Wartime Footing

In January we wrote to clients and told them: we are going to prioritize resilience for the foreseeable future. Why? Two things: scarcity and conflict. So that means the first filter for financial decisions is “will this action make me more or less resilient?” It means we are putting more emphasis on protecting value. It means we are encouraging clients to strengthen their business and personal affairs in 2025.

Said another way – we are now shifting to a wartime footing.

Focusing on resilience may seem odd. OK, there are changes happening around the world, but isn’t that always true? And besides, we work with entrepreneurs, who are natural optimists (at least with respect to whatever they are building and creating), and there will always be new problems for entrepreneurs to solve and therefore new opportunities to build companies and create value for one’s family and other stakeholders. And the problems of scarcity and conflict are not permanent. OK, yes, point(s) taken. But we are likely looking at 5-10 years that will challenge us in ways most of us have not experienced. It would be foolish not to prepare.

In our January client communication, we quoted the Commission on the National Defense Strategy (CNDS). The Commission, appointed by the House and Senate Armed Services Committees at the end of 2022, assessed the adequacy of U.S. defense forces today in the event of major conflict. The final report, released July 2024, opened as follows:

“The threats the United States faces are the most serious and most challenging the nation has encountered since 1945 and include the potential for near-term major war. The United States last fought a global conflict during World War II, which ended nearly 80 years ago. The nation was last prepared for such a fight during the Cold War, which ended 35 years ago. It is not prepared today.”1

We were stunned by the lack of media attention and said as much.

How can we handicap the economic consequence of war? Here’s one example:

“Even short of all-out war, the global economic damage from a Chinese blockade of Taiwan has been estimated to cost $5 trillion, or 5 percent of global gross domestic product (GDP).”1

But Taiwan is a long way away. Just like Ukraine and Gaza and the Red Sea…so how would military conflict really impact me?

“War with a major power would affect the life of every American in ways we can only begin to imagine…The U.S. public are largely unaware of the dangers the United States faces or the costs (financial and otherwise) required to adequately prepare. They do not appreciate the strength of China and its partnerships or the ramifications to daily life if a conflict were to erupt. They are not anticipating disruptions to their power, water, or access to all the goods on which they rely. They have not internalized the costs of the United States losing its position as a world superpower.”1

Clearly there are many variables that sit between where we are today and a protracted military conflict in the Asian theatre (or elsewhere). But we know China’s ambitions are considerable and that it sees itself as being the successor to the American hegemon (David Murrin’s Five Stages of Empire2 is a useful reference (see below)). And we can see that the new U.S. administration is OK with fighting trade and economic wars with China but perhaps less interested in military conflict for the sake of democracy and the existing world order in faraway places against formidable opponents.

I think we can agree that Pax Americana is done; and that the 30-year conveyor belt of goods flowing west to east and U.S. financial assets flowing east to west is over. Or at the very least, it will not look the same in the years ahead. And that’s the point: for a long time now, tomorrow has looked much the same as yesterday; even when challenged, U.S. government officials have worked very hard to maintain the status quo so that tomorrow would look the same as yesterday (think 2008 global financial crisis and the Covid pandemic).

But it was never sustainable over the long run. And now we have arrived at a time when tomorrow could look very different.  And that includes the possibility of war. Best be prepared.

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1.      https://www.armed-services.senate.gov/imo/media/doc/nds_commission_final_report.pdf

2.      https://www.davidmurrin.co.uk/article/5-phase-life-cycle

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