Episode 1: Should I ​STILL be worried?

Transcript

Listen: “The equivalent of what we spent in World War II was spent in the course of a year and a half to support the US economy, and that had global impacts. All of that was rolled out with incredible speed and effectiveness, [but] the hangover effects from that are very, very significant,” said David Bailin, Chief Investment Officer and Global Head of Investments at Citi Global Wealth. Years into a global pandemic and one year into an unexpected war in Ukraine, the stability of the world's economy - and political balance - remains in question.

In this episode of “Living Beyond Borders,” we’re asking once again just how worried investors and citizens need to be in the face of an ongoing conflict in Europe, rising interest rates and inflation, and more global shifts.

This episode is moderated by Shari Friedman, Eurasia Group’s Managing Director of Climate and Sustainability.

Shari Friedman

Managing Director of Climate and Sustainability, Eurasia Group

David Bailin

Chief Investment Officer and Global Head of Investments, Citi Global Wealth

Ian Bremmer

President, Eurasia Group and GZERO Media

Transcript: Season 4, Episode 1: Should I STILL be worried?

Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.

David Bailin: We're going to go through the slowest economic period in the last 40 years this year, save really for what the pandemic would've done had it been unimpeded.

Ian Bremmer: After 50 years of human development indicators, like life expectancy and infant mortality and absolute levels of poverty, education levels and the like improving year after year after year, we've now had five years of a decrease in those human development indicators, mostly on the back of the global poor and middle class since the pandemic has started.

Shari Friedman: Welcome to Living Beyond Borders, a podcast from Citi Global Wealth Investments and GZERO Media. On this program, we examine global risks and opportunities from the angles of both politics and economics. I'm Shari Friedman, managing director of climate and sustainability at Eurasia Group.

Today, I have the honor of kicking off the fourth season of Living Beyond Borders. This series launched back in March 2020, just as the world was waking up to this reality that COVID was going to be a really big deal. And it's continued to color many of our conversations since, as we take a look at the state of global economy and the shifting balance of geopolitical power.

At that time back in 2020, we asked the question: should I be worried? Worried about public health, the markets, geopolitical shifts from increased pressures? And of course, the answer was yes. Now, it's been three years since the World Health Organization declared COVID a pandemic, and a lot has happened.

War in Ukraine has further disrupted supply chains and severely affected global energy. We saw major setbacks to progress on global development goals, people plunging into extreme poverty, food insecurity, something Eurasia Group President Ian Bremmer calls arrested global development, and perhaps even more present in our daily lives, inflation and rising cost of living that are creating both economic and political insecurity.

So let's dive in level set as to where we are and what our guests see as worry-worthy today. Joining me once again on this podcast are David Bailin, Chief Investment Officer and Global Head of Investments at Citi Global Wealth.

David Bailin: Hi there.

Shari Friedman: And Ian Bremmer, president of Eurasia Group and GZERO Media.

Ian Bremmer: Good to be back.

Shari Friedman: So Ian, we want to be forward looking, but I want to start by setting the stage for where we are. And the question that's still on many peoples’ collective minds is, is COVID over?

Ian Bremmer: It's not over in the sense that you're still getting hundreds of people dying a day, even in the United States. And of course, the potential for new variants to break through vaccine capabilities is real. The expense that the pharma companies need to make to be on top of continuing to tweak their vaccine is real. There's a huge fight around disinformation of whether or not people should be taking these things, a major problem for the legitimacy of governments around the world and their leaders, and it's become very politicized. But from the perspective of, are we living in an act of pandemic? I think the answer is COVID is over. Reality is 8 billion civilians around the world have sort of gotten back to their lives as more or less normal from where they were some three years ago.

Shari Friedman: So we're seeing an end to the acute health impacts, but kind of a hangover economically and politically. David, from an economic perspective, where do you see the continued impacts of the pandemic?

