Up to 50 per cent risk of major power conflict

Christopher Joye

Coolabah Capital

In the AFR today I write that the raging conflict between central banks’ unprecedented interventions in financial markets and the global economy’s shocking underlying fundamentals makes for a confusing battlespace. Click on that link to read or AFR subs can click here. Excerpt only enclosed:

On the one hand we have the monetary and fiscal policy mavens appropriately committing to do “whatever it takes” to furnish the much-needed liquidity and stimulus bridge until that future date when (we hope) cheap and effective vaccines are widely available to finally cauterise this crisis.

On the other hand we have the harsh contemporary reality of mass unemployment, business failures, burgeoning public and private debt, and the most severe global recession since the great depression.

If that was not bad enough, one can overlay the most worrying geo-political fracturing since the darkest days of the first Cold War. The dominant western liberal-democratic trading system that has powered global prosperity since the second world war is now being challenged by an assertive alternative that has finally revealed its true intent: "socialism with Chinese characteristics" that seeks to remove all current and prospective threats to the one-party political state’s power and control.

It is this latter imperative that explains the need for the party to relentlessly reach outwards, constantly surveilling for any individual, entity or nation-state that could undermine its primacy. It requires nothing less than subordinating the international order to a subservient or passive posture that dares not question or counter whatever the party wants to do.

As this column has argued for years, the inevitable clash between these two business models—democratic capitalism colliding with closed, authoritarianism, exemplified by the competing interests of the two largest economies on the planet—dramatically increases the probability of major power conflict. When I asked professor Huge White about this eight years ago, he handicapped war between China and the US at a 10 per cent probability over the so-called forward planning horizon.

The tiny minority of foreign policy and security experts who saw this coming at that time now put the likelihood closer to 20 to 30 per cent. My own best guess is that the chance of a low or high intensity kinetic conflict of some kind between China and the US is around 25 to 50 per cent. We ain't going to be exporting much up north if that happens.

This is why it has been so impressive to see the Prime Minister Scott Morrison and his foreign minister front-up and honestly communicate these risks to an otherwise naïve public. Most folks extrapolate linearly from their immediate past. If you lived between the late 1800s and mid 1900s, global war was a constant. As an artefact of the stabilising influence of capitalism vouchsafed by a single global hegemon, it has been absent since that juncture.

We need therefore to be much more hard-headed in sketching out the disturbing distribution of future states of nature. Mine looks "bi-modal" spanning one peak denoting a slightly lower probability of major power conflict juxtaposed against another higher peak which is more benign where the Middle Kingdom experiences gradual multi-decade decline as she slowly loses the long-term economic and information war.

This latter point is a crucial insight. An epiphany in Washington in the last 24 months has been that the US and the West have been unwittingly engaged in an information and economic war waged by "the party" as Richard McGregor famously coined it. The problem is they did not know it.

Now, however, there is a universal consensus that it is time to fight back in non-kinetic terms, which is why we have seen the trade war, tariffs, and an aggressive economic decoupling that will continue for years to come. This decoupling is rapidly extending to other like-minded Western states and will inevitably spawn the emergence of two distinct global trading blocs: a poorer Sino-led system involving Belt & Road nations (developing countries in Africa, South East Asia, Eastern Europe, and, bizarrely, Victoria) jostling against the open, democratic order. This really does give me tremendous pause—I have had many sleepless nights worrying about dastardly downside risks that could quickly materialise.

For some time now this column has argued that Australia should capitalise on the global chaos and aggressively seek to attract top talent and capital fleeing authoritarian Asian states and the COVID-19 dramas rippling through the North Atlantic. Accordingly, I can only applaud the decision of the prime minister and Treasurer Josh Frydenberg to ramp-up their efforts to secure both the best brains in the business and those with the fattest wallets through new residency options.

Anecdotally there is evidence of a significant uptick in interest out of North Asia, America, the UK and Europe in both expats seeking to return home and new migrants searching for a better way of life. This influx of world-class human capital and cash could be a key ingredient to helping shore-up Australia’s recovery. As the prime minister says, we are, after all, the world’s most successful immigrant nation.

To read the full column click here.

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Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 26 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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