By Nouriel Roubini
Regardless of whether China has only itself to blame for some of these crises, the view in Beijing is veering toward the conspiratorial.
But open aggression is not really an option at this point, given the asymmetry of conventional power. China’s immediate response to U.S. containment efforts will likely take the form of cyberwarfare.
There are several obvious targets. Chinese hackers — and their Russian, North Korean and Iranian counterparts — could interfere in the U.S. election by flooding Americans with misinformation and deep fakes. With the electorate already so polarized, it is not difficult to imagine armed partisans taking to the streets to challenge the results, leading to serious violence and chaos.
Revisionist powers could also attack the U.S. and Western financial systems — including the Society for Worldwide Interbank Financial Telecommunication (SWIFT) platform. Already, European Central Bank President Christine Lagarde has warned that a cyberattack on European financial markets could cost $645 billion.
And security officials have expressed similar concerns about the U.S., where an even wider range of telecommunication infrastructure is potentially vulnerable.
By next year, the U.S.-China conflict could have escalated from a cold war to a near-hot one.
A Chinese regime and economy severely damaged by the COVID-19 crisis and facing restless masses will need an external scapegoat , and will likely set its sights on Taiwan, Hong Kong, Vietnam, and U.S. naval positions in the East and South China Seas; confrontation could creep into escalating military accidents.
It could also pursue the financial “nuclear option” of dumping its holdings of U.S. Treasury securities /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y 0.00% if escalation does take place. Because U.S. assets comprise such a large share of China’s (and, to a lesser extent, Russia’s) foreign reserves, the Chinese are increasingly worried that such assets could be frozen through U.S. sanctions (like those already used against Iran and North Korea).
Of course, dumping U.S. Treasurys would impede China’s economic growth if dollar /zigman2/quotes/210673925/realtime XX:BUXX +0.67% assets were sold and converted back into yuan /zigman2/quotes/210561989/realtime/sampled USDCNH -0.0248% (which would appreciate). But China could diversify its reserves by converting them into another liquid asset that is less vulnerable to U.S. primary or secondary sanctions, namely gold /zigman2/quotes/210034565/delayed GC00 +0.33% . Indeed, both China and Russia have been stockpiling gold reserves (overtly and covertly), which explains the 30% spike in gold prices since early 2019.
In a selloff scenario, the capital gains on gold would compensate for any loss incurred from dumping U.S. Treasuries, whose yields would spike as their market price and value fell. So far, China and Russia’s shift into gold has occurred slowly, leaving Treasury yields unaffected. But if this diversification strategy accelerates, as is likely, it could trigger a shock in the U.S. Treasuries market, possibly leading to a sharp economic slowdown in the U.S.
U.S. won’t sit idle
The U.S., of course, will not sit idly by while coming under asymmetric attack.
It has already been increasing the pressure on these countries with sanctions and other forms of trade and financial warfare, not to mention its own world-beating cyberwarfare capabilities. U.S. cyberattacks against the four rivals will continue to intensify this year, raising the risk of the first-ever cyber world war and massive economic, financial and political disorder.
Looking beyond the risk of severe geopolitical escalations in 2020, there are additional medium-term risks associated with climate change, which could trigger costly environmental disasters. Climate change is not just a lumbering giant that will cause economic and financial havoc decades from now. It is a threat in the here and now, as demonstrated by the growing frequency and severity of extreme weather events.
Any one of these developments could augur an environmental white swan event, as could climatic “tipping points” such as the collapse of major ice sheets in Antarctica or Greenland in the next few years. We already know that underwater volcanic activity is increasing; what if that trend translates into rapid marine acidification and the depletion of global fish stocks upon which billions of people rely?
Where we stand
As of early 2020, this is where we stand: The U.S. and Iran have already had a military confrontation that will likely soon escalate; China is in the grip of a viral outbreak that could become a global pandemic; cyberwarfare is ongoing; major holders of U.S. Treasury debt are pursuing diversification strategies; the Democratic presidential primary is exposing rifts in the opposition to Trump and already casting doubt on vote-counting processes; rivalries between the U.S. and four revisionist powers are escalating; and the real-world costs of climate change and other environmental trends are mounting.
This list is hardly exhaustive, but it points to what one can reasonably expect for 2020. Financial markets, meanwhile, remain blissfully in denial of the risks, convinced that a calm if not happy year awaits major economies and global markets.