The turmoil in Europe and the implications for the rest of the global economy makes it look like the Mayans were correct in their dismal predictions for 2012. The growing probability of a dismemberment of the common European currency could lead to massive deleveraging, capital controls and protectionism. On one hand, globalization created an economic juggernaut. However, on the other hand, the system is a delicate machine that can be easily derailed. This was evident in 2008, when the collapse of Lehman Brothers and the subsequent credit crunch brought the global economy to a standstill. Unfortunately, the events that lie ahead may make 2008 look like nothing more than a light summer squall. The problem is that all of the optimism that existed after 2008 is gone. Economists believed that state intervention and the emerging markets would save the day, but they didn’t. Keynesianism is dead. The tens of trillions of dollars that were wasted on useless stimulus programs and rescuing the banks left most of the developed world bankrupt. Monetarism is also finished. Zero interest rate policies and quantitative easing did nothing more than create speculative bubbles in commodities and emerging market assets. Now, the global economy is careening off the precipice, and policymakers have no way to avert the disaster. It now seems like the ancient Mayans were right.
Although the situation is bleak, there is no need to despair. The public sector is in shambles, but the private sector is alive and kicking. Adam Smith’s invisible hand is busy at work, shutting down useless industries and mobilizing resources in the most efficient way. Many people bemoan the lack of leadership in the U.S. This is due to a combination of incompetence and political gridlock. Nevertheless, the lack of direction allowed the U.S. private sector move rapidly. Thousands of workers were fired, costs were cut and new markets were sought. Balance sheets quickly improved, resulting in the reduction of debt and accumulation of cash. After three years of running lean, U.S. firms are hiring new workers. This is absorbing much of the labor force that sat idle for the last few years and the workers that are being displaced from the public sector. As a result, the U.S. is the only oasis of relative economic stability on the planet. There is no doubt that the problems in Europe and the emerging markets will have some fallout over the U.S. economy. Exporters will suffer and some financial institutions will come under stress. Yet, after three years of deleveraging and economic adjustments, U.S. households and businesses are living within their means. This cannot be said for the rest of the planet. Years of heavy consumerism, financed by easy credit conditions, is going to make life very hard for many people. Signs of social unrest are on the rise. The Arab Spring may have been an uprising against political despots, but it was also a backlash against the lack of economic opportunities. The same is happening in Russia. The willingness by members of the middle class to brave the Russian winter and heavy-handed tactics of the police to protest against the recent parliamentary elections reflects the enormous frustration people feel about the economic environment. There is a similar trend in China. Riot police cordoned off the village of Wukan, in Guangdong Province, after people took to the street to rally against the illegal seizure of communal farmland. Things will only get worse as the global deleveraging process begins to filter into countries which saw large increases in consumer debt, such as Turkey, Indonesia and Colombia.
However, the biggest surprise may come out of the former Soviet Union and its satellite states. Known for its political stability, due to the repressive nature of its governments, the region may be on the cusp of major unrest. In Kazakhstan, President Nursultan Nazarbayev declared a state of emergency after protests in the oil producing town of Zhanaozen left more than a dozen dead. The problem is that Nazarbayev is ill, and there are serious questions about the process of succession. The same is occurring in North Korea, with the recent death of Kim Jong-il. There are deep concerns that splits between factions of the ruling class will result in social and political unrest. Therefore, risks abound as the clock strikes midnight on December 31st. Most of the risks are in Europe and the emerging markets, but the U.S. could be a refuge from the global turmoil.