Fed Tops Iraq as One Thing After Another Fails to Rattle Markets

History, in the words of playwright Alan Bennett, is “just one bloody thing after another.”

Central bankers likely feel the same.

Each time the world economy shows signs of strengthening, it runs smack into geopolitical upheaval. The latest is the fighting in Iraq. Then there’s the violence in Ukraine and the Syrian civil war; also, military coups in Egypt and Thailand, clashes in Libya and street disturbances in Turkey.

A report this week from the Institute for Economics and Peace attempted to calculate the cost to the global economy of containing and dealing with violence: $9.8 trillion last year or 11.3 percent of gross domestic product. It cited upward revisions of China’s military expenditure and the intensifying of internal conflicts for the $179 billion increase from 2012.

“The danger is that we fall into a negative cycle: low economic growth leads to higher levels of violence, the containment of which produces lower economic growth,” said Steve Killelea, founder and executive chairman of the institute.

So far investors are nonplussed, yet political threats likely may present a greater risk to their portfolios when Federal Reserve Chair Janet Yellen and her international colleagues start raising interest rates, Tina Fordham, Citigroup Inc.’s London-based chief global political analyst, said in an interview.

Vox Populi

For now, she says, monetary stimulus helps explain the disconnect between increased conflict and minimal market impact -- she calls it the “palliative effect of cheap money.”

The Standard & Poor’s 500 Index is up 6 percent this year and the Chicago Board Options Exchange Volatility Index, known as the VIX, is around seven-year lows.

Another source of tension in Fordham’s eyes is what she calls Vox Populi, her description for how public opinion is becoming louder and more volatile. Citigroup estimates the number of mass protests, elections, government collapses and the like jumped 54 percent in the last three years versus the previous decade.

Richer nations haven’t been spared with the rise of protest candidates in ballots from the U.K. and France to Virginia reflecting a voter backlash against disappointing economic growth and growing income inequality. The U.S. federal government shut for a time last year and Republican lawmakers have made continued debt service a political bargaining chip.

“Geopolitical risks are intensifying and unlikely to be resolved any time soon,” says Fordham. The markets are “probably not wrong to ignore the risks for now given the Fed’s importance, but maybe that changes when the Fed change stance.”

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