By Jose Miguel Alonso-Trabanco
It seems that, much like last year, 2021 is going to be rather eventful. So far, there are already several dramatic events, including the aftermath of the contested 2020 US presidential election, the recent coup d’état that took place in Myanmar, the geostrategic rivalry surrounding campaigns to deliver millions of COVID-19 vaccines around the world, and the eventual hoped-for reset of countless activities of everyday life – including education, work, financial services, public utilities, businesses, trade, entertainment, healthcare and even leisurely pursuits – after a devastating global pandemic.
One of the most remarkable developments of the current year is the recent financial clash between Wall Street hedge funds and a virtual community of individual traders organized via internet forums like Reddit. In what looks like a postmodern iteration of the classical “David and Goliath” narrative, heavyweight hedge funds were defeated by a spontaneous legion of small investors in a speculative battle surrounding videogame retailer GameStop’s shares, suffering major losses. The damage inflicted was not trivial in many cases; for example, hedge fund Melvin Capital lost around 53% of its total value.
The shockwaves emanating from this unprecedented event generated worldwide journalistic coverage, a great deal of political controversy, the formulation of heated opinions, and even the proliferation of all sorts of conspiracy theories. However, this episode is a case study that – when analyzed in-depth through the filter of critical thinking – offers valuable lessons for developing better analytical frameworks in the fields of strategic studies, intelligence activities, political science, international relations and political economy, which taken together can improve situational awareness and foresight.
Lesson 1: The unforeseen consequences of financialization pose complex challenges for policymakers
The purpose of classical finance was to support manifestations of economic dynamism like trade, investment, business, production and consumption. Accordingly, it sought to minimize and handle risks by backing projects deemed likely to succeed. This was also the rationale that gave birth to the modern insurance industry.
However, the rise of thriving speculation (purchasing an item for the sole purpose of reselling it once it reaches a higher price as a way to make a profit) and the invention of derivatives – whose value is linked to assets like commodities, stock, currencies, metals and energy, amongst others – has enabled transactions that do not even involve the actual physical transfer of ownership. At the height of the so-called “tulipmania” during the Dutch Golden Age, said practice was referred to as windhandel (i.e. wind-trading) because it involved bets based on expectations rather than the exchange of real goods for money.
In this regard, speculation has flourished as the modus operandi of both investment banks and hedge funds. Consequently, they have amassed untold amounts of wealth. Whereas the world’s GDP does not exceed the sum of 100 trillion dollars, the global derivatives market is estimated to be worth between 558 trillion and one quadrillion. Unsurprisingly, entities like Goldman Sachs and BlackRock are economically larger than many countries. Likewise, credit rating agencies determine the ability of sovereign governments and private firms from all over the world to get access to funding, despite the fact that their operations cannot be held accountable and that the rigor of their methodologies has been repeatedly questioned.
Predictably, colossal financial entities have also become politically powerful. Their influence is projected through generous donations for political campaigns, lobbying, sponsorship of think tanks, and even sociocultural conduits like academia and journalism. Deregulation, the introduction of new financial technologies, and scant oversight have increased their collective clout.
In fact, the systemic turmoil unleashed by the financial crisis that broke out in 2008 demonstrated that they had become ‘too big to fail,’ especially considering that the amount of money spent by the US government’s bailout program to prevent the sector’s implosion represented the largest expenditure in US history. Instead of embracing a conciliatory attitude, Wall Street harnessed this turning point as an opportunity to advance an even more oligopolistic market structure.
The fact that the aforementioned decision was implemented was widely seen as a sign of favoritism towards elites, whereas the concerns of many ordinary consumers, debtors, taxpayers and homeowners who lost most of their wealth were disregarded, giving rise to simmering discontent, disenfranchisement, and resentment. From a long-rage perspective, this means that there are political scores waiting to be settled. And as physics teaches: it is only a matter of time before the accumulation of a critical mass reaches a boiling point.
On the other hand, as some analysts have noted, the short-term worldview that prevails in speculative finance might produce harmful outcomes like deindustrialization, the discouragement of long-term investment projects, and macroeconomic destabilization – all of which are phenomena that risk compromising national security. Nevertheless, the prospects of structural reform are bleak, particularly in a political environment in which bipartisan consensus seems elusive.