David Bailin: Well, the government response to the pandemic from a financial and markets perspective was, in the United States, to roll out all of the policies that they learned in '08 or in '09 in dealing with an emergency. So huge support for making sure the function of financial markets took place, an incredible capital injection in terms of the Federal Reserve providing liquidity, followed by actions taken by the government to actually write an enormous amount of checks.

The equivalent of what we spent in World War II was spent in the course of a year and a half to support the U.S. economy, and that had global impacts. And all of that was rolled out with incredible speed and effectiveness. And the hangover effects from that, as you talked about them, are very, very significant.

Number one, they are the fundamental source of inflation around the world right now, and they are causing the world to have to go through an adjustment period where the supply and demand imbalances that were caused by the pandemic, and then multiplied by that use of capital, I think are very significant.

So I think that there are knock on effects, and all of this was occurring at a time when relations, right, between the United States and China, and now with the war in Ukraine, between the West and the East, have become much more engaged, which is a nice way to say it, right? Or more conflictual. And I think that these things are all the hangover, if you will, from the pandemic. The events that have occurred since the pandemic, in my mind, have only made what we went through that much worse.

Shari Friedman: And so Ian, what are you seeing as some of these longer term impacts that other people may be overlooking?

Ian Bremmer: Well, you mentioned in the opening of the podcast that I referred to this bigger trend as arrested global development. Before the pandemic hit, the world experienced 50 years of unprecedented globalization, and that means that people and goods and services and capital are moving faster and faster across global borders.

You are seeing extraordinary growth, not just in the wealth of the 0.1%, but also in the emergence and improvement of a global middle class. And of course, that led emerging markets around the world to get stronger and to feel more aligned with the wealthy economies, and they supported that free trade. Well, the last three years - and it's not just the pandemic, but the pandemic has been the single biggest impact - has actually started to turn that around.

And so you know after 50 years of human development indicators, like life expectancy and infant mortality and absolute levels of poverty, education levels and the like improving year after year after year, we've now had five years of a decrease in those human development indicators, mostly on the back of the global poor and middle class since the pandemic has started.

And so the knock-on effects for that, well, first of all, it means you're getting greater levels of global poverty. You're going to have more refugee trends and movements, more political instability, more social dislocation, more anger, more populism in these countries, but also you get more unwillingness to support globalization trends as a consequence because populations feel that they don't benefit as much from it. So that's the big structural implication that comes from three years of pandemic, on top of the fiscal and policy goals that led to the inflation that David is talking about, and then of course, we'll get to this, the Russian invasion of Ukraine.

Shari Friedman: Right. So David had mentioned this increased tension between east and west, and you're also seeing this increasing gap between emerging markets and industrialized countries.

And so moving over also on something I know you track pretty closely, which is China's zero COVID policy, which has been very damaging both economically and politically. And now China seems to have done a 180. So what do you make of that? And where do you think this policy is heading?

Ian Bremmer: There were a lot of people, a lot of analysts around the world that believed that in the fall, after Xi Jinping was able to secure his third term and end term limits - so making himself functionally leader for life in China - that that's when you would start to see a shift away from a zero COVID policy that was increasingly failing China.

Their vaccines aren't very good. They were having a really hard time locking down given the extraordinary increase in transmissibility of new variants of COVID. What worked very well in 2020, not quite as well in 2021, became a real problem in 2022. Xi Jinping much more consolidated control of his government. This policy was very much identified and attached to him personally. And so he was still arguing, "No, this is a great policy and the West doesn't respect its elderly, doesn't respect its sick. You've got millions of people dying, and it's working in China."

And so he didn't pivot at all away from zero COVID once the party congress happened. He only did when suddenly there were demonstrations, people saying, "Enough already. We're sick of these quarantines and lockdowns. We're not going to take it." Not huge demonstrations, but unprecedented, certainly since Tiananmen Square, in the People's Republic. And that suddenly got through to Xi Jinping.

And on a dime, overnight, he went from zero COVID to that's it, no more testing, no more lockdowns. And it looks like over the course of four, six weeks, some 800 million Chinese got COVID. Their hospitals got overwhelmed, probably about a million Chinese died, though they only admitted 60,000 of them in official statistics. And that wave has gone through, and now China's back and open for business.

