The Quick Take Geopolitics in Real Time

Your excellencies, distinguished guests, it's a privilege and fitting to give this talk in Abu Dhabi, a place where geopolitics, economics, and markets have long been part of the same conversation. You know, for almost 30 years after the fall of the Berlin Wall, investors operated inside a geoeconomic anomaly, the Great Moderation. It was a time of improving fiscal discipline and central bank credibility, monotonically declining interest rates and inflation, expanding trade, technology, and capital across borders. All underpinned by an ideological convergence that made geopolitical rivalry almost seem obsolete. We've exited the anomaly.

We've reverted to the historical baseline, what I call the old normal. And it's a world defined not by convergence, but by competition, by fragmentation, by shocks. Uh and in this old normal, the anchors of the great moderation are being set a drift by five new structural forces uh that are really providing an echo of the long sweep of history before 1990 and have reshaped the global investment landscape. First, everyone here knows geopolitical competition has intensified to the greatest levels in at least the past 30 years. It's my contention though that because today's great powers are mostly nuclear powers, the risk of mutually assured destruction is channeling direct conflict away from the battlefield and into the arena of economics where confrontation isn't existential.

We're in an age of economic warfare. This isn't speculation. Since 2000, the number of sanctioned entities worldwide has increased 10fold. Trade restrictions have quintupled in the last five years alone and over 90% of advanced economies are now screening exports of sensitive technologies. Second, we live in a world of fiscal dominance.

Geopolitical rivalry is expensive uh in part to fund record defense budgets and competitive industrial policies. Most leading economies of the world are forecast to run historically large budget deficits through the end of the decade. Meanwhile, geopolitical rivalry is feeding political populism on the left and on the right that produces a general disregard for the deficits it creates. Relatedly, we may be nearing the end of what I call central bank innocence. As political authorities demand low borrowing costs to fund strategic priorities, monetary policy makers are being subordinated to fiscal imperatives with predictable impact on inflation fighting credibility, term premia, and interest rates.

We're seeing a renaissance of industrial policy. These interventions are up 8x since 2008. And governments across the world are recognizing economic security as national security. They're using every tool in their toolkit to better align private sector incentives with strategic interests. The strategic interests are clear.

Supply chain resilience, supply chain dominance, technological preeminence, energy security, rebooting the defense industrial base. But achieving strategic returns carries an economic price, fiscal costs, the risk of reduced competition and innovation. the danger of political capture and rent seeeking, the possibility of a race to the bottom with subsidy wars. We're also in an era of energy insecurity. Energy demand is growing explosively across the world, driven by AI, electrification, the rise of the global middle class.

But supply is struggling to keep up amid a maze of bottlenecks. That sets the stage for chronic shortfalls and the weaponization of choke points ranging from minerals processing, battery chemistries to oil shipping routes. We're also in a race to the commanding heights of technologies that are foundational for economic growth potential as well as the global balance of power. Already the surge of AI capex is the largest as a share of GDP other than the railroad buildout. And make no mistake this is a geopolitical race not just in AI but also in quantum semiconductors synthetic biology fusion all manner of general purpose technologies.

Now this could lead to a productivity boom across the world that diffuses higher trend growth and gifts financial nirvana to markets. But it could also proliferate controls that entrench smaller technological ecosystems and slow the diffusion and slow the pace of innovation. Time will tell. Taken together the forces of the old normal. They're reinforcing and they're compounding.

They each have a tendency to increase fiscal dominance and to subordinate central banks. They increase barriers and reduce the size of markets. They lower efficiency and raise trend inflation. They'll have a tendency to increase long-term interest rates and steepen yield curves. Gradual non-dollar outperformance, grinding equity bull markets punctuated by violent sudden stops.

That's how I see it playing out. And what does it mean for the world? We have to look back to history. History rhymes. The best analog is between 1870 and 1914.

It was the first wave of globalization. It was a time like now of dramatic technological change from the railroads, electrification, the telegraph, the telephone. Enormous wealth was concentrated in the hands of a few. But inequality fed populism. Populism fueled nationalism.

And nationalism stoked geopolitical rivalry that eventually crumbled the brittle balance of power in 1914. Now 1914 doesn't have to be our fate. It's a function of our choices. So let me close with a few humble suggestions. First, we've spent hundreds of years crafting a doctrine for the use of military force.

At the dawn of a new era of economic competition, it's time for an analogous doctrine for the use of economic force. Limiting principles for why, how, where, and to what extent we use economic weapons. Not out of altruism, but out of enlightened self-interest to avoid an uncontrolled escalation that leaves every country worse off, especially the most powerful. We need a playbook for industrial policy, for positive economic state crack. One that sets out the objectives of industrial policy, the market failure it's trying to correct, that picks the right intervention to correct the market failure, that harnesses the comparative advantage of allies, that measures strategic success, not financial gain, and also one that has an exit strategy that leaves behind a competitive market structure.

We've learned the hard way that when it comes to economic interdependence amid geopolitical rivalry, neither extreme of otterarchy or hyper globalization is optimal. We'll have to rebuild the global trade structure from the middle of this continuum and the bottom up with sectoral trade zones that allow partners playing by the same rules to collectively scale up productive capacity. And lastly, the private sector has an enormous role to play. Uh, every economic security vulnerability is a commercial opportunity. Every supply chain that's vulnerable because of a high import dependence on a strategic adversary and with limited domestic production capacity creates a business case.

Economic security isn't just a national interest. It's an emerging asset class and a generational opportunity for the private sector to multiply policy tailwinds that are both global and enduring. Just to conclude, 1914 is not a prophecy. It's just a warning. The old normal is back, but the outcome is ours to shape.

We can choose to learn from history and to renew and rebuild our bonds. And it's my sincere hope that policy makers and investors in this room collectively choose to do so. Thank you.