WEEKEND READ: Economics, war and politics

This article by Stratfor founder and chief intelligence officer George Friedman explains his organisation's geopolitical method for analysing economic issues, which has a different focus and purpose from the models used by economists.

To focus on geopolitics, as myself and my colleagues do, means to focus on the behavior of human societies organised into complex, geographically defined systems. In our time, that means that we study nation-states. In order to understand the behavior of nation-states, it is necessary to focus on three major dimensions: economics, war and politics. The nation has to be studied in terms of producing wealth, defending (and stealing) wealth, and the internal and external relations by which humans shape their lives.

Economics, war and politics are not separate spheres. They are a single entity together constituting the reality of the nation-state. There are those who argue that economic life should be left alone, not interfered with by political or military power. We won't engage in that argument. What we know, empirically, is that political and military power constantly impinge on economic life, and vice versa. It is impossible to imagine war without taking into account politics and economics. It is impossible to think of domestic or foreign policy without considering economic and military issues. By the same token, it is also impossible to think about economics without thinking about military and political matters. If it can be made otherwise, then someone will do so and then we will change our opinion. Until then, we cannot think of the free market as a meaningful independent reality. It is always shaped by other factors. Perhaps it should be otherwise. It isn't.

An integrated approach to social reality requires that these distinctions, so important in the organisation of a university or a newspaper, be overcome. They were created in order to organise human activities into manageable pieces. Our argument is that in so doing, reality is only apparently made more manageable, and in fact is falsified. The standard approach to these issues creates distinctions that don't exist and complexities that conceal rather than reveal the nature of the problem at hand. A general who tries to wage war without consideration of political ends and economic means is going to fail. An economist who tries to understand and predict the behavior of the economy without a comprehensive understanding of the political and military realities which shape the economy will not do particularly well.

Geopolitics is in one sense also an abstraction, but it has the virtue of not creating artificial distinctions. The price that the geopolitician pays for a comprehensive view of reality is a forced simplification: there is just too much happening to state it comprehensively. Geopolitics is the search for the center of gravity of reality, those overwhelming forces that drive the system in the direction it is going to take. These forces are never solely political, military or economic in nature. Usually, they are in plain sight and are overlooked because, being simple, they appear insufficient. Indeed, they may be insufficient, but others can add the details. Our goal is to lay bare the essentials and identify the general direction in which things are moving.

Take, for example, our recent analysis of the Russo-Georgian war. It derived from this central reality: Russia by the 19th century had achieved the borders essentially held by the Soviet Union. In 1992 it had collapsed to a position in which it had not been since perhaps the 17th century. That condition was untenable. Either Russia would implode or it would reassert itself fairly quickly. By early 2000s, it was our view that it would choose to assert itself. When the United States tried to make an ally of Ukraine, which Russia sees as crucial for its economic, military and political well-being, we became certain that Russia would push back. As the Americans got bogged down in Iraq and Afghanistan, a window of opportunity opened up and the Russians began the process of reassertion.

There are, obviously, endless things left out of this analysis. People of every discipline could rip it apart as being insufficiently sophisticated. In one sense they would be right. By avoiding the complexity of sophistication, we could see the fundamental shape of things – which was that the Russian collapse, if halted, would have to reverse itself for economic, military and political reasons. There were obviously many details we could not predict and some we didn't know. But we captured the essential geopolitical condition of Russia in order to understand what it had to do. We left it to others to do the important work of mapping the complexity. Our task was to capture the simplicity.

In our analysis of the current financial crisis in the United States – and the world as a whole – we have sought the center of gravity of the problem. We approached that simply by asking one question: is what is going on simply another inflection point in the business cycles that have occurred since World War II, or does it represent a systemic failure such as that which happened during the Great Depression? This struck us as the urgent issue.

We noted that in the Great Depression, the US gross domestic product (GDP) contracted by nearly 50 per cent over three years. It was an unprecedented calamity. Bearing this in mind, we compared the current situation to other events since World War II to see if there was a framework for measuring it. We found that framework in the Savings and Loan crisis of 1989, when an entire sector of the US financial system collapsed and the federal government intervened – essentially guaranteeing or purchasing commercial real estate, whose price decline had triggered the crisis. We noted that the total amount allocated by the federal government in that crisis was about 6.5 per cent of the GDP (and the amount actually spent, before recouping of costs via sales, was less than 3 percent). We noted also that in the current crisis another sector of the financial system – the investment banks – were devastated, and that the federal government intervened, this time at about 5 per cent of GDP. Meanwhile, the equity markets had not declined as much as they did in 2000-2001, and as of the second quarter of this year the economy was still growing by more than 2 per cent. From this we concluded that the US economy was moving into a recession but that the recession would not break the framework of the postwar economy, although clearly the degree of government intervention will reshape the financial markets.

From the point of view of many Russian experts in 2001, our analysis of the future of Russia was seen as simplistic and nave. From the standpoint of professional economists and traders in the markets, the same is being said of our current analysis. But just as our critics among Russian experts failed to see the main thrust of Russian history, many economists fail to see the main thrust of what is now happening. The United States is a $14 trillion economy with a potential problem amounting to $1-2 trillion (and probably far less than that). If the government intervenes, it will create inequities and imbalances in the system. But between the size of the economy and the government printing press, the problem will be managed, particularly because there are underlying assets – houses – that can be monetised in the long run. The gridlock in the financial system will undoubtedly create a recession, but there hasn't been one for seven years and it's high time.

One can like or dislike the outcome, and we certainly agree that this will cause long-term dislocations and imbalances. But we also know that America as a nation-state has the resources to manage its way through this crisis if the government intervenes. And that intervention is as hard-wired into the American political-economic-military system as the law of supply and demand.

We do not speak the language of economics. There are numerous economists who can do that. And we certainly don't speak the language of the financial markets. We speak our own language, designed to reveal the elegant essence of the problem rather than its enormous complexity. Certainly, if our analysis is wrong because we failed to identify a crucial problem, then we haven't identified the center of gravity properly. And we will be wrong, which is far worse. But as in February 2000, when we published a piece called "Recession Time?” which forecast the market collapse that happened a few weeks later and the recession that followed it, we will be criticised for not understanding some essential point – in 2000 it was that we had no understanding of the impact of increased productivity on the business cycle. They were right. We didn't understand it and we were right not to. The complexities of productivity did not trump the obvious, which was that the NASDAQ had reached unsupportable levels and there had been no recession in nine years and that was way too long.

So, too, we are criticised for our failure to understand the spread between T-Bills and LIBOR or myriad other things. But we do understand this: The political reality is that the size of the American economy, deployed by the state, trumps the financial problems created by the fall of the housing markets. It will be ugly and painful for some and there will be a recession, but things are always ugly and painful when there is a recession.

In this crisis, therefore, economists' work is valuable, but it differs from ours. Geopolitical analysis is designed to extract the obvious rather than drill into the complexity, to highlight the main tendency, not the detail. Understanding the trees has value, but seeing the forest clearly has value as well.

This pieces appears on Stratfor.com as the introduction to a four-part series on the current changes to geopolitics around the world.