And you know David and I will increasingly see much higher levels of Chinese economic growth more quickly as a consequence of that. My concern politically is that a country that used to execute much more strategically and thoughtfully on new policy changes suddenly makes this dramatic and unprecedented shift because Xi Jinping is in charge by himself.

David Bailin: There's another thing that's changed in the last few years that I think bears incredible merit as a discussion point, may be a reaction to the pandemic, and that is the use of economics, right, as a tool - if not of war, but certainly of aggressive policy. And I'll give two examples of that, right?

One is when we think about China and we think about what's happened in terms of technology transfer, we've seen that the US, which has a pretty divided government, has agreement on the fact that China's policy, as regards their military and their ambitions in the future, that the one our response to it has to be associated with our policy associated with technology and the transfer of technology.

And so we have taken a very aggressive stance as a country, right, of separating ourselves from China in terms of that technology and not providing them with intellectual property and things like that, and we've gathered the world around that activity.

And we've also seen the use of economic sanctions against Russia in the war in Ukraine. And that was the first time that there's been a broad, agreed, you know, Western response to try to isolate Russia using economic sanctions. So we see a change of policy in economics as a political reality, a tool now, that is much sharper than it was ever before, certainly in the last 30 years.

Shari Friedman: So you've noted Ukraine, which I think is the other piece this last year, the big news of the last year. And the start of the war in Ukraine has continued probably longer than many have imagined. And a year in, you've noted that you know one of the impacts has been that it's kind of created this lens of economic warfare. And what do you think the impact has been just globally? And how might that be changing now?

David Bailin: Well, the use of these economic policies is having a pretty profound impact on the global economy, and they're crashing against one another. So first of all, as Ian talked about, you had this incredible globalization trend, and now deglobalization, which is itself as inflationary, is causing lots of change of how both countries and corporations are behaving. So you're having offshoring, right, moving out of China for the manufacturing of technology goods. You're having the idea of redundant supply chains take place everywhere, and all of that is costing an enormous amount of capital expenditure, but a real breakdown of globalization.

In terms of Russia, you're seeing a bifurcation of the energy complex. What do I mean by that? So there's one cost of energy if you want to buy Western energy, and another cost of energy if you want to buy Russian oil or Russian gas.

Shari Friedman: Mmhmm.

David Bailin: And the supply chains are now between Russia and China, and countries willing to accept Russian oil, and gas and the West, which is not. Again, two markets, a bifurcation of markets. And these are, as I said, inflationary, but they also indicate that the world is moving away from a global standard and away from the assumption that things will get cheaper and more efficient to a place where there's literally a them and us. And that is profoundly important, not only for markets, not only for economies, but for investors as well.

Shari Friedman: Right. So both of you guys are talking about several different factors that are causing this shift away from globalization. And Ian, I know that as we talk about moving away from globalization and kind of regional alliances, we're starting to see this very rare galvanizing moment for NATO and Western alliances. Do you see that continuing, or do you think that we might start to see Ukraine fatigue?

Ian Bremmer: For this year, I think you're definitely going to continue to see a strong consolidation of the EU together ,of NATO more broadly, the transatlantic relationship, and even of the G7. I would add to that you know Japan, South Korea, Australia. We're seeing a lot of alignment from the advanced industrial democracies, the rich democracies around the world.

On specifically the Ukraine front, the United States is by far the biggest military supporter of Ukraine. As long as that continues much farther from the front lines than countries like Poland and the United Kingdom and the Nordics, the US is providing massive military support, those other countries are going to as well because they understand that that's much more of a war for them. And so we will see the United States with tens of billions of dollars already committed to Ukraine to the end of 2023, we see lend lease that allows for further military to be provided that the Ukrainians can pay back till the end of 2023.

