Global entropy: Enter the dragons (summary by ChatGPT)

Geopolitical disorder emerges as the greatest economic threat

Without “exogenous shocks,” sustained outperformance of the US economy amid higher-for-longer real rates remains the based case. But the risk of disruption from geopolitical disorder has risen sharply and cannot be ignored.

Disorder & Nonlinearity as Natural States:

Entropy, a concept from physics, suggests that any system, if left alone, will tend towards disorder. This applies to complex structures like human organizations, including the global political economy. Global entropy, a major Theme in the global economy, is explored, focusing on the natural dissolution of the post-War liberal order (PWLO) established by the US and its Western allies after World War II.

The Glue of International Relations:

Socio-political entities, such as nation-states and international orders, are held together by three forms of glue: power, wealth, and myth. While the most durable entities rely on all three, larger, multi-group entities face challenges, particularly in cases where differing cultural myths may obstruct cohesion rather than bind people together. The West's overreliance on its own socio-political myths, notably the assumption of "universal human rights," is identified as a contributor to global entropy.

Global Entropy, The Story Thus Far:

The US-led PWLO, unique in history, was enabled by circumstances that left the US globally dominant. However, over time, arrogance and missteps led to the decline of the PWLO. The emergence of Apex neoliberalism and its subsequent peak in the early 2000s marked a turning point, with the pillars of Western power—myth, economic dominance, and military superiority—diminishing in relative terms.

Apex Neoliberalism: The Beginning of the End:

While US power and wealth remained pre-eminent, the PWLO myth faced challenges, especially with the rise of Apex neoliberalism. The overreach of Western powers in international interventionism, such as the "War on Terror," led to a quarter-century of expeditions and regime change attempts, eroding the myth holding the PWLO together. The mismatch between Western perceptions and global reality became apparent, weakening the order.

Peak Myth:

The peak of Western international prestige in 1991, coinciding with the fall of the Soviet Union, marked the apparent “End of History” and triumph of the "rules-based order." However, this superficial victory masked a more nuanced reality, with emerging markets adopting Western liberalism for economic access and others viewing the PWLO institutions as useful tools for rapid modernization.

Peak Economy:

China's accession to the WTO in 2001 signaled a shift in global economic power. China's intentional industrialization and manipulation of global supply chains challenged Western economic dominance. With a carefully planned strategy, China became a key player in various critical technologies, challenging the economic foundations of the PWLO.

Peak Military:

The high-water mark of US military power is dated to the early hours of the Iraq War, with the failure to decapitate the Iraqi regime. As Western powers focused on counterterrorism and nation-building, potential adversaries, referred to as "dragons," developed asymmetric strategies and advanced weapons. The dragons observed, learned, and tested strategies, preparing for great-power military competition.

The Dragons Emerge to Stretch:

By the end of the 2000s, Russia and China, the dragons, began challenging the PWLO myth and Western leadership. China’s “Unrestricted Warfare” and Russia's "Gerasimov Doctrine" demonstrated a departure from the established order. The dragons strategically expanded their influence, showcasing military capabilities and challenging the traditional Western cultural narrative.

On the Precipice: Culture & Complexity:

As the dragons fully emerged, American firepower, economic sanctions, and moral suasion proved insufficient to contain them. Global entropy is well underway, and the narrative suggests that the final vestiges of the PWLO are collapsing. The key factors influencing the post-PWLO world are identified as technological revolutions driving power and wealth, while the slower evolution of culture and socio-political myths becomes a critical determinant in shaping the new global order.

The New Wars of Religion & The Blind Evangelists:

The clash between the dragons and the West is framed as a battle over cultural values and the rights of individuals versus states. Presidents Xi Jinping and Vladimir Putin present a starkly different vision for global order than that of President Joe Biden. While the dragons focus on state-to-state interests, the West emphasizes its values and individual rights. The clash over cultural values is identified as a pivotal factor in determining the course of global entropy and the shape of the successor to the PWLO.

The Western Outlier:

Joseph Henrich, an evolutionary biologist, labels the West as WEIRD (Western, Educated, Industrialized, Rich, and Democratic). While Western psychology tends to see universal truths, a comparison of values reveals the West as a mathematical outlier. The World Values Survey highlights the significant cultural distance of Western values from the rest of the world, emphasizing disparities in Personal values, “ESG” values, and Basic needs.

Cultural Distances and Global Dynamics:

Understanding cultural distances is deemed crucial in forecasting the post-PWLO world. Cultural values, though weak adhesives in international relations, become potent weapons. The article posits that exploiting cultural differences will play a pivotal role in the ongoing struggle between the US-led West and rising powers like China and Russia, shaping the course of global entropy.

Accidental Guerrillas and Strategic Blunders:

The article suggests that Western blindness to its cultural differences risks ceding ground to adversaries. Enforcing Western values as a condition for PWLO membership may unintentionally turn countries against the West, making them unintentional adversaries. The discussion delves into an example in Africa where clashes over sexual orientation highlight the clash between Western perspectives on individual human rights and African views of cultural values.

Weaponization of Cultural Differences:

Cultural differences are considered relevant and potentially weaponized in the struggle between the US and the dragons for defining the world order. Exploiting these differences is seen as part of a grand strategy, as articulated by leaders like Xi Jinping and Putin. The article suggests that weaponizing cultural gaps could lead to a Complexity cascade that accelerates Global entropy from evolution into disorder.

