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Earlier this month, when tensions were just flaring up in Egypt, I wrote on February 5 a piece here in Money and Markets titled, “How Egypt’s Civil Unrest Could Spread to Asia, and What It Means for Your Investments!“
The fact is every step of the way through this global economic crisis the shocks have been thought to be contained. But they’ve proven time after time to be just the opposite: Contagious!
Now we’ve seen successful overthrows in Tunisia and Egypt. Libya is on the verge of ridding itself of a dictator. Bahrain, Yemen, Morocco and Jordan have all flared up in public protests against their governments.
The desire for freedom, basic rights and a fair share of prosperity is universal.
And given this backdrop, plus the addition of high, persistent unemployment, sharply rising food costs and a tool to coordinate protests (the internet), a major global movement could just be getting underway.
The dominoes continue to line up. The more stories of success and change that are witnessed, the more likely we’ll see the citizens of more countries enter the mix.
So what’s next?
As I warned in my February 5 column, the biggest threat to global stability lies in Asia. And in the past week, protests have begun to kick off there, most importantly, in China and India.
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These two countries have had sharp ascents to global economic prowess over the past decade, and the hottest growth in recent years despite a global economic downturn. Yet they still have the largest poor populations in the world where the distribution of wealth has become increasingly disparate.
That makes these two dominoes the most dangerous of all for the global economy.
But before we see social unrest in China and India choke off global growth, Europe may derail the world’s economic recovery first.
Will Europe Be
the Next Domino?
While the transformations taking place in the Middle East have increasingly fueled fights for freedom and democracy, the catalyst was less political and more economic in nature: Namely sharply rising fuel costs and persistent unemployment.
With that in mind, Europe has to be among the most vulnerable to the next wave of public uprisings. In the past year, we’ve seen deadly riots in Greece; and massive strikes and protests in Portugal, Spain, Italy, Ireland and France.
Last year the 10-year old European Monetary Union faced a wave of sovereign debt defaults that could have destroyed it. And that would have likely sent European banks and the global financial system back to the brink of total collapse. So the weak euro-zone countries were force-fed tough austerity measures by their neighbors and the IMF, in exchange for “rescue” funds.
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As time passes and the weak euro-zone countries feel the reality of austerity — a bleak outlook for a return to normalcy and the power of people standing up to government — we may hear the people scream “no more!”
And the root of the turbulence might not just be pain, but irreversible change.
While many Middle Eastern citizens are seeking freedom and a just sovereign nation, what’s under threat in Europe is a loss of sovereignty.
You see, the only plausible solution to the crisis in Europe is fiscal unity.
That means the European countries that are defined by deep-rooted histories, heritage, ideologies, languages and national pride would consolidate into a true union, with one central governing power.
But I wouldn’t bet on that outcome.
Conversely, if the people stand up and reject the bailout from the rest of Europe and the IMF, and salvage their sovereignty, you can expect government debt defaults to spread around Europe like wildfire.
Given the massive exposure that European banks have to euro-zone sovereign debt, government defaults could easily send the global financial system back into a dangerous tailspin.
And be aware, there’s one thing that history shows us about sovereign debt crises: They tend to be contagious.
So as geopolitical threats spread throughout the global economy, you know it can’t be good for jobs, housing, stocks or risky assets. However, there is one sector where there is always at least one bull market: Currencies.
To see how to get concise instructions on using ETFs and options to get the biggest possible payoff from fluctuations in the euro, the dollar and other world currencies, click here to view my latest presentation.
Regards,
Bryan
{ 5 comments }
Bryan, its all very well to preach the gloom and doom scenarios of total economic annihilation. And yes, if we as societies don’t make rational decisions we could end up in real trouble. You have just pointed out that if Europe is to survive as an economic entity it will probably have to form a fiscal union. For that reason when faced with the reality of their situation, (total chaos or rational compromise) Europeans probably will form a fiscal union. Greece is a good example. There are riots in Greece because Greece has put itself into an unenviable situation. It has to restructure its society and economy because its politicians and economy behaved in an irresponsible and profligate way. As a result Greece is making the difficult and wrenching reforms that are needed and causing a lot of pain. But ultimately the country is reforming itself. In 10 years people will look back on it as a dark nightmare.
