Tag: coronavirus
Weekly Geopolitical Report – Schumann in Volgograd (May 11, 2020)
by Patrick Fearon-Hernandez, CFA
If you ever find yourself in Volgograd, Russia, you will visit Rodina Mat’ Zovyot. It’s unavoidable. The statue, depicting Mother Russia calling her sons to battle against her invaders, is one of the tallest in the world. Standing almost 280 feet high, she is nearly twice as tall as the Statue of Liberty. Her colossal height is accentuated by her position at the summit of Mamayev Kurgan, the high ground overlooking Volgograd, whose great, grassy green slopes were fertilized by the blood of a quarter-million Soviet soldiers who died defending it from the invading Nazis during World War II, when the city was still known as Stalingrad.
You never know when you’re about to have an experience that will stay in your memory, and haunt you, for the rest of your life. Such was the moment when I first entered the glittering round chamber below the statue, where an eternal flame keeps alive the memory of the 20 million or so Russians who died in the war. I entered just at the beginning of the ceremony marking the changing of the guard. Young Russian soldiers in ill-fitting uniforms and black jack boots marched in painfully slow goose steps up the ramp around the perimeter of the chamber to relieve the previous sentries of their duty. It was impressive in the extreme. But, more than anything, I remember the haunting, plaintive choral music playing in the background (see this video). It perfectly expressed the quiet calm and peace that all who suffer in war must yearn for, if only in death. But when I asked my guide what the song was, I was flabbergasted by her reply: “Daydreams, by Schumann.”
What?! A Russian World War II memorial playing the music of a German composer? How could it be?
Weekly Geopolitical Report – Revisiting Scheidel’s Horsemen: Part III (May 4, 2020)
by Bill O’Grady
In Part I of this report, we discussed Scheidel’s thesis on the events that reverse the normal trend of inequality and used this analysis to frame the COVID-19 pandemic. In Part II, we introduced the equality/ efficiency cycle and discussed the first issue that would be affected by a shift to equality. In this final Part III of the report, we will address the other four issues, discuss inflation and conclude with market ramifications.
Weekly Geopolitical Report – Revisiting Scheidel’s Horsemen: Part II (April 27, 2020)
by Bill O’Grady
In Part I, we introduced Walter Scheidel’s four horsemen and examined the impact of COVID-19 using his framework.[1] This week, we introduce the equality/ efficiency cycle and discuss the first issue that would be affected by the reversal of this cycle.
COVID-19 and the Equality/Efficiency Cycle
We postulate that economies pass through cycles of equality and efficiency. We developed this concept based on the seminal work of three scholars. The first strand is the idea of the equality/efficiency tradeoff, which comes from Arthur Okun.[2] He argued that societies face a tradeoff between equality and efficiency. Efficiency is necessary for growth, while equality is required for political and social stability. However, there is no evidence that Okun saw this tradeoff as a cycle; instead, he saw it as two competing forces to be constantly balanced.
The second source of our postulate is from Peter Turchin, who suggested that countries cycle between periods of greater or lesser equality. In the following chart, Turchin shows this cycle in the U.S. from the early 1800s to 2000. Measuring inequality (red line) is a simple calculation that originated with Kevin Phillips. It is the ratio of the largest fortune in the U.S. relative to average household wealth. The well-being line (blue line) is the detrended and log-transformed level of social optimism, which is the average age of marriage, along with the wages of production workers divided by per-capita GDP, life expectancy and average height. The chart shows that well-being is inversely correlated to inequality.
The third source of our thesis comes from Walter Scheidel, who suggests that efficiency cycles are the norm due to the power of capital. Efficiency continues until it is stopped by one of four major disruptions: mass mobilization war, revolution, societal collapse or pandemic.
Therefore, our thesis is the following:
- Societies face a tradeoff between equality and efficiency.
- This tradeoff leads to cycles in which the goals of one or the other dominate.
- The natural course is for efficiency to dominate because capital tends to accumulate economic and political power over time.
