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IMAGINE SOMEONE HAD TOLD YOU in early 2008 that the U.S. stood on the verge of a financial market meltdown of   historic proportion and the longest and deepest recession since the 1930s. Would you have believed it? What if you were told that the euro zone’s very survival would soon become a subject of front-page debate? Or that a wave of unrest would soon sweep the Middle East, toppling autocrats across the region, forcing Egyptian president Hosni Mubarak into prison and plunging Syria into civil war?

Would you have believed that all of those things would happen within five years?

Recent news appears more encouraging. The U.S. economy looks to be slowly regaining its footing, and equity markets have climbed to new heights. Europe, despite continued queasiness, appears headed toward calmer waters. The upheaval in the Arab world has so far generated limited global market impact. Yet the convulsions of the past five years arose from structural faults — financial, economic and political — that have not been fully resolved. And there are new worries. Economic growth among leading emerging markets has slowed considerably as much-needed reforms have been postponed. In particular, China — on track to become the world’s largest economy while still a poor country — has lately behaved in erratic ways on the international stage. Talk of a “peaceful rise” rings increasingly hollow for many of China’s neighbors as its military picks fights with Japan in the East China Sea; with Vietnam, the Philippines and others in the South China Sea; and with India along the Line of Actual Control that has divided the two states since 1962. A wave of cyberattacks on U.S. companies and government agencies traced to the Chinese military creates more friction. But the biggest longer-term worry is that China’s new leadership faces the most ambitious economic reform process in history as its unstable, unbalanced and ultimately unsustainable development model must be rebuilt to shift wealth from politically connected elites and state-run companies toward an increasingly plugged-in and demanding middle class.

Adding to the volatility, we’re living in a G-Zero world, in which no single power or working alliance of powers has both the muscle and the appetite to provide global leadership. That’s important, because the world needs leaders that are willing and able to accept the costs and risks of establishing and maintaining a coherent global order — putting out fires, writing the checks others can’t afford and imposing compromise to prevent conflict.

In a G-Zero world it takes a crisis to force cooperation among, and sometimes within, governments. In the U.S. only an obvious emergency could have persuaded so many lawmakers of    both parties to support big-ticket bailouts and massive stimulus spending in 2008–’09. Only a potentially catastrophic market meltdown could have induced China and other emerging-markets heavyweights, Europe and the U.S. to agree on concrete actions to help pull financial markets back from the brink. It took the threat of systemic calamity to European banks — and fears for the future of the broader European project — to create public support for the sharp spending cuts that have inflicted pain across entire societies and elite support for a redesign of the euro zone. Only revolution could have toppled seemingly well-entrenched autocracies and brought the beginnings of long-overdue political change to the Middle East.

Unfortunately, the sense of crisis has lifted on all these fronts, encouraging some to see in the changed landscape a sustainable “new normal,” a period of painfully slow but predictable economic progress, as forecast by Pacific Investment Management Co. CEO and co-CIO Mohamed El-Erian, or the more sanguine view of many investors willing to bet that a surge in liquidity in the U.S., Europe and Japan makes for a more robust way forward for all these countries — and for everyone else. Some believe U.S. lawmakers can now afford to postpone tough choices, the Europeans will muddle through, China can smoothly rebalance its economy, and fires in the Middle East can be left to simply burn themselves out.

These are dangerous illusions. The deeper questions that created the recent convulsions have not been answered, and the easing of so much useful fear will make them much more difficult to address. That’s why the uncertainty and volatility of the past half decade is far from finished — and is almost sure to trigger new crises. Be sure your seat belt is securely fastened, because nothing has really come to rest. We have entered the New Abnormal, a period in which every market assumption must be questioned and the wise investor is prepared to be surprised.

