The high level of anxiety among investors is masked by the rise of equities. As political issues dominate many discussions, the pessimism is palpable. It is fully understandable. The economic crisis lingers for many.
Traditional political elites appear to be at a loss. Many fear that the rise of populism and nationalism is sweeping across the world. Democracy is under threat. In recent years, many investors have become familiar with central bank stress tests of financial institutions. Now it seems as if circumstances are stress testing the world our parents and grandparents created after WWII.
The consensus narrative stands on two legs. The first is that many have cried wolf for several years, which not only make people less sensitive to more claims but leaves us emotionally and mentally unprepared when the real wolf appears.
Consider that some have been claiming for many years that the world is experiencing a hegemonic stability crisis. The US is no longer stronger enough or no longer has the will to lead. Five years ago, we were told, there was a vacuum in international politics as countries pursued their own interests. If that were truly the case, then the revival of the 1920’s America First, and the seemingly unilateral thrust of the new administration would not be as unsettling.
Many have been predicting the demise of European integration for years. It has been derided as a loose veneer for German hegemony. Within two months of the slim majority of the UK voters rejecting continued EU membership in what was offered as a non-binding referendum, Nobel-prize winning economist Joseph Stiglitz joined the chorus of those predicting the demise of the monetary union, which we are told is a threat to the EU (The Euro: How a Common Currency Threatens the Future of Europe). Three years earlier (2013), Jens Nordvig, a noted currency strategist, warned us of the demise of the euro (The Fall of the Euro: Reinventing the Eurozone and the Future of Global Investing).
Similarly, many analysts and journalists have been infatuated with the idea of currency wars since 2010 when Brazil’s Finance Minister Mantega accused the US over its pursuit of unorthodox monetary policy. Yet, the G7 and the G20 have denied it. Recall that during his campaign in 2012, Japan’s Abe and some of his advisers seemed too close to seeking a competitive devaluation, and the G7 signed a new protocol reaffirming the principle of letting the markets determine exchange values, except in extraordinary circumstances. The comments and tweets by Trump could represent a new assault on these principles, which we have compared to an arms control agreement.
In addition to crying wolf, the other leg on which the current consensus narrative stands is the lack of faith in the representative institutions. Many armchair diplomats see Russian President Putin and Chinese President Xi as the only strong leaders in the world. Often in these accounts, there is an envy given the backdrop of messy democratic politics. There is also a new genre of books that question the merits of elections and representative government. Many of those who are staunch believers of the representative government as a means and an end in itself have little faith in the durability of those institutions.
The resilience of representative government and the checks and balances is what the consensus narrative is missing. Globalization, the cross-border movement of goods, services, and information has been evolving for decades. Is it really ending? Similarly, the constitutional order in the US is larger than any politician including the President of the United States.
Too many believe the narrative that holds populism is sweeping across the world. It is not. Instead, it appears to be a function of the two-party system in the UK and US. The most likely scenario is that the populist-nationalists are turned back in France and Germany. Next month’s Dutch election may be a different story, but even there, a plurality for Wilders’ PVV is not the same thing as securing a parliamentary majority or a referendum on the EU or EMU (that would require a change in the Constitution).
The success of Brexit in the UK and the populism in the US is not the result of parties committed to it, like UKIP in the UK or an insurgent third party in the US. In both countries, the center-right party appropriated the agenda of the populists. This is not the case in the multi-party systems in continental Europe. There the center-right parties like the Republicans in France and the CDU/CSU in Germany want nothing to do with the populist-nationalists, like the National Front and the AfD. Wilders also appears isolated in the Netherlands.
Seventy-five years ago this weekend, the populist US President Franklin Roosevelt signed an executive order that led to the internment of tens of thousands of American citizens of Japanese descent. The Supreme Court upheld the actions, without ruling on the constitutionality of denying American citizens due process. It was not until the late 1980s that reparations were made, an apology offered, and a mea culpa was declared.
US President Reagan, a former governor of California, where the bulk of the Japanese-Americans had resided, signed the Civil Liberties Act in 1988. The US government apologized for the internment and authorized the payment $20K (present value more than twice as much) to all camp survivors. The law acknowledged that the US actions were based on “race prejudice, war hysteria, and a failure of political leadership.”
Trump’s executive order on immigration seems to many to be a not very thinly veiled attempt to circumvent the prohibitions against religious discrimination. It is being challenged in the judiciary system. The case may go to the Supreme Court eventually (some suspect that the Administration does not want to do this until its nominee is confirmed, though as we have repeatedly seen, once a person dons the robes of a Supreme Court judge for life, the voting pattern often surprises the President who made the appointment).
This is not a breakdown of the system. This is the checks and balances working. The 19th-century British historian Lord Acton claimed that “power corrupts and absolute power corrupts absolutely.” The answer is not to eschew power but to divide it and check power with another power. The different branches jealously protect their turf from encroachments from other branches.
UK Prime Minister May did not think that Parliament was required to trigger Article 50 that begins the formal process of amputating the UK from the EU. She reasoned that they approved the referendum and that sufficed. The UK Supreme Court did not agree. The system worked.
Many observers thought the UK referendum was the first mover, and it would make it easier and more desirable for other countries to leave the EU. It may be eventually proven right, but various polls show support for the EU has risen in numerous members since the UK vote. Similarly, Trump’s use of the bully pulpit is not generating the kind of results many had expected.
Since Trump was sworn in the currency that he seemed to beat up the most, the Mexican peso, has been the strongest currency in the world. His tweets are not moving equities in the direction one would expect. His criticism of traditional media, like the NY Times and CNN has perversely seen support and viewership increase. Since Trump and some advisers complained the dollar was too strong, it has generally appreciated. The system works.
Yes, globalization and representative governments are being tested. The consensus narrative suggests that it failed even before the test. And yet, a closer look at developments warns that such a cynical assessment is more about fear than reality. The resilience of globalization and representative governments is under-appreciated. Neither globalization nor democracies are rolling over and playing dead. Just like the columnist in the Financial Times who has been hypercritical of the EU and EMU has changed his tune in the aftermath of Trump’s attacks, so too some union movements that were critical of free-trade are re-thinking.
The credibility of the political and economic elites was undermined by their inability to deliver the goods, a rising living standard for a majority of people. The elites also failed to articulate a compelling vision. Few officials in the UK stood up and offered a positive argument of why the Tories led the UK into the EU (and the ERM). Instead many of the Remain camp used negative scare tactics. The positive case was left unspoken.
Stiglitz defended economists by noting that the profession argued that as with any policy, free trade would create winners and loser. They had anticipated that the winners would compensate the losers. In the US that was missing and part of the political vacuum. The “American First” thrust of the new administration is a wake-up call like none other.
The body politic has been attacked, and the antibodies which were dormant (some confused it with being dead) have begun mobilizing and resisting. The system works, and it is more resilient than many of its friends and enemies suspect.