Friday, January 28, 2011

It takes one spark

2011-01-28 / Andy Xie

Tusisian Mohamed Bouaziz, a 26-year-old with a university degree, set himself on fire on December 17 after police confiscated the fruits and vegetables he was selling without permit. One month late the Tunisian government has been toppled and the Egyptian government is on the ropes. Why and what is happening? What would be the impact on us?

Inflation is the factor pushing people into taking the desperate act. The people who were barely surviving couldn't go on when food price is up 50%. There isn't a cushion in these economies for such a large price increase.

There is a saying that demographics is destiny. After the World War II birth rate surged across the world. Two decades later, China had the Cultural Revolution, the US Woodstock, and France 1968 revolution. As birth control went mainstream in the west and China adopted one-child policy three decades ago, aging is shaping their economies today.

The Islamic World has had much higher birth rate in the past three decades. Its bulging youth population is the force behind the change. Well educated, knowledgeable, and hungry, they will change their world, regardless of what rest of the world thinks. If you look at the events from this prism, big changes are coming regardless of what the US wants. The Egyptian government is unlikely to survive.

The West is having a second thought about the change. They are worried that radical Islamic regimes could replace aging dictators and turn hostile to the west. I am sure the western governments are trying to shape the events in North Africa. People never learn. Such interventions will only make the new regimes there more hostile to the west.

Would the revolution spread to Arabia and the Middle East? That would have a big impact ton us through the oil market. The oil rich countries have had the money to buy off their youth. They may be unemployed but are not starving. Hence, they are less motivated to act. Some like Jordan don't have the financial resource to buy off their people. The revolution is distinctly possible.

If the revolution does spread to oil rich countries, the oil price could spike like nothing we have seen before. One grievance from the revolution is surely about 'low' oil price, because these governments have to keep the price low in exchange for the US's military protection.

Even if oil producing countries are not affected, the rising risk to their stability will increase oil price anyway. The Fed's zero interest rate doesn't give people a good reason not to push up oil price. This risk gives people an added incentive to buy oil.

Inflation is shaping the world this year. Central banks pumped money to fuel asset bubbles in the decade before 2007 and pumped more money to ease the pain from their bursting. The inflation seeds they sowed are sprouting everywhere. The consequences can be catastrophic.

I still think that the world would experience another crisis in late 2012. The trigger would be either a collapse of the US treasury market or an inflation-induced hard landing in the emerging economies. The political events in the Arab World point to another possibility: surging oil price could sink us all earlier.


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