Deglobalization and the Decline of the Liberal Order

| | Observations

The post-WWII period is special in political history. Instead of sovereign conflicts driven by self-interest, the world engaged in a successful experiment in multi-lateralism using world organizations to facilitate cooperation and resolve conflicts. This dominance of classic liberalism, albeit at times imperfect, was led by the United States that showed exceptionalism by furthering this global view and not normal imperialism.

Whether through trade, finance, state conflict, or natural disaster, the world tried to resolve issues through the enlightenment of cooperation. It was a period democratic ascent and the pullback of totalitarianism. This progress and its success were not linear or always successful. It was imperfect with self-interest and nationalism still existing although constrained by structures within the liberal order. (For a good description of this history, see Robert Kagan the Jungle Grows Back.)

For most everyone, consumers, investors, and companies, this liberal order was a boom for finance and economics.  This tremendous economic success, especially as we moved away from the commanding heights of controlled economies, lead to strong global growth, the successful distribution of goods and services, and lifting of many out of poverty. Trade growth increased, capital has flowed freely around the world to support financial efficiency, and labor has had an opportunity to move to places where it can be best be employed. This was a great time to be an investor with an almost unlimited set of opportunities. Poverty has been pushed back to levels only imagined a few decades ago. Contract disputes are handled by courts and rules and not by might. Democracy has increased around the world.

Again, there are plenty of examples of failure, but the liberal progress has continued for decades and has been institutionalized; yet this environment is fragile. It may not seem that way when the US stock market has continued to gain in the post Financial Crisis period, but the seeds of a reversals are present. Whether trade wars, aggressive financial statecraft, geopolitical aggression, the reemergence of bilaterism, the fall of democratic institutions, and the emergence of extremism, the liberal order is threatened and will wither if there is not outspoken leadership for a coordinated world order.

The implications are severe for most investors. Without the free flow of capital, trade, services, and labor, productivity will be decline, growth will slow, and market frictions will increase. Returns will be forced lower not the mention the more critical issue of political health and safety. The impact will not just be felt for the rich but for all. The world will adapt to change but the impact of deglobalization and the decline of the liberal order is a clear existential threat that will overhang all markets.