Wealth Secrets, three years on

“I do not understand what this book is supposed to be,” said the New York Times, in its review. Neither did my publishers, placing a book about income inequality in the self-help section of bookshops. And, to be fair, I was soon at a loss myself, even though I wrote it. I intended the book as satire, which the Telegraph reporter who came to interview me during a layover in Amsterdam clearly understood. But in his writeup of our interview, he decided to play it straight, and the book’s rather shocking suggestions on how to get rich became a series of chatty tips. “If you can’t beat ‘em, join ‘em,” I thought, and on my personal website, I began pitching the book as a series of rags to riches tales. So what was the book supposed to be? Three years on, that is a lot easier to explain, because a lot of very clever people have started to say similar things, more clearly than I did. At the time I wrote Wealth Secrets, most of the talk about income inequality focused on Thomas Piketty’s insights regarding capital accumulation and inherited wealth. But Wealth Secrets was about another source of inequality: what economists call “rent seeking.” Rent seeking is the pursuit of monopoly profits for monopoly’s sake. While most pursuit of profit tends to enhance the wealth of society, rent seeking is unproductive, detracting from economic progress. Wealth Secrets attributed much of the recent growth in inequality in the US and UK to rent seeking, particularly in the financial and technology sectors – and more broadly, argued that many of...

Political risk has come home, and we must combat it

The past decade has upended my profession almost entirely. I work in political risk, and my job is to advise companies how to manage political and economic instability. A coup in Turkey, sanctions against Russia, unrest in Venezuela, debt default in Argentina – such risk events are the bread and butter of political risk analysts such as myself, and of political risk underwriters who offer insurance policies against such perils. Until recently, these risks occurred almost exclusively in emerging markets such as Turkey and Russia. No one ever asked us to analyze the politics of the Netherlands. No one ever tried to buy political risk insurance against civil war in Canada. To have done so would have been preposterous. Indeed, the absence of political risks from the “advanced economies” of North America, Western Europe and Japan was almost definitional. The certainty that politics would not impact business operations was what made these countries safe havens for investment; it was part of the formula that enabled these countries to become, and remain, rich. The Eurozone crisis changed all that. Greece’s sovereign default in 2012 was the first default by a rich, industrialized country since World War II. (And even during World War II, defaults were rare.) It was an event that most people had considered inconceivable. For Greece, the economic costs of political uncertainty turned out to be enormous. Perhaps hoping to stave off cognitive dissonance, in 2013 Morgan Stanley Capital International duly reclassified Greece as an “emerging market.” Such risks are not limited to Europe. In 2011, the US lost its AAA debt rating from Standard & Poor’s, in...

Beware falling objects

Sam explains that shifts in the world economy cause companies and countries to lose their grip. (Sorry about the low talking: the day before I had given five hours of back-to-back media interviews to promote the Dutch edition of my book, and managed to lose my...

Two decades of geopolitical analysis

[UPDATED JULY 2018] I’ve been employed to analyze geopolitics and the world economy for about twenty years now, which means, alarmingly, I’ve got a track record. (Most of my publicly-available articles are now posted on this blog.) What did I get wrong, and what did I get right? The worst calls 1. Turkey My worst call has been Turkey. In a 2004 editorial, I contended that Turkey was on the path traveled by so many Eastern European states: convergence with Western Europe. I even invested in Turkey, I was so sure of this call. To be fair to myself, the problem arguably wasn’t with Turkey: to my surprise, the EU got cold feet. But even after that I doubled down on Turkey with another article predicting a turnaround. This is an example of what Daniel Kahneman would call irrational decision-making based on “loss aversion.” C’mon Turkey! This is your year! 2. China Starting with my 2003 book The Kimchi Matters, co-authored with Marvin Zonis and Dan Lefkovitz, I’ve continually been predicting trouble in China. But, China just keeps on booming. I did get some things right: in a 2004 editorial, I predicted that China would get into trouble by stimulating its economy too much if it faced a downturn. That is indeed what happened during the 2007-8 global slowdown, and China now faces a severe debt problem as a result. So I doubled down on this prediction as well. But there’s no denying that, blithely disregarding my sniping from the sidelines, China is still booming today. Good for you, China. The best calls 1. Venezuela In 2004, I wrote an...

Can Russia change direction?

Venezuelan President Hugo Chavez and I go way back. In the late 1990s, as a young political risk analyst, I traveled down to Houston to talk to one of the oil majors about a large investment they were planning to make in Venezuela. “Venezuela is risky,” I confidently informed them. “Hugo Chavez has a radical agenda.” Meanwhile, my colleague cooked up various disaster scenarios involving political violence or the loss of assets. The oil company’s project team, several of them Venezuelans, sat through our presentation in stony silence. Walking us to the elevator, though, they had something to get off their chests. “You don’t know anything about Venezuela,” they said. “Hugo Chavez is a pragmatist, not a radical.” “And,” they continued, “you don’t even know how to pronounce Chavez. It’s ‘TCHA-VEZ’!” In the long term, I was right (except about pronunciation). I wouldn’t, of course, be telling this story otherwise. The assets of most foreign oil companies operating in Venezuela were indeed expropriated, with limited compensation, on the orders of Chavez. But I admit it was the oil company’s project team that had the better grasp of the situation in Venezuela. Chavez was indeed a pragmatist. He did not jump right in and start nationalizing things, as I had predicted. At first, his economic policies were relatively moderate. But over time, he began to change direction. Not necessarily because he had planned to. But Chavez had made a lot of promises he could not keep. “So much riches,” he had said, “the largest petroleum reserves in the world, the fifth-largest reserves of gas…and 80 percent of our people live...