Full marks for timing, Mr President. Last week marked the 10th anniversary of the start of the biggest financial crisis since the Great Depression, making it an appropriate moment for Donald Trump to threaten North Korea with obliteration.
One of the few achievements Trump can point to in his first six months in office is that shares on Wall Street have been steadily rising since his election victory last October. The “fire and fury” remark and the inevitable counter blast from Kim Jong-un gave the markets pause for thought. But not much more than that.
All things considered, the financial markets took the Kim and Trump show in their stride. Sure, there was a sell-off in shares and the customary flight to safe haven assets such as gold and the Swiss franc in times of heightened tension. But nothing to touch the panic of a decade ago, when the markets suddenly froze up and banks refused to lend to each other.
This is part of a recent pattern. Markets have become relaxed about geopolitical risk and with good reason. Wall Street started rising from the moment Iraq was invaded in 2003. There was barely any response to Russia’s annexation of the Crimea in 2014.
The assumption underlying the muted response is that there will be no war between the US and North Korea, nuclear or otherwise, and that the smart investment play is to buy into any dips.
The markets are part right. It still looks unlikely that Trump will sanction a pre-emptive strike. Kim knows that, which is why he would be dumb to up the ante by aiming some missiles into the sea off Guam first.
But the financial markets – and the broader global economy – could still turn nasty in an repeat of what happened 10 years ago even without a shooting war. Over the past decade, markets have shrugged off geo-political risk but have proved much more vulnerable to economic and financial risk. And there’s plenty to worry about in that respect.
For a start, the world has never really recovered from the…