Financial Cold War

As we crossed the finish line last week into the longest bull market in human history, a question that has been on my mind for years came bubbling to the surface again: if this is so easy, why didn’t the governments of the world do it before? In other words, since it’s been proved quite clearly that central bankers can prop up equity markets around the world, as well as public sentiment, why did it take them so long to figure it out?

Were they really that dim? Why would the governments, and all the self-interested individuals which comprise them, put themselves through the financial horrors of 2007/2008, the crash of 1987, the Internet bubble collapse of 2000, or the grinding equities-are-dead market that lasted the entire 1970s? It doesn’t make any sense.

However, I’ve been fleshing out something that I think might provide an answer to the question by way of a surprisingly strong analogy. During this “Everything Bubble”, conjured up by Mario Draghi, Ben Bernanke, Haruhiko Kuroda, and Zhou Xiaochuan, the idea of “mutually assured destruction” keeps springing to mind. M.A.D. is defined as “a form of Nash equilibrium in which, once armed, neither side has any incentive to initiate a conflict or to disarm.” As a child of the cold war myself, I probably have this M.A.D. analog deeply planted, but as I thought about it more deeply, I was astonished how cleanly it explains our new financial world.

To explain this analogy, I’ll lay out the players involved:

The Pre-Atomic World: In the case of military conflict, there were obviously countless wars throughout the centuries. In the financial world, there were likewise countless periods of booms and busts. The mass of humanity in both the military and financial worlds tended to engage locally, and there certainly was no overarching global “hand” over either of these worlds.

Knowledge Development: Necessity is the mother of invention. In the case of war, the global conflict of World War II prompted the U.S. (as well as, although not as far along, Germany and Russia) to explore the creation of atomic weapons. The necessity in the financial world was brought on by the financial crisis that unfolded in 2007 and 2008. In each of these cases, the accumulation of knowledge and cooperation had reached a level that didn’t exist in the past, and a new form of “technology” was formed.