We live in dangerous times, right? There is a threat of war, chaos prevails, and destruction lurks…
Actually, no. We are more or less living in normal times, even though it seems like the apocalypse is always nearing when we watch the daily news. In fact, there is remarkable stability in that the economy is doing well and living standards remain intact.
Citi researchers recently examined more than 100 years of geopolitical developments to determine where we are today and how much risk global investors face. evaluated. Their conclusion was that “things aren't that terrible.”
“The consensus is that geopolitical shocks are becoming more frequent and severe,” a team led by Citi's global chief economist Nathan Sheets said in a new report. “There is little support for this view. The world is experiencing increased geopolitical pressures in the 2020s compared to the relatively calm 2010s, but such pressures have It has hardly increased compared to .
This may seem counterintuitive, given that Russia and Ukraine are waging the biggest war in Europe since World War II, while Israel and Iran are openly bombing each other for the first time in history. unknown. 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 percentage of Americans who think the country is heading in the wrong direction is the highest in generations.
However, the data is not so negative. Citi highlights the Geopolitical Risk Index, developed by Federal Reserve economists Dario Caldara and Matteo Iacoviello to measure current conditions in historical context. Their methodology includes a detailed search of English-language media dating back to 1900, aiming to capture references to wars and other crises that disrupt normal economic activity.
Unsurprisingly, geopolitical risk spikes most rapidly during major wars, with World Wars I and II setting the upper bound for the risk index. Other events that caused unusually high risks over the past 124 years are shown in the chart below.
Not all wars spike geopolitical risks. The Vietnam War, which reached its peak in intensity in the late 1960s and early 1970s, has not been correlated with an upsurge in geopolitical risks, perhaps because the war remained in one corner of the world and had no significant impact on the global economy. This is probably because it had no effect. Skirmishes in the Middle East pose greater global risks as they could affect global oil supplies.
The average index value for the whole period is 100. So how are you doing these days? The most devastating events of the 21st century were the 9/11 terrorist attacks in 2001, which pushed the index to 304, and the US invasion of Iraq in 2003, which pushed the index to 245. For most of the period from 2007 to 2021, the risk index was below its historical average. (The 2008 stock market crash and the 2020 coronavirus pandemic were not geopolitical in nature, so they are not included in the index.)
Russia's invasion of Ukraine in 2022 clearly shattered the peace. The risk index jumped from a calm 85 at the end of 2021 to 167 immediately after the invasion. The market felt the pain, with oil prices soaring from $90 to $120 in the coming months before settling below $100.
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The geopolitical risk index returned to the normal zone as markets adjusted to the Russian attack, but rose again after Hamas attacked Israel last October. However, the index has fallen from 137 to 104 as of March 1st. This does not take into account the recent shootout between Israel and Iran, which many analysts believe is over and oil prices are largely unaffected.
As a result, geopolitical risks are near normal levels compared to the past 120 years. But people don't think things are normal. Despite low unemployment, rapid economic growth, and rising household wealth, consumer confidence surveys are nearing recession levels. President Biden's approval ratings are declining, and his re-election is in jeopardy.
what happened? Why are Americans so depressed? Citi suggests that one explanation is “recency bias,” or the tendency to compare the current situation to the most recent one in one's memory. People don't compare his life in 2024 to his life in 2001 or his life in 1944. Compare that to the last time you felt good about your life was 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. Radical news sites thrive on spreading anger and frustration to those who care about it. Politics has become toxic, with politicians and voters alike attacking those who disagree with them. Inflation over the past two years has shrunk some wallets and made small privileges precious.
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 is right, and some things are right. The United States has become the world's largest producer of oil and natural gas, making it less dependent on unstable supplies from the Middle East than it was during the oil shocks of the 1970s, for example. Inflation has been low in recent years, but the Federal Reserve has brought it down rapidly without causing the kind of devastating recession it took to rein in inflation in the early 1980s. The wars in Europe and the Middle East are alarming, but American troops are not involved, and the nation's costly campaigns in Afghanistan and Iraq are nearly over.
If you want to buck the trend and believe that everything might be okay, the evidence will back you up.
Rick Newman is Yahoo Finance. Follow him on Twitter @rickjnewman.
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