I used to scoff at colleagues who, following the election of Donald Trump, predicted that the US would someday splinter into separate states. I am not laughing any more.
Supreme Court rulings over the past few weeks have deepened the fissures that have been opening up in America for years. These are rooted not just in Trump’s election and the progressive backlash to it, but can be traced right back to the 2008 financial crisis.
Policy decisions made by both Republicans and Democrats since then (including the bailout of banks rather than homeowners, and big corporate tax cuts) have eroded trust in American institutions, which is now at a record low, according to Gallup.
The court judgments, in particular the overturning of Roe vs Wade, and the new curbs put on the ability of federal agencies to act at a national level, will weaken and divide the country further. Taken to their natural limits, they would make it impossible for the federal government to guarantee a single rule of law across America on basic issues that matter not only to citizens but to investors.
I’m talking here about corporate regulations and reporting standards, labour and environmental rules, various consumer protections and even what kind of assets can be traded or not. Just think of everything that a federal agency such as the Environmental Protection Agency or, perhaps more importantly, the Securities and Exchange Commission, regulates. The legality and enforcement of those rules is now up for renegotiation across the country, depending on which state you live in.
This comes at a time of an increase in mass shootings across the US (along with frightening Supreme Court rulings that make it easier to carry concealed weapons), rampant inflation and a backdrop of televised congressional hearings about the January 6 Capitol Hill attacks. These hearings make it easy for every schoolchild to see that America is a country in which armed insurrections can, and do, happen.
All of this raises a larger question currently being discussed by some investors. When it comes to issues of political risk and volatility terms, is the US starting to more closely resemble an emerging market than a developed economy?
Mark Rosenberg, founder and co-head of the research firm GeoQuant, has been tracking various measures of political risk in America and numerous other countries on a daily basis since January 2013. In a recent client letter, he noted that, as it celebrated Independence Day on July 4, the country hit a new high in political risk. This was driven by increases in sub-indicators including governance risk, social risk and security risk.
While US political risk in global comparisons is still relatively low (it ranks 85 out of the 127 countries tracked by Rosenberg), it is now by far the highest of any developed market. Only countries such as Turkey, Colombia, Mexico and Israel look anything like the US within the OECD nations. Even more worrisome is the fact that the change and volatility of key metrics, including the risks of social and government instability, political violence and even the risk to democracy, make the US look much more like a developing nation than a developed one — let alone the supposed leader of the free world.
Rosenberg calls this the “EM-ification” of US politics, which he defines as “a less stable form of political conflict in which institutions are too weak to clearly define or enforce the rules, increasing social polarisation as well as political and economic uncertainty around key political events”.
“EM-ification” intensified under the Trump administration but has also increased under Biden as America’s political factionalism worsened. “US social and institutional risks are now more like those in an emerging market than the world’s oldest democracy,” says Rosenberg.
Of course, not all EMs are fractured or on the brink of violence; many, including China, India, Taiwan, Poland, Greece and the Philippines, have seen risk scores improve over the past decade. What’s more, while political risk has risen in the US, the size and depth of the US capital markets and the massive power of its consumer market mean there has been little to no impact economically from that. The dollar is strong, and the US has fared better economically than many developed countries over the past few years.
Still, economies and reserve currencies require trust to thrive over the long term. And trust is built on consistent adherence to the rule of law. The recent, radical rulings by the Supreme Court, which itself reflects political polarisation, have made clear that the law won’t be applied in the same way everywhere. The legal framework that binds you will depend on who you are, and where you live.
What might happen in a country in which a handful of coastal states and a few blue ones in the middle have wildly different frameworks for corporate regulation, social issues, taxation, labour and the environment? We are about to find out.
Secession used to be something that was joked about in the US — people spoke of “Tex-it” or the western states’ independence movement known as “Cascadia”. Armed conflict was something that happened elsewhere. Not any more. With or without guns, the US is now at war with itself.