I was watching a fascinating documentary on World War I the other day. World War I was a truly pivotal moment in world history. What really struck me about the situation in Europe just before the outbreak of war was how every nation believed it could fulfill its own ambitions without upsetting the prevailing balance of power on the continent.
For example, the tiny Balkan country of Serbia was perennially at odds with its powerful neighbor, the Austro-Hungarian Empire. Serbia thought it could slice off the Slavic parts of its Austro-Hungarian enemy and fuse them together into a pan-Slavic Balkan state. And Serbia thought it could do so with few to no geo-political repercussions, other than perhaps giving the hated Austro-Hungarians a bloody nose.
Serbia’s World War I ambitions clearly fall under the rubric of “be careful what you wish for.” Even though they were one of the few World War I participants who actually achieved their primary war goal (the foundation of Yugoslavia), it came at a terrible price.
Serbia was crushed militarily and occupied by its Austro-Hungarian enemy in 1915. In 1934, the king of Serbia’s successor state, Yugoslavia, was assassinated by a fascist dissident. In 1941 Hitler invaded the weak Balkan country. After World War II, the unfortunate nation and its people were subjected to almost 50 years of a repressive Communist regime.
Finally, in the early 1990s Yugoslavia broke up in an acrimonious and bloody civil war that is best remembered for its systematic ethnic cleansing. Clearly Serbia’s leadership in 1914 never imagined that achieving their most cherished aim – a unified pan-Slavic Balkan state – would not only redraw the entire map of Europe, but also lead to 80 years of unmitigated pain.
Tiny Serbia was not alone in its conceit. The powerful British Empire also suffered from delusions that by joining the Great War it could maintain the international status quo. In 1914, Great Britain understood that it was dependant upon the good will of the other leading European powers, notably France and Russia, to protect its sprawling empire. So Great Britain rather reluctantly entered the war against Germany in an attempt to assuage its continental allies in the Triple Entente alliance.
The results were predictably unpredictable. After great sacrifice in men and money, Great Britain was victorious. Not only did the leading colonial power preserve her existing empire, but she also expanded it substantially. In fact, the British Empire reached its greatest geographical extent in 1921, in the immediate aftermath of World War I.
But the grand imperial power was now a paper tiger. Great Britain’s military strength had been hollowed out by the grueling and bloody trench warfare of World War I. In addition, the financial cost of the conflict weighed heavily on the nation’s currency. The redoubtable British pound was forced to temporarily abandon it sacrosanct gold standard for the first time since the Napoleonic conflict a hundred years before.
Russia, one of the European powers the British had originally attempted to mollify by entering the war, fell to the Bolsheviks and became fanatically opposed to British interests. But, in the end it almost didn’t matter. The British Empire endured another 25 years after the end of World War I before succumbing to the unstoppable nationalist movements of its colonies.
There are frightening parallels between the national experiences of World War I participants and today’s looming global economic reset. Every major financial player in the world right now, including central bankers, multi-national investment banks and governments, falsely believe they can achieve their own economic goals without upsetting the balance of the entire system.
China believes it can continue to pursue its mercantilist policies by exporting massive quantities of finished goods abroad in order to support employment and economic growth domestically. It implicitly believes that no major trading partner will dare to erect tariffs or other trade barriers. Until now, China has been correct in its estimation. But at some point, the pain imposed on other countries by Chinese mercantilism will grow too great to ignore.
Likewise, today’s central bankers are enamored with the idea of unconventional policy tools. Quantitative easing and negative interest rates are almost universally seen as safe, effective ways for central bankers to achieve their economic and employment goals when faced with the zero interest rate bound. And yet, it is obvious that these policy tools have significant consequences that are both unintended and negative.
The ultimate result of these untenable policies will almost certainly be some sort of global economic reset. This became obvious to me as I was looking at a chart of financial sectors while doing investment research. Significant portions of the U.S. and global economy will be very different in the next 20 years, if for no other reason than that they cannot stay the way they are today.
The higher education, finance, information technology and healthcare sectors will all experience profound change during the coming economic reset. As it stands, U.S. universities pile onerous amounts of student loan debt on the young and then we wonder why they cannot get ahead. U.S. Hospitals charge ridiculously high fees for routine procedures and tests, placing healthcare increasingly out of the reach of average people. A few large technology companies strive to monopolize people’s online experience, determining the news and opinions they see and hear.
And all the while corporate financial juggernauts trade paper assets back and forth to each other at ever higher prices, misleading investors into believing they are becoming extraordinarily wealthy. But the global economic reset looms large on the horizon. It is coming and it will be brutal. It is merely a question of when.
This is one of the reasons that I advocate holding alternative, tangible assets like art and antiques. When the inevitable economic reset finally happens, most paper assets, including stocks and bonds, will suffer losses that seem utterly impossible today. Precious metals, art and antiques will be some of the few assets that avoid the worst of the destruction.
