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Niall Ferguson: The Black Swan Investors Should Fear

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The black swan event investors should fear is war, and the tapering that should concern them most is “geopolitical tapering.”

That was the impassioned message that economic historian and prominent conservative Niall Ferguson delivered on the closing day of Altegris’ annual investment conference in San Diego, a tough hurdle, Ferguson quipped, saying “it’s hard to explain to people sitting in California that life can ever get bad.”

But noting that an act of state-sponsored terror in Sarajevo in 1914 precipitated World War I, the Harvard historian emphasized that investors in 2014 have more to worry about than a monetary taper that is often talked about but hasn’t actually happened.

Indeed, Ferguson said the main talk in Europe these days is when European Central Bank President Mario Draghi will move into full-throttled U.S.-style quantitative easing.

Rather, the taper American should focus on is one that has already happened — America’s geopolitical tapering from its post-Pearl Harbor role upholding international peace and security.

The problem, he said, goes far beyond the reduction in defense expenditures even as entitlement programs are increasing as a share of GDP.

The scaling back of the U.S. military presence in the Middle East and North Africa has indeed been dramatic. Ferguson noted we had 180,000 active duty U.S. military personnel when President Barack Obama was elected in 2008 and virtually none today.

That rapid change was made possible by a broader rise in isolationism that he argues is making the world an increasingly dangerous place.

“Geopolitical tapering is a state of mind; it’s a view of the world as well as actual policy.”

That tapering was manifested in a speech Obama gave last September explaining why he would be taking no action in Syria despite Bashar Assad’s having crossed a red line that Obama himself drew regarding the use of chemical weapons. In the speech, the president twice stated that the U.S. should not be the world’s policeman.

As the author of a history of American empire, Ferguson says he was startled.

“If the U.S. is not the world’s policeman, who is?” he asked.

Similarly, the historian noted with alarm a New Yorker interview with the president last year in which he stated, referring to the strategic thinker who formed U.S. strategy vis-à-vis the Soviet Union during the Cold War, “I don’t really even need George Kennan right now.”

Similarly, in 2012 presidential debates, the president mocked his opponent Mitt Romney’s emphasis on Russia as a primary enemy of the U.S. by saying “The 1980s wants its foreign policy back.”

Given the geopolitical tension between Russia and the West over Ukraine right now, Ferguson commented that the president could indeed use a George Kennan right now.

But it’s not merely a leadership problem that Ferguson highlights but rather a problem rooted in shifting American attitudes about the U.S. role in the world.

Recent polling data show that the U.S. population has embraced isolationism and it’s no longer just the “campus left,” but across the ideological spectrum.

“We are so over 9/11; it’s like it never happened,” Ferguson lamented, noting that nearly half of Americans want their country to play a less active role in the world compared with just 14% who felt that way at the time of the Sept. 11 attacks.

“I think this is a more profound taper than any change we are likely to see in monetary policy this year or next,” he said.

Indeed, American views of the world reflect this downsizing even against the facts. Americans have regarded China as the No. 1 economic power since November 2009, though it is only this year, and only by one (disputed) measure, that China’s GDP has overtaken ours on a purchasing power parity basis.

Though the U.S. in actuality remains economically dominant, Ferguson says is likely that China will in fact overtake the U.S. within the next two decades because of America’s diminutive GDP growth rates.

“We are living through one of the most astonishing reversals of economic fortunes in economic history,” Ferguson said, noting the average American was 20 times richer than the average Chinese in the 1970 but just four times wealthier today.

And though the U.S. has demographic advantages over a rapidly aging China and a renaissance in energy production, the economic historian noted “two major manmade problems that will be persistent headwinds to U.S. growth as we go forward in the coming decades.” One is mounting U.S. debt, a trend which our political system seems incapable of arresting, and the second is education. While many point out that socioeconomically disadvantaged groups do worse on standardized tests, Ferguson noted that “even students in China whose parents are manual workers do better in math than the students of professionals in the U.S. … If you don’t think that will have a profound effect on the future economic performance of the U.S., you are dreaming.”

That educational deficit also has serious consequences for a nation whose citizens, polls show, have a hard time finding Ukraine on the map — a few of those surveyed even pointed to North America.

The reason why, according to Ferguson, is that while the president is sincere in his belief that policing the world is antithetical to peace, it is a wrong belief.

Already, more people have died in the Middle East under President Barack Obama’s 5 ½ years in office than under George W. Bush’s eight years.

Jihadist Islam has spread beyond the Middle East, even Ferguson’s native U.K, where London is an active Islamist hub.

Noting the kidnapping of Nigerian schoolgirls by jihadist terror group Boko Haram, Ferguson commented, bitterly:

“Tweeting a hashtag by the first lady from the White House: Is that our response to this threat?”

Similarly, U.S. passivity in Eastern Europe has emboldend Russia and ignores the fact that the U.S. has “many, many military options short of war.”

Ferguson’s biggest fear is in East Asia, particularly the increasing brinksmanship between China and Japan, which he says is aggravated by U.S. passivity.

To those who might argue that trade in the region is too important to yield to war, Ferguson quotes Japanese prime minister Shinzo Abe, who himself noted that the huge volume of trade between Britain and Germany in 1914 did not prevent those great powers from entering protracted military conflict.

Ultimately, the reason for that epochal conflict, Ferguson argues was geopolitical tapering on the part of the British, which led to an ambiguity in its foreign policy that the U.S. is imitating today.

“Not having a strategy, not needing a George Kennan, is the surest recipe for geopolitical disaster,” Ferguson said.

Monetary policy is a more popular subject of discussion at financial conferences than war and peace, and investors at a similar conference in 1914 would not likely have had much to say about war and peace either; but the historian concluded his talk with this warning:

“If there is one black swan you need to fear, it is the black swan that is going to fly straight out of Obama’s geopolitical taper.”

Check out Niall Ferguson: 4 Reasons America Is Falling Apart on ThinkAdvisor.


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