Systemic geopolitical risk has bigger impact than we may think

John Robb presents a scary picture of what the raw geopolitical world looks like today. We are not going to be surprised by the actions of nation-states but by the activity of small groups of extremist who focus on creating system failures. The amount of damage that a few can do to the current global system is multiples greater than the cost of these types of terrorist operations. This places all financial markets at greater risk than two decades ago when the Cold War was ending.

An attack on a pipeline or refinery may cost a few thousand dollars, yet the impact of this type of terrorist attack can run into the hundreds of millions. The integration of our trade and financial systems means that a terrorist act will have a significant impact around the globe. Small groups that are not aligned with any nation only a cause can be able to obtain simple tools to create massive destabilization of the global markets. The very integration which has be the hallmark of the globalization growth may now be the downfall for the trade and financial system.

The dead-weight cost of terrorism is significant. Think of all the costs with airport security given the cost of carrying out the 9/11 event. All of this money could have been spent on other priorities in a different world. There is little that can be done to solve this problem except to dismantle the centralization and economies of scale that have cut costs for businesses. We could try and disengage with troubled parts of the globe but those with special causes can live and move almost anywhere. Our level of safety has declined with the free flow of goods and people.

Risk management has to be all the stronger to combat these types of risk.The risk is not with a surprise announcement but an event that may disrupt our energy, electrical, or transport system. The theorizing on how to handle these issues is necessary for any money manager.