Preparing for more black swans
The author is executive editor of the JoongAng Ilbo.
A series of black-swan events have darkened global skies. Many warn of the worst recession since the Great Depression.
Rate hikes by the U.S. Federal Reserve struggling to tame the runaway inflation and the strong dollar have sent a tsunami across the world. The U.S. base rate is expected to reach 4.5 percent by year-end, which would be the highest since 2007, backing the mighty dollar. The rate lifting by Fed Chair Jerome Powell so far has been less ruthless than the dizzying pace of Paul Volcker in the 1980s, who pushed the policy rate up to 21.5 percent. But the synchronized rate increases by central banks elsewhere are an unprecedented phenomenon.
A majority of experts do not think the Fed will stall its tightening campaign in light of the damaging impact on other economies. In his memoir “Keeping At it: The Quest for Sound Money and Good Government,” Volcker recalled he had battled with a persistent inflationary spiral until he was sure the vicious cycle ended after learning lessons from former Fed Chair Arthur Burns, who had neglected the spiral buildup under President Richard Nixon aiming for a second term in the 1970s.
In late 1997, a liquidity crisis swept Thailand, South Korea and Indonesia. This time, foreign media have come up with a grisly prediction on the impact of the Fed rate hikes on Asian markets. No one knows how many would lose jobs after the crash of their housing markets and companies if the Fed rates soars to 5 percent or above. As the New York Times suggests, each country must survive the crisis on its own.
Russian President Vladimir Putin’s threat to break the nuclear taboo since the Hiroshima bombing is not less perilous. U.S. President Joe Biden straightforwardly warned of “Armageddon” — not just once or twice but three times at a fundraising event. “We have not faced the prospect of Armageddon since Kennedy and the Cuban crisis” of 60 years ago, said Biden as he believed that Putin would not be bluffing about the use of nuclear weapons if he senses a defeat in Ukraine.
“We’ve got a guy I know fairly well,” Biden said of Putin as “he’s not joking when he talks about potential use of tactical nuclear weapons or biological or chemical weapons” due to the “significantly underperforming” military when his political survival is at stake.
Biden could be exaggerating at a fundraising event ahead of the mid-term elections. But the Washington Post pointed out that he is a veteran on Russian affairs and dealt directly with high-ranking Soviet officials when he led a U.S. delegation in the 1970s for talks on the Strategic Arms Limitations Treaty. Historian Avner Cohen agreed that “Biden is right to suggest that this is a most fateful and dangerous moment in the nuclear age.” The dilemma is that any responses to the attack — such as a counterattack with tactical nukes or a strike on the location of the missile launch with conventional weapons — cannot avert the possibility of a full-scale war and nuclear domino effect.
Chinese President Xi Jinping entering a third term amidst a struggle with the U.S. poses another burden for South Korea. The U.S., which joined with enemy state Soviet Union to defeat Nazi Germany, had to contain communist expansion. America pulled in China to the World Trade Organization order. A new Cold War has panned out after China flexed its muscle. After Xi envisioned complete self-sufficiency on high-tech, the U.S. is out to stamp out the plan by building an anti-China bloc on like chips, IT, batteries, and intellectual property and bringing its democratic allies to join the lockout.
Xi’s ambition of the first perpetual rule after China’s founding leader Mao Zedong casts dark clouds over the geopolitical landscape. Martin Wolf, Financial Times chief economic commentator, wrote that Xi’s unchallenged power will lead to a suspension of economic reform due to inner rigidity. Failed Marxism and one-man dictatorship cannot control 1.4 billion people, Wolf observed, predicting a deeper international conflict with China.
Liberal democracy also has been shaking. Experts have been saying the U.S. is the most divisive it’s been since the Civil War. Tweeting with the mention of civil war jumped 30 times since the private residence of former president Donald Trump was raided by the FBI.
With the heart of democracy being wobbly, free democracies that numbered 42 a decade ago have been reduced to 34. Following anti-democratic leader of Hungary, Viktor Orban, Italy is under the first female prime minister of the most far-right government since the Fascist era under Benito Mussolini, who ruled from 1922 to 1943. Far-right nationalism and soft autocracy have come into fashion by leveraging on social media to incite the public, sabotaging the freedom of the press and civil rights, and commanding the judiciary to divide the nation to maximize interests of the governing power. Authoritarian populists capitalizing on public distrust from wealth polarization can be the biggest threat to democracy.
None of the dangers can easily be solved. What we can do is to keep our eyes wide open on the looming crisis. People must not be sacrificed and pained by the politicians who are busy fighting among themselves. Politicians must come to their senses and turn their eyes beyond the border.