The real question is longer term because this war's not going to be over in just a few months. And there, there's an open question. I mean for example, if the United States has a massive fight over the debt limit this summer that ends up reducing American expenditure on programs that are seen as critical for American citizens, might you see bigger pushback against the United States providing the same tens of billions of dollars of military support for Ukraine in 2024? I think that's an open question.

If Donald Trump were to get the Republican nomination, and he strongly opposes continued support for the Ukrainians and is talking about this leading to nuclear war and he wants to end the war no matter what, I think that would absolutely undermine the willingness that the United States to continue to provide the same level of military support as we get to 2024, 2025.

So I think that there are big questions here about to what extent, medium term, NATO maintains the same level of support for Ukraine. But there's one other point I want to make here, which is that while it is true that Ukraine can lose this war, in the sense that they may not be able, they may not get the level of support they need to take all of their territory back from the Russians, Russia can't win. And what I mean by that is no matter what happens on the ground in Ukraine, Russia will still be decoupled from the west.

They will be treated as a functional rogue state. They won't get their gas pipelines going and operational again to Europe, and it'll take them a decade to rebuild them, even if then. NATO's going to be expanded, massive increases in forces forward deployed on Russia's border, much more defense expenditure from the Europeans, the United States, even the Japanese - also with the border on Russia. And so from that perspective, Putin cannot achieve getting his country back to remotely close to the place they were before they invaded Ukraine almost a year ago.

Shari Friedman: I want to zoom out a bit. What we've heard is that COVID, the China US relations, the situation in Ukraine are all creating these ships, these global shifts in supply chains and alliances and in growth patterns. And so David, we're going to touch on the economy more specifically in ongoing episodes, but at this point, what do you see as the outlook for 2023? And will it get worse before it gets better?

David Bailin: So we're going to go through the slowest economic period in the last 40 years this year, save really for what the pandemic would've done had it been unimpeded. So you're going to see low to small digit negative growth in Europe and in the UK, you're going to see less than 1% GDP growth in the United States, and you're going to see, to Ian's point, accelerating growth in China, which will be the only bright spot because of the reopening that took place.

And this is basically a resetting of the post pandemic period. Then what we see in 2024 is a very significant opportunity for global growth to become reinstated. What's going on right now that we have not talked about is the Federal Reserve in the United States basically completely reversing its policy that it began the pandemic with and rapidly increasing interest rates using four three quarter to 1% increases in a very short period of time, the fastest, largest increases in Fed history to basically tamp down the inflation that we've discussed that has been caused by global supply chains and the pandemic response of the Fed and the government itself.

Now, that sounds very complicated, but really what we're talking about is that the Fed is going to slow the U.S. economy at pretty great expense in order to drive inflation down. And in doing so, they're going to either create a very shallow recession or a major slowdown in the economy that will have world impacts this year, and they're willing to take the pain to do that. So amidst all of this recalibration of the world's economies, we have this backdrop of the Fed really giving us harsh, harsh, harsh medicine of a profound degree.

I think that the implications of that are also not well understood, because of course, the world has increased the amount of indebtedness that it has considerably, over the more recent period, last 10 years, and then at an accelerated pace over the last three years. And to the degree that the world has more debt in it and certain corporations have that debt, that is all money that has to go to paying debt service and not toward reinvestment. So this, in my mind, is a sort of global macro condition that has pretty profound impacts for markets and for investors as well.

Shari Friedman: And so on top of this slowdown that you're talking about, we've heard these stories about mass layoffs, particularly in the tech sector. How stable do you think the job market is right now?

David Bailin: Well, the job market is actually the problem for the Fed, because the job data suggests that the economy is holding up reasonably well. But as you pointed out, right, in areas like technology, in real estate, and specifically in manufacturing services and all of those things related to those industries, we are going to see unemployment in the U.S., in spite of what people think. We expect that instead of having 8 million job losses like we saw in the '08, '09 period, we'll see about 2 million job losses at peak in the United States as a result of the Fed policies. So it is going to be significant, but it's not going to be anywhere near what we've seen in the worst situations in the past.

