Earning from History?: Financial Markets and the Approach of World Wars

Are world financial markets paying due heed to geopolitical risk? Despite unchallenged U.S. military supremacy, the financial consequences of a terrorist nuclear strike, or war in the Middle East or the Taiwan Strait—or some totally unforeseen conflict—could still be enormous. That globalization under a powerful hegemon has strengthened linkages among national economies may not rule out another major war: such linkages were also strong on the eve of World War I, which thus caught investors off guard. Investors try to learn from history, but the very different financial impacts of the two world wars and the Cold War reveal the tendency of military technology and regulatory regimes to shift significantly, reducing the relevance of past experience. Any lessons investors might take from the last war could have limited relevance for the next—or be forgotten after a generation of relative peace has led to complacency.