Who predicted the 2008 global financial crash? COVID? The war in Ukraine?
Of course, some did. Hollywood gave us a taste of a global respiratory pandemic in the 2011 film, Contagion.
Some economists saw the unravelling of the financial markets and the ensuing recession long before it happened.
And we should all have seen Vladimir Putin’s war coming. He had already annexed Crimea, he massed troops on the border for months and kept warning he would strike.
But even if we should know, we often don’t want to know. We certainly don’t prepare.
These events are what statistician Nassim Taleb popularised as “Black Swans”. Why? Because they are outliers. They have extreme impact. What’s more, we are all wiser after the event, concocting explanations that make it all seem so predictable.
Another pandemic was always going to happen. We had trial runs with SARS and Swine Flu. How we had erased the history of the so-called “Spanish Flu” pandemic that killed more people than World War I.
Financial crash? Well, Asia’s markets collapsed a decade before the GFC.
Let’s not forget the Great Depression.
War? When has the world not been at war?
‘Black Swan’ events are not so rare
But these recent Black Swan events reshaped our world. The best laid plans were reduced to dust. People die. Businesses are ruined. Livelihoods and homes are lost.
We live in a world now where Black Swans are not so rare.
Climate change has made weather catastrophes a regular occurrence.
The world has never properly recovered from the financial crash; it left in its wake gross wealth inequality and that is now baked in.
Economic upheaval has upended politics, seeing the return of the political strongman, and democracy is in a spin. We have just had a federal budget at a time when the global economy is being ransacked by runaway inflation and major economies are going backwards.
The International Monetary Fund says we should expect things to only get worse.
Black Swans, Taleb says, are outside the realm of regular expectations. So where are they hiding?
A global recession. The World Bank and the IMF are ringing the alarm bells. It would not be unexpected, a recession is hiding in plain sight. The Black Swan is inflation and it is already here.
Treasurer Jim Chalmers calls it public enemy number one. Is it truly a Black Swan? Well, it is not entirely outside the realm of expectations.
But we did not see inflation coming and, like the 2008 crash, COVID or the Ukraine war, if we did it see it we didn’t want to — and we did not act.
Reassurance has been swapped for the wrecking ball
Remember the Reserve Bank not that long ago was reassuring home buyers that interest rates would not be going up.
Tell that now to families paying $800 more each month for a $500,000 mortgage.
Interest rates will keep rising while ever inflation keeps raging.
It is a blunt instrument and, for families, a wrecking ball. The Treasurer has said the indebted and the poor will bear the burden.
They will have to stretch the family budget to pay for food, fuel, electricity and hope to hold onto their homes.
But what if interest rate hikes are not enough? Then, the World Bank says, the globe could experience a sharp downturn — if not in 2023 then 2024.
The World Bank warns that every global recession since 1970 was preceded by weakening growth in the previous year.
All previous global recessions coincided with sharp slowdowns in major economies. That’s right where we are. The two biggest economies in the world — the United States and China — are weakening.
For these reasons the government banked its windfall from higher commodity prices. It needs something in reserve. It also cannot afford right now to splash cash and further fuel inflation. This follows the World Bank playbook.
But there is another economic Black Swan lurking: unemployment. Jim Chalmers says it will increase.
If that gathers steam then the government is fighting two enemies. Inflation puts the breaks on spending but to get unemployment in check, the government might have to boost spending to stimulate the economy.
That’s battleground with two fronts and a divided army.
The clock is ticking
The economic Black Swans are not unprecedented but they are out of recent memory. No Australian under 50 has seen a time like this in their adult lives.
The problems are not just event driven – like the Ukraine war – they are structural. There is a widening wealth gap, young people feel abandoned or forgotten, we are facing an epoch-changing energy transition and we know we can’t fund all the urgent spending demands with our current tax mix.
Jim Chalmers warns Australia’s GDP will slow to 1.5 per cent before it gets better. He is hoping that inflation tops out and starts to pull back next year. These may be hopeful projections. It is a high wire act and we are a shock away from a fall.
What is that shock? What is the Black Swan we should fear most?
Vladimir Putin has more than hinted at nuclear war. His back is against the wall and he cannot countenance defeat in Ukraine. He could unleash tactical battlefield nuclear weapons. It is hopefully unlikely but not unthinkable. No one can predict what happens after that.
There is a revolution brewing in Iran. The protests are continuing as women demand their rights. The regime is killing its own people. Where does this end? Is this enough to topple the ayatollahs? Iran in free fall will upend the Middle East as the Iranian revolution in 1979 upended global political Islam.
Iran, we know, is a big energy provider — it has the world’s second largest natural gas supply and the fourth largest proven oil reserves. Uncertainty and chaos there will touch us all.
Then there is China. What is the Black Swan? War in Taiwan. We can’t say we weren’t warned. Xi Jinping is determined to “reunify” the island with the mainland and he will use force if necessary.
The clock is ticking. Xi has now claimed a historic third term as China’s leader. Some analysts fear this is when he will strike. Even if he does not invade, he may blockade the island. That would stare down the United States. Would America intervene? Would Australia be dragged in?
These are our calculations. Taiwan manufactures 90 per cent of the world’s most advanced semi conductors essential for everything in the digital economy. The digital world grinds to a halt.
War over Taiwan would destroy the global economy. The two biggest economies would be at opposite ends. Shipping lanes would be choked off, there would be tit for tat trade sanctions and, of course, cyber war.
This would dwarf the impact of the Ukraine war.
The Rand Corporation has war-gamed this frightening scenario. A year long war would wipe up to 10 per cent off the US economy. For China it would be worse. GDP would drop by up to 35 per cent.
In the Cold War they called this mutually assured destruction. It doesn’t mean it can’t happen. We can see it, but can we stop it — can we prepare for it?
In a world of Black Swans, this is the blackest of all.
Stan Grant is the ABC’s international affairs analyst and presenter of Q+A on Thursday at 8.30pm. He also presents China Tonight on Monday at 9:35pm on ABC TV, and Tuesday at 8pm on the ABC News Channel.