Lesson 2: Financial warfare is here to stay
Clashing geopolitical agendas are giving birth to strategic competition in the realm of international finance. Washington is using the hegemonic position of the US dollar and US control of critical global financial nerve centers and circuits whereas Beijing, Moscow and – to a lesser extent – Tehran are actively coming up with creative measures intended to challenge the role of the United States as the world’s financial superpower.
Taking into account the relevance of finance as an impersonal force that generates intricate networks of complex interdependence, the nature of the global financial battlespace is exceedingly complex. For instance, its dynamics involve both state and non-state actors. In other words, in this arena great powers can engage each other – just like they have in many different ways throughout history – but other players can get involved too, either as attackers or targets. For instance, the US has sanctioned private companies and individuals linked to hostile powers, terrorist organizations, and criminal groups.
Nonetheless, non-state actors can also fight against one another. In this case, a group of ordinary American citizens instigated what is being viewed as an “insurgency,” “uprising,” or “rebellion,” carried out through channels and platforms that can be weaponized as asymmetric force multipliers, and targeting an economic sector that is widely seen as being privileged at the expense of everyone else in society, even benefiting from the misfortunes of others.
It must be borne in mind that, in the realm of speculative finance, it is irrelevant if prices go up or down. In the grand scheme of things, the only factor that matters is that one can anticipate the direction of wild market fluctuations.
Lesson 3: Free markets are not as free as commonly believed
According to the liberal branch of political economy, free markets are convenient, effective, and desirable because – in theory – they are supposed to perform better than the possible alternatives. Nonetheless, their feasibility depends on: 1) the unrestricted flow of actionable information; and 2) the existence of competitive conditions. However, empiric reality does not support the validity of either assumption in modern financial markets.
Actually, insider trading seems to be the norm whenever large sums of money are at stake. Even though said practice is regarded as either unlawful or illegitimate, there is little that authorities can do about it due to deregulation. As a result, private financial entities operate with methodologies commonly employed in the field of intelligence-gathering activities. This gives them a competitive edge that is difficult to match for economic agents with limited resources, insight, or capabilities.
Moreover, the world of finance has become increasingly oligopolistic. Concomitantly, these large entities have the market power to exclude smaller players, and that is precisely what happened when several trading platforms – like the Robinhood app – attempted to stop the execution of financial operations that were detrimental to the interests of big Wall Street firms. In fact, their political influence goes well beyond that, particularly if one considers that they have managed to avoid accountability for a litany of alleged fraudulent activities, including money laundering, tax evasion, and the systematic implementation of elusive measures to avoid sanctions.
Lesson 4: Homo economicus represents a flawed conception of human nature
According to mainstream thinking in contemporary economics, human beings behave as rational maximisers of utilitarian convenience, a notion that has inherited the core philosophical principles first put forward during the Enlightenment. In other words, the core theoretical axiom of said ideology is that the top human interest is making a profit and that the influence of any other factor is either secondary or even ‘irrational.’
Nonetheless, such worldview is an oversimplification of reality. Actually, humans are multidimensional creatures whose mindsets are influenced by historical, social, emotional, cultural, religious, identarian and – above all – political considerations, as thinkers like Aristotle and Carl Schmitt have pointed out. As a result, people care about their families, communities and countries. Otherwise, they would not be willing to die or kill in the context of war or existential contingencies.
Thus, the political and psychological desire to bring down Wall Street’s behemoths makes sense for amateurs who harbor resentful attitudes toward those which are seen as the instigators of their hardships, even if it means assuming the risk of suffering monetary setbacks. Schadenfreude can be a powerful motivator. In fact, some small traders manifested that – above all else – their actions were driven by a vengeful interest in ‘punishing’ entities which are often held responsible for the privatization of gains and the socialization of losses.
Far from being exclusively conditioned by narrow unidimensional criteria of immediate material satisfaction, the behavior of market forces in the economic sphere responds to political and social factors that are commonly overlooked. In fact, the anthropological dialectic distinction that differentiates ‘friends’ from ‘enemies’ is also present in the financial battlespace. Therefore, it is wise to envisage what an emerging complex system of parallel confrontation that encompasses geostrategic, political, financial and ideological risks might look like, both in the present and in the near future.
The views expressed in this article are those of the authors alone and do not necessarily reflect those of Geopoliticalmonitor.com or any institutions with which the authors are associated.