- What reverses the dominant trend is a cataclysmic event, i.e., mass mobilization war, revolution, collapse of social order, pandemic.
- What reverses an equality cycle is persistent inflation, which is usually supported by equality policies of trade impediments, immigration control and regulation.
[1] Scheidel, Walter. (2017). The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century. Princeton, NJ: Princeton University Press.
[2] Okun, Arthur. (1975). Equality and Efficiency: The Big Tradeoff. Washington, D.C.: Brookings Institution Press.
Weekly Geopolitical Report – Revisiting Scheidel’s Horsemen: Part I (April 20, 2020)
by Bill O’Grady
Although we do cover current events in the Weekly Geopolitical Report, we also try to anticipate changes that may be a consequence of current situations. The COVID-19 crisis is just such an occasion. We regularly update the current path of the virus in our Daily Comment, but we will consider the longer-term ramifications of COVID-19 in this report. We have recently discussed the pandemic, in general, in our weekly reports, and in the previous two installments we discussed how the virus has frayed relations in the EU.
This week, we frame the impact of the pandemic using Walter Scheidel’s book on inequality, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century.[1] We reviewed this book in a previous WGR published in 2017. In Part I, we will examine Scheidel’s thesis that says inequality tends to be resolved by violent or extreme events. Simply put, history shows little evidence that periods of high inequality are reversed without tragedy. Using this thesis, we will examine how the COVID-19 pandemic best fits into Scheidel’s framework. In Part II, we will discuss the equality/efficiency cycle and introduce one of five problems that could be resolved by the pandemic. In Part III, we will examine the other four problems, discuss the impact of inflation and conclude with market ramifications.
[1] Scheidel, Walter. (2017). The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century. Princeton, NJ: Princeton University Press.
Weekly Geopolitical Report – Could the Coronavirus Pandemic Break Up the EU? – Part II (April 6, 2020)
by Patrick Fearon-Hernandez, CFA
(Note: Due to the Easter holiday, our next report will be published on April 20.)
In Part I of this report we examined the history of the European Union (EU), how it works, and the political, economic, and social fissures that had already rendered it unstable when the COVID-19 pandemic took hold. This week, we look at several recent policy moves that various EU countries have taken in response to the pandemic, and we explain why those policy moves could potentially push the EU over the tipping point toward disintegration if they are carried too far. As always, we’ll wrap up with a discussion of the possible economic consequences of a break-up and the ramifications for investors.
The Temptation to Barricade
As we discussed in Part I, the founders of the EU believed that preventing another major war on European soil could be accomplished, in part, by an “ever-closer union among the peoples of Europe.” The EU is often seen mostly as an economic arrangement (i.e., a customs union coupled with a free-trade area), but its founding principles are broader than that. The EU aspires to the free movement of virtually all people, goods, services, and capital. Unfortunately, the COVID-19 pandemic has tempted EU leaders to erect barriers in these areas.
Weekly Geopolitical Report – Could the Coronavirus Pandemic Break Up the EU? – Part I (March 30, 2020)
by Patrick Fearon-Hernandez, CFA
In times of crisis, the future is a luxury. Or, at least, thinking about the future can seem like a luxury, especially if you’re reeling from the death of a loved one, the loss of a job, the devastation of a retirement portfolio, or just the boredom and isolation of a quarantine. Many people are overwhelmed with those challenges in the midst of the COVID-19 pandemic. And yet the pandemic is changing the future course of the world in ways that we’ll all need to understand and respond to eventually. Those future changes extend to politics and geopolitical relations.
In this report, we explore the recent signs suggesting the COVID-19 pandemic could potentially lead to a break-up of the European Union (EU). In Part I, we examine the history of the EU, how it works, and the political and social fissures that undermine its stability. In Part II next week, we will look at the recent policy moves by various EU countries that could lead to disintegration if carried too far. We’ll wrap up with a discussion of the possible economic consequences of a break-up and the ramifications for investors.