Shari Friedman: Ian, speaking geographically, we've touched on China and Ukraine, and you brought in emerging markets in general. What other specific geographies are you taking a look at and should we be keeping an eye on this year?

Ian Bremmer: I guess Iran geopolitically is the one that I have to mention. They are effectively at nuclear breakout capability. They are enriching their uranium now at 60%. There is no economic reason to do so. It's only for a military program. In other words, for nuclearization. It is in an underground facility under a mountain, place called Fordo that the Israelis couldn't blow up if they wanted to, according to the defense officials I've spoken to.

That, combined with Iran's repression of their domestic instability, as well as their enormous support for Russia militarily and helping Russia fight this war with ballistic missiles and with drone production increasingly moving to Russia - Iranian plants - all of that implies that Iran is becoming a more dangerous rogue state for everyone in the Middle East, and for NATO.

We saw sudden strikes against a major drone production facility in Iran. The likelihood of direct military confrontation in Iran is higher than at any point since the JCPOA, the Iranian nuclear deal was originally signed in the Obama administration. Also, the likelihood that the Iranians eventually go nuclear, decide that they want a nuclear weapons program like North Korea, of course, eventually did. That would be the one geography that geopolitically, I think we have to focus on.

I think more broadly, there are just a bunch of emerging markets that are particularly vulnerable to the economic shocks that David is talking about because they've got dollar denominated debt in an inflationary environment, and they have populations that are very unhappy that they're not able to continue to provide the kind of social contract services that they've been promised.

Shari Friedman: David, this takes us to a question to you about trends in recessions. And are there patterns here that are similar to previous recessions that might be helpful to keep in mind? It seems like some of our current situation is the long tail impacts of COVID, and some of it is fairly unique. Hopefully we won't be going through this all over again, but can we pull any lessons from the past here?

David Bailin: Absolutely. I think that you've hit upon a very important point, which is that recessions, you have your typical attributes, and then in this case, some atypical attributes. But typically, right, you have a recession when the economy is overheated, and we don't have that circumstance right now. Now, you're having a recession caused by external factors, which is effectively the Fed moving as quickly as it has. But the very nature of the recession, regardless of what it's caused by, is actually historically incredibly consistent with prior events.

And what I mean by that specifically is you are going to have markets leading the economy. Markets are going to tell you what's happening. In 2022, markets got hammered, and that told us that the economy in 2023 would be in difficulty. At some point, markets are going to lead us out when they begin to see 2024 results, right? But as we go through 2023, we're actually going to have to experience the downturn.

What the Fed managed to do is to market the recession brilliantly. We're going to have recession. This could happen. It's on the horizon, but you still have to have it in order to get over it. And the recession really has not begun, except in certain industries. It is going to begin in the months ahead of us. We're already seeing contractions in industrial production, especially in imports to the United States, in the actual real consumer spending, which is going down. And all of that tells us that there's something in front of us.

But as I mentioned earlier, it will be shallow. And what's interesting is that the periods after recessions tend to be, over the next two years, fairly robust returns for investors and relatively good momentum builders for the global economy. So as we head into the US elections in 2024, which of course, Ian can speak about infinitely better than I, or when we think about what's going to happen in terms of the post-pandemic economy, I think we're going to be dealing with a more rich and perhaps beneficial backdrop than we might anticipate right now.

Shari Friedman: Well, that's a better piece of news than I think we've been touching on through most of this conversation. And before we wrap up, I think a question for both of you, are there any big risks that you're looking at that we haven't mentioned? Are there gaps in what people need to be looking at?

Ian Bremmer: For me, the big one, it's both a risk and an opportunity is artificial intelligence, 2023, after decades of AI not panning out and not leading to dramatic transformations in the global economy and in the way humanity functions, this is the year of breakout for generative AI. And what that means is that in 2023, we're going to have the Turing test broken. People will no longer be able to differentiate between a bot online chatting with them and a real human being.

