The Cold War redux

Recently, I have become very concerned about the deteriorating geopolitical situation and its likely effects on the global economy. The Georgia-Russia situation produced a response from the U.S. to defend Poland with a missile shield, which could be labeled provocative at best.

In further escalation of U.S. -Russian tensions, the response from Moscow was to threaten Poland and say that Poland was exposing itself to a military strike. Is a new Cold War already underway? I certainly believe so.

Stephen Cohen of the liberal magazine “The Nation” made a compelling case for this two years ago.

The real U.S. policy has been very different–a relentless, winner-take-all exploitation of Russia’s post-1991 weakness. Accompanied by broken American promises, condescending lectures and demands for unilateral concessions, it has been even more aggressive and uncompromising than was Washington’s approach to Soviet Communist Russia. Consider its defining elements as they have unfolded–with fulsome support in both American political parties, influential newspapers and policy think tanks–since the early 1990s:

A growing military encirclement of Russia, on and near its borders, by U.S. and NATO bases, which are already ensconced or being planned in at least half the fourteen other former Soviet republics, from the Baltics and Ukraine to Georgia, Azerbaijan and the new states of Central Asia. The result is a US-built reverse iron curtain and the remilitarization of American-Russian relations.

Stephen Cohen, The Nation, 21 Jun 2006

Paul Krugman has a very good piece called “The Great Illusion” on his blog which fits into this thesis quite well about the end of globalization. He compares the present geopolitical volatility and backlash to globalization to events 100 years ago. For anyone who thinks about the interconnection between politics and economics, this is a must-read piece.

Along the same lines, in a piece I wrote in March, I said:

The asset bubble of the late 1990s was one of the largest in history. Rather than allow this bubble to fully unwind, the Greenspan Fed created more asset bubbles, especially in housing, leveraged finance, private equity and asset-backed securities. It is possible that the U.S. will escape with a garden-variety downturn, but, in the face of one of the largest asset bubbles of all time, this is unlikely. In the end, a margin squeeze from high energy prices or a dollar shock could be crucial factors tipping us into a downturn. However, ultimately these factors will be merely the catalysts; the true cause of the expected malaise in 2008 lies in the imbalances in an asset-driven economy.

This downside scenario was not predestined. Unfortunately, crucial policy errors by the U.S. Federal Reserve all along the way have had led us to a ‘point of no return.’ The global economy, now supported in the main only by the overextended U.S. consumer, finds itself at stall speed, susceptible to any number of potential exogenous shocks. Ultimately, the economic malaise created by this confluence of events will take years to unwind. A positive outcome to this process is dependent wholly on liquidation of excess credit and consumption.

This process will be extremely painful in the short term, but will lead to a healthy economy long-term. Unfortunately, experience shows that these painful steps will only be taken as a last resort. Moreover, geopolitical events become volatile in a world of economic insecurity, leading to political upheaval and protectionism. [Emphasis added]
The U.S. Economy 2008

Ultimately, the benefits of globalization may well becoming to an end, both politically and economically. Not unlike a century ago, we are entering a more volatile geopolitical period with likely negative economic consequences.

Related articles
Russia warns Poland over missile shield – FT
Bush warns ‘bullying’ Russia – FT

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