The Return of “Might Makes Right” Is Reshaping the Economic Framework

This first note of the year could have been about a regular economic topic like the continued weakness in Canadian business investment, the urgent need to boost productivity amid sluggish population growth or the increasingly fraught path of public finances. They’re all still important issues. But recent events have thrust geopolitics back into the spotlight.

Last weekend’s US military intervention in Venezuela marks the return of a global economy in which “might makes right.” For the first time since World War II, an American president has decided that projecting technological, financial and military superiority isn’t enough and is openly talking about territorial expansion, including annexing Greenland. That’s easier said than done, of course. But as with tariffs, deportations, Fed interference and other disruptive actions it’s already taken, the Trump administration is pressing forward.

For several decades, macroeconomic analysis operated within an implicit framework of relative geopolitical stability. There was consensus around a seemingly solid foundation built on the rule of law, independent monetary policy and strong institutions. Sure, there were conflicts. But most were seen as exogenous, local and unlikely to undermine the rules-based international order. The justification for past US interventions was crisis management, deterrence or regime change, not territorial expansion. That framework is now in question.

Our challenge as economists is to assess the implications of this change. And those implications may be more sweeping than immediate market reactions suggest. It is rational for markets not to overreact if the intervention remains limited in scope and expectations around key variables such as growth, profits and monetary policy remain largely anchored. But the frame of reference used by economic agents is shifting. In this increasingly turbulent environment, investment is becoming more sensitive to political risk, value chains are becoming more vulnerable to disruption and risk premiums are becoming more volatile.

The security framework is transforming before our very eyes. NATO’s commitments to increase military spending were intended as much as a deterrent as an attempt to appease the president of the United States. This past November, the head of France’s military sparked controversy when he said the country must be prepared to “accept the loss of its children.” The US Department of Defense has been renamed the Department of War. Leading experts have warned that 2026 could be the most dangerous year since 1945 and be marked by increased armed conflict and unprecedented geopolitical instability.

Others are less alarmist, believing that nuclear weapons and economic interdependence will serve as deterrents. Either way, there’s reason to be somewhat humble about the frontiers of economic forecasting as we begin the new year. Economics is still a powerful explanatory tool, but it must now be considered alongside dynamics once relegated to the history books. This is likely to be one of the major story lines of 2026. Stay tuned.