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In recent weeks we’ve seen riots in Algeria, a coup in Tunisia and a massive public uprising in Egypt. The catalyst: The combination of skyrocketing food prices and high, persistent unemployment.
But while most are focusing on the specific political shortcomings within the countries and dismissing the events as isolated and contained, the lessons learned from this global economic crisis give every reason to expect contagion …
- The subprime crisis was said to be contained. But it wasn’t.
- The failing of major U.S. financial institutions was said to be contained. But it wasn’t.
- The sovereign debt crisis in Greece was said to be contained. But it wasn’t.
Now, global politicians and financial market experts are hoping the latest events will be isolated and contained. But, they likely won’t.
Here’s why …
Spreading Discontent
This dangerous combination of persistent unemployment and rapidly rising food inflation isn’t just specific to North Africa and the Middle East. Global unemployment remains at record levels. And world food prices rose to a record in January.
The expanding unrest is most vulnerable in those countries with low per capita income, where people may spend as much as 70 percent of their income on food. Moreover, the threat of civil disorder rises when those countries have significant income inequality and/or have gone through major economic stress where the outlook for a return to normalcy looks bleak.
In this environment, there are many countries that fit the bill. Take a look at how risks in other parts of the world stack up against Egypt and Tunisia.
The table below is a gauge of economic misery across the biggest countries in the world. This index was created by a former economic advisor to President Lyndon Johnson, Arthur Okun. It simply takes the sum of inflation and unemployment rates. According to his index, the higher the index value the more miserable life is in these countries.
You can see that Tunisia and Egypt, two countries that have already erupted in crisis, are among the most miserable.
Also note the position of the weakest euro-zone countries — Portugal, Ireland, Greece and Spain — all of which have been forced into stifling austerity plans by the IMF and their European neighbors.
We’ve already seen massive protests in recent months, both from those countries taking money … and from those giving money. And growing inter-European political fractures and languishing economic activity promise more social volatility ahead.
Asia at Even Greater Risk!
Perhaps the biggest potential threat within this table is a spread of public uprising to the three Asian countries that have been important drivers of global economic recovery: Indonesia, India and China.
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Food prices in Indonesia and India have risen 16 percent and 17 percent, respectively, over the past year. And while China’s misery index is on the bottom of this list, it’s risen 40 percent in the past year.
Remember, China still has the world’s second largest poor population, with 135 million people living on less than one U.S. dollar a day. The largest poor population: India.
So a backlash in China or India could stop the global economic recovery dead in its tracks!
That’s why, despite all of the global pressure on China to stop manipulating global trade through its weak currency advantage, it is unwilling to make meaningful concessions. The risk of losing exports, and therefore losing jobs, is a recipe for violent protests and too big of a risk for China’s ruling Communist Party to take.
To be sure, major problems in China are major problems for the rest of the world. Yet, the pressures on China to strengthen the yuan will continue to grow, because its currency policy promises to keep the global economy imbalanced, and stuck in the current cycle of booms and busts.
If the China problem sounds like a conundrum, you’re right, it is.
Still, recent meetings of world economic and financial leaders in Davos, Switzerland were filled with optimism about the global recovery.
But for all of the reasons I’ve touched on here, IMF chief Dominique Strauss-Kahn followed those meetings with warnings this week that the growing divisions between countries and within countries pose the risks of global protectionism and war.
If in fact, we see a spread of public backlash across the world, it’s fair to expect global investors will, again, pull in their horns. And we’ll likely see the risk aversion dynamic return to global markets in a hurry.
That means weaker global stock markets, falling commodities, a flight from emerging market currencies and a rise in the dollar.
Regards,
Bryan
{ 12 comments }
Bryan – I agree, I revisit your commentary and charts from 11/06/10 often ! The jobless report gave us a nice bounce on the $ yesterday – here we go ?? Keep up the good work
As usual I find your columns interesting and insightful. The misery index gives one a whole new perspective on how things are in the rest of the world.
Your articles convey enormous global insight and I value the opportunity to read them.
But you seem never, or rarely, to mention the one currency that out shines them all: Gold.
And I sense that, deep down, defying the realities, you really are a Perma-US-Dollar-Bull.
William in Canada
Your conclusion is puzzling. Based on the logical argument spelled out in your column, how do you figure that commodities will NOT rise and the dollar wil NOT decline? You do NOT have my permission to alter the content of my email in order to publish.
That means weaker global stock markets, falling commodities, a flight from emerging market currencies and a rise in the dollar.
Regards,
Bryan
Bryan, I hope you will reply to my following comments:
Assume Arthur Okun’s 11% index for the U.S. is based upon 9 percent unemployment and 2 percent inflation. We both know that such numbers are grossly understated. Therefore, are we sure Okun’s numbers for other countries ensure an “apples-to-apples” comparison? If not, the U.S. might deserve a much higher index number supposedly putting the U.S. at even higher peril than China , India and Indonesia, countries that you describe as already at high risk of “spreading public disorder.”