Likewise in the United States, there are solutions to America’s problems. America’s national debt is a huge problem but it could be solved with simple solutions like a VAT (value added tax). Canada did this over 10 years ago and it put it on the path to fiscal responsibility. Eventually, America will realize that it must do the same. Will there be rough patches? Inevitably.
I see this period as a period of transformation. American’s are finally getting involved in creating solutions. The Tea Party Movement, despite may of its irrational ideas is evidence that Americans are finally waking up and getting involved. The problem is that there is a lot of misinformation and crazy ideas. Like the “Laffer Curve”. The ridiculous idea that somehow if you lower taxes, that somehow you will generate more taxes.
A lot of what we need to do to repair the current state of affairs is not brain surgery, its common sense. Jettisoning America for China is not going to help us (as North Americans). America has a great tradition of democracy, honest and transparent government (more so than China and much of the rest of the world) and the Rule of Law. I think Americans will eventually get it. The only way to solve our problems is to sit down and rationally talk and listen to each other. No one political or economic philosophy has all the answers. To suggest otherwise is to close ourselves off to innovative solutions. And what has made America great and the richest and most powerful country in the world is that Americans are innovative and can think outside the box.
In short, I am Bullish on America for the long term.
“The ridiculous idea that somehow if you lower taxes, that somehow you will generate more taxes.”
“Those who cannot learn from history are doomed to repeat it.” – George Santayana
Lowering Taxes worked for J.F.K., R.R. and G.W.B. Money in the peoples pocket is always more productive than money in the governments pocket.
Brian Rich is right. Anyone doubting it should bookmark this page, refer to it periodically, and note how long it takes you to prefer Mr Rich’s view over the contrary view. This time, it is not “Return to Normalcy” or business as usual. It is this mantra that currently is sweeping N. Africa and the Mideast: “The people demand the downfall of the regime!” (Those eight words are the actual words, nation after nation, as reported by the press.)
It will be a long hot summer in Europe, and we have had few of these in modern US history as well.
The book “Indignez-vous!” has sold a million copies in French since October 2010 and is flying off the shelves in the UK as “Time for Outrage.” It shows we really do need to “think out of the box” as Mr. Gordon says.
Also, we need to remember that people had currencies before capitalism and they will after.
Egypt’s civil unrest has spread so far only to other countries of the Arab world and should be contained to within that region. Any “me too” uprisings in China and India would be as unrelated to the Arab world as would to Latin America who also has deep social divides.
I am also bullish on America and will not enter the Weiss bear cave. Go Dow 15K.
I am still on the fence as to Brian’s predictions however, I do fnd him to be a steady voice less prone to aggrandizing situations so I take his views on board. As a European, I see the situation regarding the fall of the Euro as inevitable. The ECB and Europe are increasingly in dire debt in an attempt to stem the inevitable with Greece, Ireland, Portugal and it looks now like Spain also. The basis of regaining financial stability to the region seems to be internal country reform and economic growth. The countries who need this growth most are not experiencing it leaving huge debt burdens on the individual countries and on Europe’s central bank.
In addition, interest rates charged on the loans seem designed to be punitive and stifling rather than to stimulate growth and help these countries find a way out of their situations. Politics seems to be interfering with what should be simple good business sense.
I would like to comment on the protests and strikes that are routinely referred to by all authors in Weiss Research. Deadly riots are referred to in Greece which seem to be the case. I’m unsure of what the situation is in Portugal but it doesn’t seem to be as heated as in Greece. As a resident in Dublin, I am at pains to inform you that there has been one mass peaceful protest which had any significant numbers attend it. The other two “attention grabbing” protests were organised by a long standing extreme nationalist organisation within the country and had a max of 150 – 200 youths attend. This did lead to some agression and violence but it was an extraordinarily small group considering the austerity measures the people of this country have undertaken. In fact their local media have written about why people are not angrier? Where has this anger been stored? As an outsider I feel this anger may boil over at some point but for now I think reports of voilent riots, protests and strikes are totally inaccurate in relation to the Irish situation and over dramatising it is unfair to a nation which seems to be doing everything thing in their power to take on austerity measures and to (as they would say themselves) “get on it with it”.