Weekly Geopolitical Report – Germany: The Reluctant Superpower (February 27, 2017)

by Bill O’Grady

Two recent articles caught our attention.  First, the New York Times discussed growing worries in Germany about a post-American Europe,[1] given the potential withdrawal of the U.S. from the superpower role.  Second, an op-ed in Der Spiegel went so far as to suggest that Germany should become the world leader of an anti-Trump coalition.[2]

These reports are indicative of the rapidly changing views on how the U.S. manages its superpower role.  The fact that Germans are considering their options in response to American foreign policy is a significant development.

In this report, we will start with the background of American foreign policy post-WWII to the present.  This will set the stage for why Germany feels compelled to adjust its foreign policy.  From there, we will reflect on how Europe and the rest of the world could react to a hegemonic Germany.  As always, we will conclude with potential market ramifications.

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[2] http://www.spiegel.de/international/world/a-1133177.html

Weekly Geopolitical Report – Nuclear Blackmail (February 13, 2017)

by Bill O’Grady

(N.B.  Due to the upcoming President’s Day holiday, the next report will be published on Feb. 27th)

During the 1950s, in the early days of nuclear weapons, there was much discussion about the potential for nuclear blackmail.  The world had recently defeated fascism but the problem of an aggressive and amoral leader like Hitler worried geopolitical strategists.  If Hitler had developed a nuclear weapon, would the war have ended the way it did?  And, if a similar leader emerged and possessed nuclear weapons, would he engage in blackmail by using the threat of a nuclear attack?

As the Cold War evolved, the U.S. and U.S.S.R. (the superpowers during the Cold War) created a workable solution to reduce the chances of a nuclear exchange.  Both parties built formidable nuclear arsenals that had second strike capabilities, meaning that either side could not “win” such a war by attacking first.  By treaty, defense mechanisms against nuclear missiles were limited, reducing the likelihood that either party would conclude it could strike without fear of retribution.  Although the U.S. was not the only free world power to have nuclear weapons (the U.K. and France did, too), and China had developed nuclear weapons within the Communist bloc, the two superpowers generally controlled the decision to deploy a nuclear strike.  In other words, nuclear proliferation was limited and thus controlling the global nuclear arsenal was manageable.

As time passed, nuclear strategists became less concerned with nuclear blackmail.  The world was divided into areas of influence.  The U.S. managed and protected the free world and the Soviets did the same for the Communist bloc.

People usually explain outcomes in terms of narratives.  Stories are powerful tools for helping us understand why outcomes occurred.  Two characteristics often emerge from narratives.  First, the simplest narrative becomes the most powerful.  Second, because the narrative is simple, outcomes can sometimes be seen as inevitable.  A well-developed narrative not only explains why an event occurred but also critically examines the factors that might have led to a different outcome.

The Cold War narrative suggests that nuclear weapons are primarily defensive because of the threat of a second strike and nuclear annihilation.  Thus, unless a nation fears regime change, there is little reason to develop a nuclear weapons program.  However, this thesis assumes that nuclear weapons decisions will always follow the Cold War pattern.  Just because nuclear blackmail did not develop during the Cold War doesn’t mean it won’t happen in the future.

In this report, we will define nuclear blackmail and differentiate it from blackmail in a nuclear context.  We will discuss why this didn’t develop during the Cold War but why it could happen now.  We will also analyze how nuclear blackmail might be used as part of coercive diplomacy as well as part of conventional conflict.  Finally, we will examine the likelihood of either form of blackmail occurring in the future and how it may change international relations.  As always, we will conclude with potential market ramifications.

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Weekly Geopolitical Report – War Gaming: Part II (January 23, 2017)

by Bill O’Grady

Two weeks ago, we began this two-part report by examining America’s geographic situation and how it is conducive to superpower status.  This condition is problematic for foreign powers because it can be almost impossible to significantly damage America’s industrial base in a conventional war with the U.S.  In addition, it would be very difficult to launch a conventional attack against the U.S. (a) with any element of surprise, and (b) without significant logistical challenges.  The premise of this report is a “thought experiment” of sorts that examines the unconventional options foreign nations have to attack the U.S.  Although these may not lead to regime change in America, such attacks may distract U.S. policymakers enough that foreign powers could engage in regional hegemonic actions that would otherwise be opposed by the U.S.

In Part I of this report, we discussed two potential tactics to attack the U.S., a nuclear strike and a terrorist attack.  This week, we will examine cyberwarfare and disinformation.  We will conclude with market effects.

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Weekly Geopolitical Report – War Gaming: Part I (January 9, 2017)

by Bill O’Grady

(Due to Martin Luther King Jr. Day, Part II of this report will be published on January 23.)

One of the key elements of global hegemony is the ability of a nation to project power.  Ideally, this means a potential hegemon needs local security.  In other words, a nation that faces significant proximate threats will struggle to project power globally.  As a general rule, it’s easier to attack via land compared to the sea.

Rome’s power base was the Italian peninsula.   It only needed to defend the northern part of the land mass.  Spain had a similar situation.  The Netherlands was the global hegemon for a while but was always facing a land threat from France.  Britain, being an island, was geographically ideal for superpower status; the last successful invasion of the British Isles was in 1066.  Finally, the U.S. has managed to create an island effect on a larger land mass giving America more access to natural resources compared to Britain, making the U.S. a nearly ideal hegemon.

In Part I of this report, we will examine American hegemony from a foreign nation’s perspective.  In other words, if a nation wanted to attack the U.S. to either replace the U.S. as global superpower or to create conditions that would allow it to act freely to establish regional hegemony, how would this be accomplished?  This analysis will begin by examining America’s geopolitical position.  As part of this week’s report, we will examine the likelihood of a nuclear attack and a terrorist strike against the U.S.  In Part II, we will examine the remaining two methods, cyberwarfare and disinformation, discussing their likelihood along with the costs and benefits of these tactics.  We will also conclude in Part II with potential market effects.

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Weekly Geopolitical Report – The 2017 Geopolitical Outlook (December 12, 2016)

by Bill O’Grady

(This will be the last WGR for 2016.  The next report will be published on January 9, 2017.)

As is our custom, we close out the current year with our outlook for the next one.  This report is less a series of predictions as it is a list of potential geopolitical issues that we believe will dominate the international landscape in the upcoming year.  It is not designed to be exhaustive; instead, it focuses on the “big picture” conditions that we believe will affect policy and markets going forward.  They are listed in order of importance.

Issue #1: The Trump Doctrine

Issue #2: European Elections

Issue #3: The Fall of Islamic State

Issue #4: China’s Financial Situation

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