I suggest that the Misery Index calculation should also include another component: The per capita debt a country’s people are over-burdened with – especially government debt which is beyond their direct control. For example, the growing U.S. $14 trillion federal debt currently represents a $47,000 burden of postponed taxes for each of an assumed 300 million population – or $188,000 per household at 4 persons per household. Including lower level government debt, credit card debt, home mortgages, college loans, etc. worsens Americans’ debt burden. Considering such overall per capita debt, many more Americans are poor than economists and politicians acknowledge. Need I suggest that if just the per capita government debt burden doesn’t qualify us for the top of Okun’s Misery Index, not to worry. We will still achieve respectable big-time misery when we are finally forced to suffer the pain and sacrifices required to check the debt’s growth and then pay it down to to reduce its interest burden.
Bryan, your article states, “The expanding unrest is most vulnerable in countries with low per capita income, where people may spend as much as 70 percent of their income on food. Moreover, the threat of civil disorder rises when those countries have significant income inequality and/or have gone through major economic stress where the outlook for a return to normalcy looks bleak.” If your first sentence is revised to read, “where people may spend as much as 90-100 percent of their income on food and taxes,” it seems to describe an America hurrying to satisfying that description…unless, of course, someone can invent a miracle debt solution that doesn’t require miserable pain and sacrifice.
Cheers :-)!
Dear Bryan:
It is interesting how your prognostications are typically the opposite of those of Larry Edelson or Martin Weiss. They vaunt the foreign markets, both present and future, as superior to our situation here. You usually have much more confidence in the economic future of the U.S. and the dollar than in any foreign currency or economy. You seem to have a strong underlying belief that America will always come out on top. I did notice how depressed Larry looked on his video right after gold plummeted. He must have “lost” a fortune within a few days (but of course he’s holding, so he hasn’t lost it just yet). Larry trashes silver in favor of gold, while Sean Brodrick swears by it. So, you fellows definitely have your own individual opinions.
The fact of the matter is, the government, and hence the government controlled and/or influenced media are definitely giving the American public loads of false figures. They continually go back and revise the job figures, for instance. The genesis of the recession itself was backdated to late 2007, if I’m not mistaken, about a year after the fact. This shows us that we simply cannot rely on the propaganda being disseminated. It is basically hooey.
When I look out on the streets where I live, I daily see more shop fronts emptying out, more for lease signs going up, more businesses closing, more restaurants running slashed-price specials, more old cars on the roads—and that is in a solidly middle-to-upper-middle class area with average family incomes of $95,000 per year.
I believe in patriotism, supporting our country, and being optimistic, but I am first and foremost a realist, and I clearly see, after drawing a probable scenario based on everything that is happening, the state of local governments, state governments, the federal debt, and the jobless rate, that we are in for a severe “humbling” as a nation.
You might even agree with that, but you stand on the grounds that, by comparison to what could happen abroad, we are, after all, still the most secure nation and the best bet investment-wise. I do not disagree that there might be a rush back into dollar investments, but will that solve all the problems we face. While investors might profit in the short term it still leaves the local and state governments and the bulk of the population here high and dry.
You also do not figure in the “disaster factor” as I call it. Statistically, the U.S. is the most disaster prone nation on earth. We have more violent weather events than anyone from the scientific data I’ve see. One cannot discount the effect a few major natural catastrophes, like a Los Angeles or Seattle earthquake, or another Katrina style hurricane, might have on the overall national economy. Yellowstone is the world’s biggest volcano waiting to blow. If that happens you could see our economy turn to dust—as in volcanic—-overnight.
Best regards,
ABE
GET REAL. AIN’T GONNA HAPPEN. ADMITTEDLY, IF IT DID THERE WOULD BE BIG TROUBLE IN LITTLE CHINA BUT YOURE NOT DEALING WITH WEAK SISTERS IN THE CHINESE GOVERNMENT. THE CHINESE DYNASTY MAKES MUBAREK LOOK LIKE HANNA MONTANA AND THE INDIAN PEOPLE HAVE TOO MUCH TO LOSE. THEY HAVE ECONOMIC HOPE FOR THE FIRST TIME IN A CENTURY. LET’S WORRY ABOUT REAL DANGER LIKE OUR FED AND HEALTH CARE TAXATION AND SPENDING AND LAST BUT NOT LEAST STAGFLATION. STEVE AHO
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gZXCpm AFAICT you’ve covered all the bases with this answer!
Hello All,
Good to see India is becoming part of misery and prosperity. I am from India. As any country citizen, I am patriotic. But the issues faced by India or not anything different from what other nations are facing. Raising un-employment, raising prices and high inflation of food/commodities. I fully agree this is threatening food security for millions of Indians. I am worried a lot about this.
In any case India will survive due to its social fabric and people attitude towards life. There are more than 40% population who never became rich and who now becoming poor because of the prices etc.
The expectations are low for many and survival is sufficient for most of the population from MANY brackets.
Hope things will change in whole of the world.
Dear Bryan,
Thanks for your insight into the global economy. Why are the hiccupps not happening in South Africa and Venzuela if we are to go by the misery index. Are there other contributory factors?
Halimat
Hello Bryan,
interesting on the misery index. You mention Asia; however, you do not include any countries in the index in this article, other than China and Indonesia.
Thanks
Eric
are there insurance policies which covers such social unrest and insecurities?.thanks though for the article