We live in perilous times, don’t we? Wars threaten, chaos abounds, misfortune lurks…
Actually no. We live in more or less normal times, even if the daily news gives the impression that the apocalypse is always around the corner. In fact, there is a remarkable stability that allows economies to continue functioning and standards of living to remain intact.
Citi researchers recently examined more than 100 years of geopolitical developments to assess where we are now and how much risk global investors face. Their conclusion: things are not so bad.
“A common perception is that geopolitical shocks are becoming more frequent and more severe,” a team led by Citi global chief economist Nathan Sheets wrote in a new report. “We find little support for this view. The world has seen increased geopolitical pressures in the 2020s compared to the relatively benign 2010s, but these pressures are barely high compared to many previous decades.
This may seem counterintuitive, given that Russia and Ukraine are fighting the largest war in Europe since World War II, while Israel and Iran are openly bombing each other for the first time. Analysts are warning of a new Cold War pitting the West against a new “axis of evil” including Russia, Iran, China and North Korea. Here at home, the proportion of Americans who think the nation is heading in the wrong direction is reaching a generational high.
The data is not so negative, however. Citi highlights a “geopolitical risk index” designed by Federal Reserve economists Dario Caldara and Matteo Iacoviello to measure current conditions in a historical context. Their methodology includes detailed searches of English-language media dating back to 1900, intended to capture references to wars and other crises that disrupt normal economic activity.
It is not surprising that geopolitical risk increases most during massive wars, with World Wars I and II setting the upper limit of the risk index. Other events resulting in unusually high risk over the past 124 years are listed in the following table.
Not all wars cause geopolitical risks to skyrocket. The Vietnam War, which reached its peak in the late 1960s and early 1970s, was not accompanied by an increase in geopolitical risk, probably because it was confined to a region of the world that did not did not affect the global economy much. Smaller skirmishes in the Middle East bring more risks globally because they can affect global oil supplies.
The average index for the entire period is 100. So how have we been lately? The most disruptive events of the 21st century were the terrorist attacks of September 11, 2001, which pushed the index to 304, and the US invasion of Iraq in 2003, which raised it to 245. Most of the time, from 2007 to 2021., the risk index was lower than the historical average. (The 2008 stock market crash and the 2020 COVID pandemic were not geopolitical in nature, so they are not listed on the index.)
Russia’s invasion of Ukraine in 2022 has obviously shattered the calm. The risk index rose from a modest 85 at the end of 2021 to 167 just after the invasion. Markets felt the pain, with oil prices rising from $90 to $120 over the next few months before falling back below $100.
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As markets adjusted to the Russian attack, the geopolitical risk index fell back into the normal range before rebounding after the Hamas attack on Israel last October. But the index has since fallen from 137 to 104 as of March 1. This does not take into account the recent exchange of fire between Israel and Iran, but many analysts believe that episode is over and that oil prices are largely unaffected.
The result is that geopolitical risk is near ordinary levels compared to the last 12 decades. Yet people don’t feel like things are normal. Consumer confidence surveys are near recession levels despite low unemployment, booming growth and rising household wealth. President Biden’s approval rating is dismal, threatening his re-election bid.
What is going on? Why are Americans so disappointed? Citi suggests that one explanation is “recency bias,” the tendency to compare current circumstances to what is freshest in our memories. People don’t compare life in 2024 to life in 2001 or 1944. They compare it to the last time they thought life was good, which might have been 2018 or 2019.
There are many other reasons why the national mood is gloomy. Social media allows for deep “doomscrolling” that wasn’t really possible before. Fringe news sites thrive on peddling outrage and grievances to anyone willing. Politics has become toxic, with politicians and voters alike lashing out at those who disagree with them. A surge in inflation over the past two years has shrunk some portfolios and made small privileges expensive.
In polls, Americans cite a chaotic immigration system, poor government leadership and inflation as the country’s biggest problems. But pollsters don’t usually ask people what’s going well, and some things are. The United States has become the world’s largest producer of oil and natural gas, making it far less captive to supplies from a volatile Middle East than, for example, during the oil shocks of the 1970s. inflation has hurt over the past two years, but the Federal Reserve brought it down quickly, without the kind of grueling recession it took to contain inflation in the early 1980s. The wars in Europe and the Middle East are disconcerting, but American troops are not involved, and the costly excursions to Afghanistan and Iraq are largely over.
If you want to reverse the trend and believe that everything could be okay, the evidence will support you.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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