The New Geopolitical Order

We are currently witnessing a new geopolitical order developing, but in order to see what the new order is going to look like, we must first understand the previous order. So I'll start this post with a basic history lesson.

The Previous Geopolitical Order and How We Got to the Current One:

The previous order was built at the end of World War II. Before the 2nd World War, the world was effectively run by the Europeans (even though the Americans were powerful since the mid 19th century, they really didn't care).

There really was universal trade between all the countries of the world, but there was trade within each of the imperial regimes that was protected by the militaries of those imperial regimes. For example, the British military protected British trade within the British Empire, the French military protected French trade within the French Empire, and similar things were done by the Russians, Dutch, and others. This geopolitical set-up meant that a war between countries in Europe meant a massive World War. This setup culminated in the Second World War.

After World War II, basically every single boat was in the bottom of the ocean except for the Americans, which led us to the Cold War era. At Bretton Woods in 1946, the Americans set up an alliance network that guaranteed security and protection of trade to every member of the network in order to fight the Soviet Union. The US also provided a market for every member in the network without demanding reciprocity (effectively bribing other countries). For lack of a better word, this geopolitical order will be referred to as the "free trade order" for the rest of this post.

The Current Geopolitical Order:

Ever since the end of the Cold War, the American support for the free trade order has been dwindling. The geopolitical benefits deriving from the free trade order have been falling while the economic costs have been rising. As I've detailed before, the economic cost of the free trade order comes about because of the international monetary system and its hallmark as the US Dollar being the reserve currency. Basically, the USD being the reserve currency forces the most capital rich country--the United States--to import capital which creates asset bubbles, demand leakages, asset bubbles, and eventually excess unemployment.

Notice that the Cold War ended about 25 years ago. The only real advantage the US has had from the current geopolitical order/monetary system over the past 25 years was that it allowed the US to secure its energy supplies as the US was a massive importer of key economic inputs, primarily oil. Now, the US is the world's largest producer of crude oil and natural gas due to the breakthrough in hydraulic fracturing (fracking) that is rapidly changing the energy landscape of not only the US, but the world as a whole. Even though the US is still a net importer of crude oil, the US no longer needs energy from countries like Saudi Arabia and others in the Middle East. All of the necessary oil the US economy needs can come from North America and will soon do so. Actually, the Saudis now preposition oil tankers in the Gulf of Mexico because the Americans no longer need their oil and they haven't been called for it in a while.

So we're now in a situation where the world's current geopolitical order serves absolutely no purpose to the people in charge (the Americans). The current order was designed for a different time and era with different threats. The leader of the current order, the US, was gaining geopolitical benefits at a longer term economic cost. As time passes, the geopolitical benefits to the US continue to dwindle while the economic costs continue to worsen. On top of this, the US is experiencing demand leakages during a time of worldwide depression. Naturally, this is leading to an inevitable shift in the way the world operates.

Over the past few years, we've seen the US pull out of Afghanistan and Iraq while being much more hesitant to promote "stability" in other regions (it seems like the US government only cares about destabilizing regions to undermine foreign governments, but that's a different topic for a different day). We've also seen countries like Japan and China follow economic development models designed to take advantage of the American economic system by accumulating large amounts of reserves using an undervalued currency while the US becomes forced to run large current account surpluses. The USD ends up being strong in the FX market while American business loses demand and production to foreigners.

The Coming Shifts in the Geopolitical Order:

Essentially, we're seeing the American support for the global free trade order dwindle. The Americans no longer want to be the world's policeman, which means that the geopolitical order will have to shift. What we are interested ìs how the world's order will shift and what will be the impact of the shift. Since the end of the Cold War, the US has used the international order to guarantee security to guarantee trade to guarantee energy. The US no longer needs the energy any more which means that we no longer need to guarantee trade so there's no reason to guarantee security.

What does this upcoming shift imply? It implies that every country that has relied on American protection for its trade is in trouble. This will affect countries that are reliant on external protection for both economic inputs and economic outputs. The first countries to experience trouble, as I've already discussed, are countries that're heavily reliant on exporting commodities for different reasons that happen to be primarily economic.

The countries who are in the most trouble after large scale commodity exporters go down economically are countries that import large amounts of economic inputs. The first countries that come to mind are countries like China and Japan. Other countries that're in trouble are countries like Saudi Arabia and other major energy exporters who rely on American protection for shipments will be in major trouble.

Also note that the American protection of global trade allowed for certain countries to import food at relatively cheap prices (primarily in the Middle East). Many of these Middle Eastern countries have exploding populations with very high fertility rates while importing most of their calories. In a world without global free trade, we're likely to see famine return (see map below from this link). In other words, we're likely to see large population corrections in many of these countries. Groups like ISIS will become more prevalent throughout the world--particularly in the Muslim world. Much of the Islamic world is in a whole heap of trouble.
Note: In the map from the attached link, countries in the red (horrible) and orange (bad) are net calorie importers while countries in green (good) and blue (better) are net calorie exporters. The countries in purple (okay) are relatively flat.

The Return of Empire and Possible Empires to Look Out For:

We're also likely to see a return to neo-colonialism across the world. If you're a country with guns/technology and rely on importing key economic inputs, the obvious solution is to go to a country that doesn't have the guns/technology to fight you, hold a gun to their head, and effectively take what you need as an economic input. This primarily applies to the Europeans. Even though they are fading away from power and effectively destroying themselves, they still have guns and many of these countries need energy. So it makes sense for a country like Italy to take over the Eastern part of Libya (the region held by the rebels) and use its natural resources for its own gain. Similarly, we could see Algeria returning to France. Note that these regimes may not be the exact same as what they were previously, but the regimes in these countries could develop into proxies of European governments that eventually become imperial

Russia is doing this with the countries in its region and is effectively recreating the Russian Empire (this has been called the Eurasian Union). I touched on this issue in my previous post on Ukraine, but I only touched on it. The countries in Eurasia are landlocked, sparsely inhabited, and consist of harsh terrain, but they do contain lots of natural resources. Integration with Russia just makes sense for most of these countries. The countries in question are Kazakhstan, Armenia, Belarus, Kyrgyzstan, and possibly Tajikistan. 

We could also end up seeing a recreation of the Persian Empire. Notice that most of the oil/natural gas reserves are located around the Persian Gulf (see first map below) and the location of these reserves are all Shia population zones (see second map below). As we've previously discussed, the Arab countries are heavy importers of food and heavy exporters of natural gas/oil who're strongly disliked by the Americans at a time when the Americans are no longer willing to police the world. In other words, Persian interests are starting to align with Americans once again. We could easily end up seeing a return of the old Persian Empire that spans across modern-day Iraq with Baghdad to the northeast and spanning across the Persian Gulf to the Eastern edge of the Arabian peninsula.

What I'm basically saying is that we're going to see history return with a twist. What's the twist? I don't now. We can never know what will happen, but we do know that the current landscape will not hold.

Note: Countries who are relatively insulated from external demand shifts and don't rely on importing lots of natural resources will be relatively okay. If you do need to import a lot of natural resources, guns and technology make the job a lot easier. If you lack food, but have guns/technology/money (or some weird combination) you can find ways to make sure your population gets enough to eat.

Note: These are not predictions. They are possible scenarios and things to look out for. We do not know what will happen, but we can--at least to some degree--determine the possible risks we face.