Apr 18, 2022

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Strategy Bulletin Vol.303

"The decline of the US" is not only wrong but also sinister
- The global democratic liberal order will be reconstructed

Putin's victory is gone

Since the outbreak of the war in Ukraine, the daily reports of tragedy have been depressing. But that should not make us pessimistic about the future of the world. There is no chance of Putin winning the war in Ukraine. The longer it goes on, the worse it will be for him, as he failed to settle the short-term battle. The cost of the war will grow enormously, international criticism of the brutality of the Russian military will increase, and the deteriorating lives of the Russian people caused by economic sanctions and increasing casualties of the war will force a growing war-weariness. On the Ukrainian side, on the other hand, the support of international public opinion, military and economic assistance from the US and NATO countries, and rising morale will increase resistance. Putin will have no choice but to accept a ceasefire that keeps his face even at best. Eventually Russia will face new reality such as weakened economy and declining its political presence. The economic situation in China, which secretly supports Russia, will also become more difficult due to the peaking of the real estate bubble, the economic slowdown caused by the recurrence of the corona, and growing criticism of China in the West, to which it exports. Within the UN, South Africa and Brazil are reluctant to condemn Russia, but such trends are unlikely to gain strength.


Global recession averted, US stocks may have hit a major bottom

I may be preemptive in reasoning; it is likely that the outcome will be in favor of the US. To begin with, Russia's economy is small, accounting for only 1.7% of global GDP, and the war itself is unlikely to shake the global economy. The only concern is inflation caused by soaring prices due to reduced supplies of oil, gas and coal from Russia and soaring wheat prices, but this does not appear to be as worrying as feared. Because total embargo of oil and gas from Russia has been avoided, and it is assumed that the shift to alternative sources of supply, such as increased shale gas production in the US, will be significant within a year or two.


The biggest cause for concern in the US stock market is not so much war as overkill due to high inflation and excessive monetary tightening, which is likely to be avoided: the CPI rose by 8.5% y/y in March for the first time in 40 years, but since much of the cause is transitory due to supply system constraints It will clearly peak out later this year. Policies to suppress demand through monetary and fiscal tightening in response to supply-driven inflation are a mistake. Overkill will be avoided as this is the consensus of the US Government, the Fed and the markets. US stock prices are likely to have hit a major bottom in the immediate aftermath of the invasion of Ukraine. The past experience of stock prices hitting a major bottom immediately after the outbreak of war, as in the case of the Gulf War, is likely to apply this time as well.


Overwhelming superiority of US national power

This brings to light the overwhelming dominance of the United States. The US is the world's largest oil and gas producer and net exporter. Rising energy prices are not a negative for the country as a whole. It is also the world's largest exporter of grains such as maize, wheat and soya. In fact, while the SP500 stock index has fallen 7.8% since the beginning of the year, the energy sector's share price has risen by 43.7% and the agricultural products sector by a remarkable 43.4%. The competitiveness of advanced technology of the US is overwhelming such as five US FANGM companies dominate the global internet and cyberspace except for China. Technological innovation power is so strong that keeps other countries away. The US also dominate global finance through its reserve currency, the dollar. Russia has increased its yuan and gold holdings to escape that yoke, but about half of its foreign exchange reserves have been frozen by a coordinated sanction of the Central Banks the US, Europe, Japan and the UK. The US military budget of USD 778.2 billion is overwhelming (in 2020), three times that of second-ranked China and ten times that of Russia, and no country would be an enemy if confronted head-on. It has not supported Ukraine from the front to avoid a development into a world war, but this is not because the US is weak. Despite criticism, the US is the strongest democracy in the world and a country that respects human rights, and the US is the last destination that most displaced people want. There are opportunities and dreams there those other countries do not have. A surprisingly considerable number of US political leaders are refugees from Eastern Europe or their children.


The Russia-Chinese aggression is a failure of US diplomacy that has created a "power vacuum", not a decline in US power

This image of the US as a declining superpower has been captured, with Putin invading Ukraine and Xi Jinping attempting to challenge its hegemony, but this is a mistake. The decline in the US geopolitical presence began when the war on terror was in deadlock. Obama was misinterpreted as having abandoned 'diplomacy by force' by advocating nuclear abolition and declaring that he would cease to be the world's policeman. The subsequent Trump administration reverted to self-centeredness by advocating America First, and the Biden administration withdrew from Afghanistan without gaining anything, no doubt creating a major power vacuum in the world. Both Xi Jinping's South China Sea tyranny and Putin's invasion of Ukraine have taken advantage of this. It is a failure of US diplomacy, but not a decline in US power.


The war in Ukraine is a breakthrough in the reconstruction of the world liberal democratic order

As the greater threat from the war in Ukraine became evident to all, it became clear that the conflict between conservatives versus left-wing liberals in the US was a minor one. After the mid-term elections in November this year and other events, US public opinion, which has been skewed towards idealistic liberals, will swing towards realism again. The vectors of the liberal democratic world are also aligned, such as Germany's shift from pacifism and Finland and Sweden's intention to join NATO. It is inevitable that an unprecedented centripetal force will be generated to rebuild a world order that does not allow the status quo to be changed by force.


It is important to emphasize that it is neither correct nor desirable to question the world liberal order or to advocate the theory of the decline of the US, as in the case of China and Russia.