This means that the average human being online no longer has access just to information, but has access to actionable intelligence, whether it's for healthcare or education or for greater efficiencies and expenditure of resources, agriculture, dealing with climate change, you name it. The economic transformational power that the application of artificial intelligence will have to some of the most challenging economic difficulties that the world faces is unprecedented.

At the same time, the dangers posed to humanity with these technologies being used in the hands of people that want to promote disinformation, that want to force you to believe things that are not actually true is also unprecedented. And we don't yet have the tools to respond to that effectively. So a tremendous opportunity. I am very, very bullish on what AI is going to mean in transforming whole sectors across the economy, but I'm also deeply concerned about what it means for democracy and the functioning of society.

Shari Friedman: So this sort of brings us right back to what David was pointing out at the beginning, which is that disinformation has been destabilizing. Of what you're saying is that this is going to accelerate given AI. David, any risks that you're most concerned about? And bottom line, how worried should people be at this point?

David Bailin: Well, there's always, always, always big things to worry about right now. And in my mind, the absence of venues of cooperation, you take a look at what Davos looked like, you take a look at the poor communication between China and the US, the back channel only communication between the West and Russia, issues that have to be addressed that are global issues like climate change, which has certainly not gone away as a major, major, major issue, and you just don't see the venues and the opportunities that we saw for real cooperation.

And part of that is a risk associated with war and peace, which is the probability of conflict, but also of the ability to make progress on issues that are in everyone's greater interest. And that degradation of the global community continues. I think it's accelerated. And certainly, I think that that is a major backdrop.

Just to give you a sense of the impact of that. At one moment, the U.S. stock market was 65% of the world's total market capitalization this past year, and that is indicative of the fact that the US was seen as a safe harbor for money, if you will, for the economy. But it also indicates the degree to which the rest of the world is sort of starving for capital of that kind.

And unless capital goes the other way, unless you actually have – that everyone's opportunity set is rising, and that includes China, that, to me, is a risk that I think creates the backdrop for lots of bad things, and it's something that I can only hope and pray changes, for a good reason, over the next decade.

Shari Friedman: Ian, the bottom line question again to you also, do you think that we should be worried at this point? Is there a lot to worry about?

Ian Bremmer: The Russia issue is a deep, deep and global concern. Making a rogue state out of a country with 6,000 nuclear weapons, a leader who feels humiliated. And it's his own fault, but nonetheless, it reflects the greatest geopolitical danger since the Cuban Missile crisis in 1962. Nothing else is close. We were putting together our top risks for this year.

It wasn't like we were considering, well, Russia might be number one, it might be number two, number three. Now, Russia was number one by an enormous margin. It is by far the most dangerous and immediate geopolitical risk that I have experienced in the 25 years since I started the firm. So on that issue specifically, we should all be very concerned. But if you were to take that out, and that's a very big caveat, actually, there's a lot of places where things look better than people, I think are generally assessing. The US-China relationship is more generally stable than the headlines would have you believe. Certainly around a war with Taiwan, or more broadly, a U.S. China Cold War.

I think the US economy, as David has been suggesting, is more robust than is generally presumed. The European Union is more strongly governed politically on healthcare, on defense, on tech and privacy, on fiscal policy, on energy than at any point since the EU was actually created. Brazil's democracy is more robust than people generally presume, and there's a whole bunch of things like that.

Shari Friedman: Mhm. Well, it's good to know that there's some of those upsides, even given this overall blanket that there is a lot to worry about.

David Bailin, chief investment officer and global head of investments at Citi Global Wealth, and Ian Bremmer, president of Eurasia Group and GZERO Media. Thanks to you both.

Ian Bremmer: Great fun.

David Bailin: A great pleasure. Thank you for having us.

Shari Friedman: And that's it for this episode of Living Beyond Borders. Listen to all the seasons episodes by heading to gzeromedia.com and click on the Living Beyond Borders tab. Or you can find the episode in the GZERO World Podcast feed or wherever you get your podcasts. For GZERO, I'm Shari Friedman. Thanks for listening.