The Role of Sovereignty:

The issue of sovereignty emerges as a key factor in the African perspective, with nations like Nigeria asserting their right to define laws based on their cultural values. The article concludes by emphasizing the importance of understanding cultural distances in forecasting the future global order and warns of the challenges posed by the weaponization of cultural differences during Global entropy.

Assessing Cultural Influence on UN Votes:

To scrutinize the impact of cultural values on international relations, the author conducts cross-sectional regressions on factors influencing countries' votes in favor of Ukraine or against Russia in its invasion. The analysis incorporates economic relationships and Chinese official and military aid. Notably, cultural distance from the West is found to have a significant negative effect on votes for Ukraine, beyond that of Chinese aid.

Cultural Values and Aid: A Costly Link:

The results suggest that coupling acceptance of Western values with aid comes at a high cost. Cultural distance from the West appears to have a considerable negative impact on votes, challenging the notion of cultural values as an "abiding advantage." The article raises questions about the worthiness of such a cost and the effectiveness of using aid conditionality for promoting Western values.

Debates on Restructuring the Global Order:

As the article delves into international relations tradeoffs, it presents two opposing narratives for addressing issues in the post-War liberal order (PWLO): "Resuscitate and Reinforce" its institutions and "Restructure" them. The discussion introduces historical precedents, such as the foreign policy debate in the 1980 US election between moral absolutism and flexible realism, raising the question of whether a new approach is needed.

Global Entropy and Potential Scenarios:

Acknowledging the inevitability of Global entropy, the article explores potential scenarios for the future global order. The examination of cultural distance from the Western center for 64 countries reveals the unique positioning of the West and emphasizes the potential challenges of pushing Western values on culturally distant nations. The analysis implies that the Western adoption of the “Restructure” narrative may play a pivotal role in shaping the emerging global order.

Examining Cultural Distance:

A detailed examination of the cultural distance from the Western center for different regions, focusing on personal values and quasi-ESG values, provides insights into the cultural battlefield. The article highlights the 'weird' nature of the West relative to the rest of the world and underscores the potential challenges in forming stable alliances based on cultural values in a new world order. The figures depict cultural distances from the Western center, China, Russia, and an 'Other' category, shedding light on potential geopolitical alliances based on cultural affinity.

China's Cultural Challenge and Russia's Advantage:

The analysis suggests that China faces challenges in building alliances based on culture, with most countries culturally closer to the West. In contrast, Russia is in a stronger position, with only a few countries, primarily in Europe, culturally closer to the West. This positioning could give Russia an advantage in its partnership with China, potentially posing stability issues for the Sino-Russian duo-pole if the West weakens significantly.

Strength of Regional Powers:

The assessment of cultural distances emphasizes the strength of regional powers, with the 'Others’' center being culturally closer to every country than China or Russia. The placement of regional powers like Iran and Turkey suggests they may have cultural advantages in forming regional alliances, reinforcing the notion that regional powers could play a crucial role in the emerging global order.

Endgame: Postulating a New World Order

Culture alone won't solely shape the emerging world order from Global entropy. Economic might and military power are crucial. However, cultural differences likely will influence the speed and progression of Global entropy, impacting economic and military dynamics.

Base Case: Evolutionary Path to Global Bifurcation

Global entropy has been ongoing for over two decades, raising global Uncertainty but in a still historically peaceful world. Specialized technological advancement, path dependence, and geopolitical implications are pushing toward a bipolar world. The Anglo-sphere and China are becoming technological leaders, reinforcing a bipolar ascendancy.

Regional Power Dynamics in the New Order

Resource distribution plays a crucial and potentially disruptive role in the bipolarity. The Anglo-sphere is resource-rich, while China depends on external sources. Strategic alliances, geopolitical rivalries, and resource competition shape regional power dynamics.

Alternative Case: Rapid Descent to Anarchy

A swift unraveling of Global entropy could disrupt economic networks, hinder technological dominance, and prevent the emergence of a stable order. The West and China, already heavily indebted, would face economic and military strains, weakening alliances.

Cultural, Complex Systems, and the Path to Chaos

The evolutionary path presents more predictable Global entropy, but the world teeters on a potential rapid descent into chaos. The article explores the uncertain probability of a Complexity cascade, likening it to catastrophic failure in complex systems.

How Catastrophic Collapse Happens

Complex systems, from nations to international orders, are prone to catastrophic failures. Dr. Richard Cook's insights highlight key characteristics, including many smaller failures, rapid change, hindsight bias, lack of experience with failure, and inflexible parts. The article notes that all these characteristics are present in the current global order.

Complexity Cascades: Expect the Unexpected

A Complexity cascade follows a system failure, with aftershocks that are unpredictable in timing and impact. The larger the failure, the more significant the consequences. The article explores potential interstate wars, civil wars, state failures, and debt crises resulting from a collapse of the existing world order.

What Does This Mean for Markets and Portfolios?

The final section anticipates exploring how to construct an insurance portfolio against disorderly Global entropy, creating defensive portfolios, describing the likely economic structure of the new world order, and addressing the ongoing bifurcation of financial assets.

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