Text by Pyr Marcondes, Senior Partner at Pipeline Capital Tech.
The thesis is actually simple. Scary though.
The war between Russia and Ukraine would be the touchstone of something that had previously been shaken and threatened, which is the conception that the world is a single integrated economy and that everything fits together like a great internationally global puzzle. This came to include even nations not traditionally integrated into classical Western economic systems, as was the case with Russia itself and, more notably, China, among other nations not always ideologically aligned with capitalism.
Because of the recent conflict, defend the theorists of this movement of disruption, deglobalization, they believe that now the time has come to separate blocks for good and that each one turns around in the best way he can. Screw globalization.
This theory has economic foundations, those simply mentioned above, and also has ideological and political principles. The soldiers of the end of globalization claim that it no longer makes sense to do business and stimulate economies that foment state dictatorships.
It is also a way of not being more convenient with the expansion and, apparently inevitable, growth of the new world’s greatest potential, China. No longer openly doing business with the country could be, hypothetically, a way of trying to minimize the effects of this growing Chinese economic dominance.
One of the supporters of this thesis, Larry Fink, CEO and president of BlackRock, clearly defended this thesis in a letter to its shareholders last week. BlackRock is the world’s largest asset manager, managing $10 trillion.
For him, it is the end of globalization, as the conflict overthrew the current world order and will have lasting global economic consequences.
Russia’s invasion of Ukraine has officially broken cross-border ties between countries that were already strained by the coronavirus pandemic, notes Fink, as companies and governments around the world will now be forced to “further reassess their interdependencies and reanalyze their international fabrication and assembly”.
War will have many long-term economic consequences, Fink warns, as deglobalization further increases inflation, leaving central banks with a stark choice between higher prices or lower economic activity.
“The world is undergoing a transformation: Russia’s brutal attack on Ukraine has toppled the world order that had been in place since the end of the Cold War more than 30 years ago,” Fink wrote. “The magnitude of Russia’s actions will extend into the coming decades and mark a turning point in the world order of geopolitics, macroeconomic trends and capital markets.”
To support his thesis, markets have been dragged lower this year amid continued uncertainty over the conflict, with the S&P 500 down about 7% in 2022, while the Dow is down nearly 6% and the Nasdaq Composite 12%.
Investors face renewed fears of inflation even as the Federal Reserve prepares to more aggressively raise interest rates, thanks to conflict supply disruptions that have driven up oil and gas prices.
Deglobalization undoubtedly has foundations. And with disastrous consequences. However, radical theories of economic ruptures are not always confirmed as their theorists imagine. That’s what the story shows. We’ll see what she’s going to show us now.