Saxobank CIO On The End Of US Dominance

Authored by Steen Jakobsen, CIO Saxobank, via,

  • Tensions and volatility inevitable as world redefines itself
  • China and Russia forming powerful anti-US alliance
  • Potential for geopolitics to become core to risk assessment/return

World Order is the title of the latest book by Henry Kissinger, the former US Secretary of State and National Security Advisor, and it's riveting stuff. Kissinger draws on his deep experience of decades of shaping foreign policy and observing the complex interactions between nations and ideologies to develop a timely analysis of the world and where it's heading.

Some of Kissinger's central themes are drawn out in an interview with Charlie Rose in Bloomberg Businessweek.

A key concept is that the world goes through frequent cycles of redefinition and these periods mean increased tensions and higher volatility. China and Russia are now forming a strong anti-US and anti-dollar alliance. This alliance is expanding in magnitude and impact as China increases its presence not only in Africa but also in Club Med via infrastructure investments.

The new world order means less US dominance, a gradual weakening of reserve currency advantages and trade areas away from from Europe and the US. Add to this the much-needed fight against radical Islamism and we have a potential for geopolitical risk finally becoming part of risk assessment and return.

Kissinger says that the current era is one of the most chaotic periods of which he is aware. Every part of the world is redefining itself, some internally—like China, and some externally.

"The European system hasn’t dominated the world; it’s been abandoned in Europe. And the US is moving into a new period in which the dominance enjoyed in the immediate postwar period economically is no longer there. On the other hand, we are still the central element in creating a new order. Without our participation, it’s difficult to see how a new system can emerge in most parts of the world."

That's the essence of Kissinger's argument as presented in Businessweek but I would encourage you to read both the interview and, of course, the book itself.

Finally, let me add a chart from a recent presentation of mine:

End of US Supremacy?


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Which looks a lot like the one we presented here (via Deutsche Bank) where we concluded:

The geopolitical consequences of the diminishment of US global dominance

Each of these events has shown America’s unwillingness to take strong foreign policy action and certainly underlined its unwillingness to use force. America’s allies and enemies have looked on and taken note. America’s geopolitical multiplier has declined even as its relative economic strength has waned and the US has slipped backwards towards the rest of the pack of major world powers in terms of relative geopolitical power.

Throughout this piece we have looked to see what we can learn from history in trying to understand changes in the level of structural geopolitical tension in the world. We have in general argued that the broad sweep of world history suggests that the major driver of significant structural change in global levels of geopolitical tension has been the relative rise and fall of the world’s leading power. We have also suggested a number of important caveats to this view – chiefly that a dominant superpower only provides for structurally lower geopolitical tensions when it is itself internally stable. We have also sought to distinguish between a nation being an “economic” superpower (which we can broadly measure directly) and being a genuine “geopolitical” superpower (which we can’t). On this subject we have hypothesised that the level of a nations geopolitical power can roughly be estimated multiplying its relative economic power by a “geopolitical multiplier” which reflects that nations ability to amass and project force, its willingness to intervene in the affairs of the world and the extent of its “soft power”.

Given this analysis it strikes us that today we are in the midst of an extremely rare historical event – the relative decline of a world superpower. US global geopolitical dominance is on the wane – driven on the one hand by the historic rise of China from its disproportionate lows and on the other to a host of internal US issues, from a crisis of American confidence in the core of the US economic model to general war weariness. This is not to say that America’s position in the global system is on the brink of collapse. Far from it. The US will remain the greater of just two great powers for the foreseeable future as its “geopolitical multiplier”, boosted by its deeply embedded soft power and continuing commitment to the “free world” order, allows it to outperform its relative economic power. As America’s current Defence Secretary, Chuck Hagel, said earlier this year, “We (the USA) do not engage in the world because we are a great nation. Rather, we are a great nation because we engage in the world.” Nevertheless the US is losing its place as the sole dominant geopolitical superpower and history suggests that during such shifts geopolitical tensions structurally increase. If this analysis is correct then the rise in the past five years, and most notably in the past year, of global geopolitical tensions may well prove not temporary but structural to the current world system and the world may continue to experience more frequent, longer lasting and more far reaching geopolitical stresses than it has in at least two decades. If this is indeed the case then markets might have to price in a higher degree of geopolitical risk in the years ahead.