challenging the liberal world order that was created by the US and its allies following World War II. Within this concept of geopolitical depression, the world is facing the challenges of cyberwarfare and the threat of nuclear conflict (think Russia and Iran). Today’s geopolitical conflicts are accelerating the deglobalization process as protectionist trade policies become more popular and the US-China trade war fragments the global economy. Meanwhile, the risk of an “environmental Apocalypse” heightens by the day, and along with it comes a growing risk of new pandemics. Roubini also adds advances in AI, robotics, and automation to the list of megathreats as they will destroy more and more jobs over time. The combination of these megathreats, and their complex interconnections, have brought us to a bleak macroeconomic situation. Roubini argues that due to high inflation and the prospect of a recession, we are on the edge of falling into a period of stagflation. Negative supply shocks will persist due to the megathreats discussed and heighten the risk of stagflation. Furthermore, the world is heading into “the mother of all debt crises” as private and public debt ratios have mounted over the last few decades. To avoid a “dystopian scenario”, Roubini believes the world needs strong domestic leadership that is willing to choose solutions that are costly in the short term but will be beneficial in the long run, international cooperation among great powers, and technological innovations that may not yet be available.

Another more specific issue that may be considered a megathreat by some but an opportunity by others is central bank digital currencies (CBDC). Central banks are facing a “trilemma” when it comes to issuing CBDCs. They can only have two of three things: a digital currency, confidentiality of transactions, and financial stability. While consumers will desire confidentiality of transactions, central banks can’t promise this without limiting their ability to track transactions which could allow financial risks and imbalances to build up out of sight. Another obstacle standing in the way of the widespread adoption of CBDCs is an international platform on which CBDCs can be traded. While CBDCs may be a welcome alternative to expensive cross-border payments, the 120 central banks across the world would need to agree on how to govern such a platform. CBDCs are also being pursued by central banks who want to reduce their country’s dependence on the US dollar which is the dominant vehicle for cross-border transactions. This fact has raised concerns in the US that CBDCs may weaken the dollar which could have both domestic and global consequences for financial stability. For now, central banks seem to be slowly pursuing the concept of CBDCs as they deal with more pertinent issues, like inflation.

Xi’s era of Red China

The Weakness Behind China’s Strong Façade

Bonny Lin, Joel Wuthnow, Foreign Affairs

The Return of Red China

Kevin Rudd, Foreign Affairs

Xi Jinping has put the lid on China’s reform. After decades of slow liberalization and integration into global markets, Xi is walking China back. He is an idealogue who, at the Chinese Communist Party’s 20th Party Congress, pushed for a Marxist-Nationalist vision of the party. He called for “Chinese-style modernization,” which entails decoupling China from Western political and social norms, as well as underlying cultural beliefs. Xi further cemented his grip on power during the Congress. He filled top party and state positions with his cronies while removing reform-minded party officials.

The Party Congress also marked a shift in CCP goals from economic development to Chinese nationalism and national security. Behind Xi’s resoluteness, he sees China surrounded by growing security threats. Beijing perceives Washington and its partners in Southeast Asia as hostile, interfering in Taiwan which Beijing believes to be a domestic affair. Xi also seems to realize that the People’s Liberation Army (PLA) is not up to the task of being the force of a world power. The PLA, which has not fought a war since 1979, has likely atrophied in peacetime. He gave the PLA a daunting list of feats to accomplish, including technological research, doctrine modernization, and to use resources more efficiently. Xi wants the PLA to become on-par with the United States’ forces by 2049, the hundredth year after the founding of the People’s Republic. He is also taking note of how Russia’s nuclear weapons have held off more direct NATO intervention in Ukraine and wants to enhance China’s nuclear arsenal and other strategic deterrents.