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New 'Age of Disorder' looms for economy, politics: DB

Deutsche Bank Research Strategist Jim Reid joins Yahoo Finance’s Zack Guzman to discuss why he believes U.S.- China political tensions will remain large issue moving forward and how Millennials could 'reverse decades of policy.'

Video Transcript

ZACK GUZMAN: An interesting new report here to highlight from Deutsche Bank, looking into the new era that they call the age of disorder in the decades to come, a shift in not just politics around the world and power around the world, as China looks to surpass the US, in terms of the size of their economy, but also interesting dynamics in inequality and age, as generations here-- the power dynamics between millennials and boomers will shift in decades to come here. So joining us now is Jim Reid, a Deutsche Bank research strategist on the phone.

And Jim, thanks for coming on. I mean, it's hard to overstate the drama of this report. You guys had a volcano with lightning and fire coming out of it. But you're talking a lot about some pretty important changes, and I just want to start with the power dynamic between the United States and China. You say an inevitable Cold War, economic war coming between these two powers. Talk to me about what you see on the horizon.

JIM REID: Yeah, thank you for having me on. Yeah, I think we have to look back in history to understand the dynamics because China, historically, for centuries, was one of the biggest powers in the world. And from the mid-19th century, it had a 100-year period where it diminished in importance. And I think China sees itself as getting back to where it belongs in the economic standing in the world. And I think as it approaches the US, the US felt that China would conform more to Western ideals, but I think China has got a long history of its own ideals.

And I think that clash is kind of becoming much more center ground as China approaches the US, in terms of size. And you know, historian Graham Allison wrote that when an emergent country approaches the biggest country in the world, in terms of size, in 16 of the-- 12 of the last 16 occasions over the last 500 years, there's usually been a war. Now, there won't be a war in this scenario, we hope, but I think there'll be an economic battle between the two nations.

ZACK GUZMAN: Yeah, no, I mean, we're already seeing that economic battle play out now, whether it is going to be President Trump again for his next four years, no doubt heralding his trade war with China, but also Joe Biden, equally aggressive in his stances against China on the economic front. And I guess we'll see. I mean, we're already tracking kind of the way that China has, you know, expected to surpass the size of the US economy, perhaps in this coming decade. I mean, it's something that's going to be there, regardless if it's a Republican or a Democrat in power.

But back here at home and as well as some of these G7 countries, you highlighted even split thinking at Deutsche Bank when it comes to inflation. Talk to me about some of those fears and what could happen over these next few decades. People have said that this time is no different than maybe what we saw back in 2007 to '09. Talk to me about why you think it is and why inflation risks are something investors should be considering right now.

JIM REID: I think the inflation story, the reason there's maybe a disagreement, is that it still depends on what policymakers do going forward. So if-- well, I think we can all guarantee that monetary policy is going to be pretty loose as far as the eyes can see-- QE, low interest rates. I think that is a given. What is more debatable with how much fiscal policy will move. The decade we've been through after the financial crisis was very one that-- very much one where the economic orthodoxy was being fairly disciplined on the fiscal side and trying to repair balance sheets. And I think post-COVID, that discipline is likely to stay-- is likely to be removed.

And I think you get a combination of fiscal and monetary policy going forward, and that, I think, would be more inflationary. But if I'm wrong, it is probably because the governments try to repair their balance sheet again. And then, I don't think you will get inflation. So fiscal policy, I think, is the key to inflation here going forward, and that's why there's some difference of views.

ZACK GUZMAN: Yeah, I mean, obviously, that's going to differ across the world. We've already noted that a lot of countries out there grappling with this pandemic don't necessarily have the same tools to deal with it that we have here in the US, when you think about how accommodative the Fed has been and how little we've seen on the inflation front. What might that do in terms of the power dynamic around the world, as we see maybe some economies here, in the developing world especially, maybe falter and succumb to some of those pressures?

JIM REID: Well, I think it's going to be a more disorderly world. Because in the globalization era, which we think we're just leaving, which is a 40-year period, I think most countries were aligned in policies. The economic policies of the world were fairly aligned. And I think going forward, there's going to be a lot more kind of, you know, that-- well, kind of more stand-on-your-own-two-feet type policy.

So some governments might choose the inflation option. Some governments might choose the repair that balance sheet option. Emerging markets that don't have the same access to international markets might struggle, relative to ones that do. So I think it's a bit more of a bipolar, mixed-up world rather than the kind of everything moving in a similar direction world of the globalization era.

ZACK GUZMAN: Yeah, looking within specific borders here, I think the most interesting piece of the report is looking at maybe some of the power dynamics within countries shifting as well here. As we've highlighted on this show, the US increasingly is hitting historic levels of inequality. You can look at that, our Gini coefficient, which tracks how unequal we are here, hit a record last year. I mean, the closer you get to one on the scale, the more unequal your country is. The US moving in the wrong direction on that front.

But within that, also the power dynamic here between millennials and boomers. We've covered that hostility here. But the power dynamic shifting as generations will be voting more. Another dynamic here when you think about the discrepancy between where we are politically. I mean, how might that change not just here in the US, but you see it across there in England as well. How might that change the dynamic here?

JIM REID: I actually think the inter-generational divide is probably the most interesting thing we're going to look at in the next decade. It's probably the thing that people, in my opinion, get wrong. Because the general assumption is that as the population ages, you are going to cement in the kind of haves and have-nots. So the elder people-- as the population ages, they are going to continue to vote for the status quo.

But actually, if you look at it arithmetically, by the-- just before the end of this decade, people born below-- before 1980, the millennials and younger, are going to be the majority. And that is changing very quickly. So if you go back to, you know, 2015, the elder generation still had a massive advantage in electoral numbers. And why this is important is I think people that were in the millennial and young generation are going to struggle to catch up with that intergenerational wealth divide.

You know, that generation is probably the first of many that hasn't been richer than their parents, and I still struggle to see how they're going to jump that gap. And if that's true, then by the time they become more powerfully electorally, which we think happens towards the end of this decade, the challenges of then voted for more radical politicians and policies are quite high, in our opinion. So you know, that will bring disorder to the status quo, not necessarily a bad thing. It might be a good thing for equality and the inter-generational divide, but it will bring disorder to the status quo.