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BPEA Article

Earning from History? Financial Markets and the Approach of World Wars

Abstract

Are world financial markets paying due heed to geopolitical
risk? Despite unchallenged U.S. military supremacy, the financial consequences
of a terrorist nuclear strike, or war in the Middle East or the Taiwan
Strait—or some totally unforeseen conflict—could still be enormous. That
globalization under a powerful hegemon has strengthened linkages among
national economies may not rule out another major war: such linkages were
also strong on the eve of World War I, which thus caught investors off guard.
Investors try to learn from history, but the very different financial impacts of
the two world wars and the Cold War reveal the tendency of military technology
and regulatory regimes to shift significantly, reducing the relevance of
past experience. Any lessons investors might take from the last war could
have limited relevance for the next—or be forgotten after a generation of relative
peace has led to complacency.

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