BEYOND THE G-ZERO PROBLEM, there are two more reasons political and market turbulence has plenty of room to run. First, complacency enables short-term thinking and political and policy gridlock that will play out in different places in different ways. In the U.S. lawmakers stepped back from the fiscal cliff, and warnings that sharp spending cuts triggered by the so-called sequester will have dire consequences remain abstract for most voters, even if those cuts are already denting growth. Volatility elsewhere in the world reminds investors that America and its dollar remain, at least for the moment, the safest port in any storm, and pressure for a plan to finally address U.S. long-term fiscal imbalances has eased. The underlying question has not been resolved, however, and the failure of negotiations between Democrats and Republicans to produce a grand bargain on long-term spending, entitlements and taxes continues.



The European Central Bank has so far convinced jittery investors that it will do whatever it takes to buttress the single currency and the governments that depend on it, and as market pressures subside there is less urgency for Spain, Portugal and Italy to accept the austerity measures that Germany insists are the price for their rescue. This worry is beginning to play out most ominously in Italy, where an election in February produced another round of political confusion and voters validated a populist protest candidate and the euro-rejectionism he represents. New elections, which are unlikely to yield a credible solution to Italy’s troubles, cannot be ruled out in the months to come. And with German voters casting ballots in September, austerity fatigue in the periphery is colliding with bailout fatigue in the core.

The much-hyped BRICS — Brazil, Russia, India, China and South Africa — are losing steam as well. China’s leaders, who publicly pride themselves on their strategic long-term vision, have allowed the internal influences of economic stakeholders to slow progress on the crucial reforms needed to ease China’s dependence on exports and investment for growth and to empower the Chinese people to save less and consume more of the country’s output. In India a sharp economic slowdown over the past two years has not forced the tough political choices and substantive reforms that enabled a historic liberalization in the early 1990s. Instead, with national elections next year, the opposition Bharatiya Janata Party and heads of smaller parties across India have put enormous pressure on the ruling Congress Party–led United Progressive Alliance to avoid most of the crucial reforms that impose near-term pain, bringing policymaking in New Delhi almost to a standstill.

Brazil’s central government has a freer hand than India’s, and its policymaking is much more efficient, but here too political complacency often begets the kind of short-term political calculation that allows solvable problems to grow. There are 24 parties represented in Brazil’s lower house of Parliament, and President Dilma Rousseff’s coalition includes ten of them. Coalition-building in Brazil is often ad hoc and varies from one issue to the next. A combination of easy monetary policy that has triggered higher inflation, looser fiscal policies that have increased debt and delays in the structural reforms needed to boost potential growth have yielded mediocre growth.

In resource-rich Russia, even with oil prices hovering at or above $100 per barrel, potential growth is barely 3.5 percent and actual growth is no better: Corruption; ham-fisted authoritarian politics; rising state control of the economy; unfriendly policies toward domestic and foreign private investors; and lousy demographics are sapping confidence and strength. The newest member of the BRICS, South Africa, suffers from serious social cleavages, poor policymaking, sluggish growth and low levels of physical, infrastructural and human capital.

The other big factor feeding the New Abnormal is strong public demand within all these countries for a political focus on domestic challenges, allowing transnational problems like collective security, climate change and the security of food and water to slide toward the bottom of the agenda. Officials in the U.S., Europe and Japan, as well as those in China, India and other emerging economies, face far too many complex and dangerous tests at home these days to venture abroad in search of new ones.

Washington has helped backstop the euro zone almost entirely through its influence within the International Monetary Fund, and technological progress in energy production is now encouraging policymakers to avoid deeper engagement in the explosive Middle East. The development of new energy reserves at home has already reduced U.S. dependence on OPEC oil by 20 percent in just the past three years. In fact, the International Energy Agency has forecast that the U.S. could become the world’s largest oil producer by 2020 and energy self-sufficient by 2035 as more-efficient automobile engines and a surge in the production of renewables ease total energy demand. Even in Asia, increasingly the focal point of   U.S. foreign policy, Washington spends much more time managing potential emergencies than working to shape outcomes.

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Related Topics: fiscal policy· ian bremmer· nouriel roubini