Emerging Risk Scenario (1)

The British dominance of the world scene was largely seen to have ended with WWI.  However, that decline was not really an absolute decline in wealth, it was really mostly just a relative decline.  Other countries, especially the US rose in wealth faster than the UK.

That story begins to hint at the ELEPHANT in the room.  That elephant is the relative per capita wealth of the people in China, India, and the other emerging economies.

We have entered a period of equalization of personal wealth between the have-nots and the haves.  That will be a very disruptive process in the Have countries.  It may go gradually with small slow changes or it may go rapidly through a series of big jumps.

But what we will see will be a series of shocks like the dot com bubble and the current financial crisis.  At the end of each shock, the PPP per capita wealth of the rising economies will be the same as at the start or more likely higher and the PPP per capital wealth of the Have economies will be lower.

This will happen largely via shocks because there is extreme amounts of resistance to the process on the part of the Have economies.  This resistance took the form of excessive leverage in recent times.  People were unwilling to accept the fact that their PPP income was dropping, so that they borrowed to keep their lifestyle at the level that they felt that they are entitled to.

So discussions about deficits are really about how the US will handle the coming change in distribution of the wealth of the world.  If we simply choose to resist the change and try to bring things back to “normal” by government or personal deficit spending, then eventually we will have to pay through devaluation of our currency and if we persist, those funding our debt will cut us off.

It is hard to imagine our political process coming to the conclusion that we need to rethink our financial strategies in the light of the changing world financial order. That thinking has to come from outside the political process and eventually find its way in.

So the Emerging Risks scenario is for the long term decline of the income of the Have economies accomplished through a long series of financial system shocks accompanies by growing government deficits and declining credit quality for the government debt of the developed nations.  At the same time, the successful “emerging market” economies become the dominant economic players and their people gradually risk in PPP income to match up with the PPP income of the “developed” nations for people who still do the same or comparable work.  That income equalization will include some significant increase in overall wealth, but not enough to maintain the incomes of the developed countries during this process.

So if this is the emerging risk scenario. the questions are:

1.  How would your firm fare in this scenario if no specific advance planning or anticipation is done?

2.  Are there any things that your firm might do differently if you thought that this scenario was somewhat likely?

3.  Assuming that this scenario occurs, what is the cost benefit of those actions?  i.e. do they make sense in that scenario?

4.  Are there any ways to track secondary signs that this scenario might be coming to be?

From time to time, different Emerging Risk scenarios will be posted here and in the INARM LinkedIn Emerging Risks group for discussion.

Readers can post scenarios also – directly on LinkedIn or as a comment here (that I will “promote” to a posting.)

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Explore posts in the same categories: Black Swan, Emerging Risks, Enterprise Risk Management, ERM, Risk, Risk Learning, Unknown Risks

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