Sebastian Mallaby

For the past quarter of a century, the United States has maintained an unrivalled military establishment as well as unnerving mountains of government debt. It has succeeded in doing this because the U.S. dollar’s status as the world’s reserve currency has facilitated limitless amounts of U.S. borrowing. But now the resulting debt burden casts a shadow over the U.S. ability to project power. The defense budget will have to be cut, the dollar’s reserve status is increasingly questioned, and the United States may find that foreign creditors attach tough conditions to their loans, potentially using these as levers in military stand-offs. Drawing on his work as the Director of the Center for Geoeconomic Studies at the Council on Foreign Relations, Sebastian Mallaby explains the vital connections between financial and military power. Never before has the world’s leading nation also been its leading debtor.

Since the world tumbled into recession in 2008-2009, global policy makers have committed an unprecedented quantity of public money in an effort to kick start growth. But they have met with only limited success: Growth in emerging markets has bounced back, but most of the rich world has experienced only the feeblest of recoveries. Drawing on his work as Director of the Center for Geoeconomic Studies at the Council on Foreign Relations, and anchor of the Council’s marquee World Economic Update series, Sebastian Mallaby explains this uneven pattern of recovery. He predicts a future very different to the world we have experienced until now: One in which not only the BRICs but also other frontier economies gain strength, realizing astonishing productivity gains as workers move from the countryside and firms adopt western management insights; and one in which the hitherto advanced nations struggle under the burden of high debts, soaring health costs and negative demography.

In the aftermath of the financial crisis, global regulators have focused on reining in the risks taken by commercial banks, investment banks and insurers. Drawing on colorful case studies from his best-selling history of hedge funds, Sebastian Mallaby explains why this approach is not enough. Experience shows that too-big-to-fail institutions will always take excessive risks, no matter what the regulatory constraints imposed upon them. Meanwhile, a sounder way of handling financial uncertainty is hiding in plain sight: Regulators could make the world a safer place by encouraging small-enough-to-fail hedge funds. Because of their powerful incentives to control risk and seek out contrarian insights, hedge funds are the one part of the financial system that came through the crisis well. To a surprising and unrecognized degree, the future of finance lies in the history of hedge funds.