Beijing strengthened by chaos in Afghanistan
Undoubtedly the biggest subject to focus on for us as global citizens is how the world’s two super-powers, the US and China, can work together to avoid falling in to the “Thucydides Trap”, where conflict arises as two rival countries or states jostle over the sharing and eventual transfer of power from one hegemon to another. This might well be a slow-moving transition and take decades to resolve, but events have accelerated in the last few years, and our sense is that China is emboldened by the lacklustre efforts from the Biden administration, whose foreign policy efforts have been very questionable. In particular, the shambolic scenes in Afghanistan and the further retreat of the US from its post-1945 role as global “policeman” may encourage a view in Beijing that now is an opportune time to strengthen its creeping sphere of influence across their region and through Eurasia, as well as strengthening its ambitions in the South China Sea. We have been of the view that China’s claims over Taiwan would likely remain unresolved and that a military conflict was unlikely (unless triggered by a mistake or an overreach), but the probable indirect impact of the chaotic and sadly predictable scenes in Afghanistan is that China will feel much more powerful after the US’s miserable retreat. That this is happening when Xi Jinping is about to secure his third term as “Emperor” of China creates further uncertainty and is something we will monitor closely.
Political gridlock in the US
If one indirect result of the events in Afghanistan is an increasingly ambitious China, another is a possible further negative lurch in US politics. Just as commentators and investors were sensing that the Democrats and Republicans could be trusted to work together, in part, on major policy initiatives (such as the messy infrastructure bill currently progressing in Washington DC), those hopes could well have been dashed upon the rocky mountains of Afghanistan. It is likely that the Republicans will sense weakness in the Democrats as an opportunity to gain political momentum into next year’s mid-term elections, where we could see control of the chambers of political power in the US swing away from the Democrats. The uproar around recent events in Kabul, as well as a growing unease around underreported rises in consumer prices, could be heavy weights for Democratic candidates to bear into their individual elections next November. Elections are often determined by which political base is angrier, and all confidence and sentiment surveys hint that the Republicans will have a surge in their voter base as we move into next year’s elections.
Auf wiedersehen, Frau Merkel
An election that could have a currently understated importance before next year’s US midterms is that in Germany next month. The latest polls give a clear indication that the elections will not be clear-cut and will result in discussions over who can form a workable coalition, determined eventually by who is willing to cede their political positioning on various matters in order to govern. Whatever happens, there will be change for the first time since 2005, as Angela Merkel has already decided that her race as Chancellor is run. Irrespective of what one might think of Merkel’s policies and philosophies from the last sixteen years, the inescapable fact is that she has been a steadying influence in the turbulent waters of European politics. What happens next will be interesting, with regards to Germany’s commitment to a “balanced budget”, their commitment to the European project and, most importantly for investors, financially bailing out their neighbours, as they have tacitly done for the last decade. Any new policies and turns could bring fresh opportunities for investors. At least for now, European financial markets and investors have been anaesthetised by the miracle drugs applied by the European Central Bank, who through their exhaustive money printing have created an air of total complacency around the structural political, economic and demographic risks that exist across the Channel; but these could rear their ugly heads once again in a less certain political environment ahead.
