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With the world in flames, why is the economic recovery still going strong?
The Middle East is falling apart. Planes are falling out of the sky. And market don't care.
 
Putin still hasn't rattled investors.
Putin still hasn't rattled investors. (AP Photo/Silvia Izquierdo)

Investors around the world are becoming increasingly unnerved by the menacing specter of geopolitical risk. Bloomberg reports that "28 percent of investors surveyed this month by Bank of America Corp. identified geopolitics as the biggest risk [to the global economy], up from 14 percent in June."

The real question is, What took them so long? The past year has featured a veritable smorgasbord of geopolitical meltdowns and calamities, from the interminable civil war in Syria to the ongoing war in Gaza to Vladimir Putin's annexation of Crimea to the rise of the al Qaeda offshoot the Islamic State in Iraq and Syria.

Planes are being shot down over the sky in Ukraine. North Korea continues to rattle its nuclear saber. Boko Haram is trying to destabilize Nigeria and its neighbors, sparking fears of an all-out war. The Libyan state is in danger of falling into tribal anarchy.

But this volatility has not dampened U.S. stock markets, which have continued to rise swiftly in 2014, nor the wider economic recovery, with unemployment now down to just 6.1 percent. And on Wednesday, the Commerce Department reported that the U.S. economy grew at a torrid rate of 4 percent in the second quarter.

Some argue that the continued ebullience of markets is a worrying sign. Bloomberg points to the view of Raj Hindocha of Deutsche Bank Research, who argues that markets have been "numbed" to these bubbling geopolitical risks by the "abundant liquidity" and easy monetary policies provided by central banks such as the Federal Reserve, the Bank of England, and the Bank of Japan.

But with the economy doing just fine even in the context of these myriad geopolitical hazards, it's clear that the recovery is more robust than we thought, not less.

Why is that? I don't think it's because investors have been "numbed into complacency" by the Fed. Yes, the government has been slowly nursing the U.S. economy back to health since the financial crisis through a mixture of low interest rates, quantitative easing, and fiscal stimulus. But these tools are not capable of ameliorating the damage that severe geopolitical shocks could do to the U.S. economy. A sharp spike in oil prices, for example, would squeeze consumers and businesses irrespective of what the Fed does. Another example: a trade war, which could cut off imports of crucial goods and raw materials.

The real reason the U.S. economy still looks robust, is that the geopolitical turmoil of 2014 hasn't really touched the American economy directly. Instability in the Middle East used to cause great concern about the oil supply, but oil prices have not risen much. That can be attributed to the fact that U.S. domestic energy production is increasing rapidly, meaning that the U.S. is becoming increasingly energy independent.

The U.S.'s top five trading partners — Canada, China, Mexico, Europe, and Japan — are also stable, far from where the action is. Jihadis may be rampaging through Iraq and Syria, and pro-Russian rebels may be firing surface-to-air missiles in eastern Ukraine, but these are localized events that hardly dent the global web of trade and commerce.

So while the footage of death and disaster in the Middle East and eastern Europe may be shocking, America has grown more insulated to the economic fallout.

Still, in the absence of real, material damage to U.S. interests, fear itself could send the recovery into a nosedive. But so far it hasn't. U.S. investors have not panicked, perhaps because they understand that periodic outbreaks of geopolitical turmoil have become the norm. These days, Israel and Hamas go to war every couple years. Conflict between Israel and Hezbollah has been similarly frequent. Russian interference in former Soviet republics is nothing to sneeze at, while North Korean provocations are old hat. Markets may have become desensitized.

Is that complacency? It seems more like resilience. The ongoing geopolitical turmoil is certainly a threat to the U.S. economy, but unless things worsen dramatically and start to damage global commerce in a concrete way, it's nothing to panic about.

On the other hand, of course, it's still important to emphasize that while the U.S. economy is less vulnerable to global geopolitical turmoil than it was in the 1970s or even as recently as 2000, it's not invulnerable. Concerns are high that escalation of trade sanctions between the West and Russia will lead to lost business or even asset seizures for Western firms with interests in Russia. It could also put the U.S. and Europe in confrontation with Russia's economic allies, including China.

But for now, the recovery is looking strong even as the world burns.

Editor's note: This article has been revised since it was first published in order to more clearly include proper attribution to source material.

 
John Aziz
John Aziz is the former economics and business editor at TheWeek.com. He is also an associate editor at Pieria.co.uk. Previously his work has appeared on Business Insider, Zero Hedge, and Noahpinion.

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