Global instability must be contained in 2009

I want to make a brief statement about analysis, prognostications and this global recession. When I began this site nine months ago, my focus was clearly on the downside scenario.

The first four posts were entitled:

You can’t pick a more dour set of post titles than that. Now, while I did believe policy makers were underestimating the threat of economic calamity, I must admit that I was optimistic about the potential outcomes. And I am still optimistic today that we can overcome the major hurdles we face. However, we must always prepare for the worst, even while we hope for the best. This is why I am still focused on the downside scenario — because I believe that complacency is still much too high regarding how quickly things could unravel.

In my third post on the US economy, I said the following about why I was worried about the present economic downturn (emphasis added):

The global economy, now supported in the main only by the overextended U.S. consumer, finds itself at stall speed, susceptible to any number of potential exogenous shocks. Ultimately, the economic malaise created by this confluence of events will take years to unwind. A positive outcome to this process is dependent wholly on liquidation of excess credit and consumption.

This process will be extremely painful in the short term, but will lead to a healthy economy long-term. Unfortunately, experience shows that these painful steps will only be taken as a last resort. Moreover, geopolitical events become volatile in a world of economic insecurity, leading to political upheaval and protectionism. Protectionism is a natural outgrowth of nationalist economic policy

The “bad” scenario is playing out according to script because protectionism, trade wars, competitive devaluations, bailout packages, and export subsidies are all on suddenly on offer across the globe. All of these policies are designed to “protect” domestic producers and jobs. However, as they unfairly advantage domestic producers at the expense of consumers, they always invite a response from exporting nations. You can hear about it in China the U.S., Argentina, Brazil, Vietnam, Russia, Germany, India – the list is quite long.

But, I worry even more about political instability and social unrest. There are reports of burgeoning unrest in China. The Russians anticipate social unrest as the ruble loses value. And there are still more reports of strife between India and Pakistan. Below is a sample of articles in the news from just the past 12 hours:

We are living in a very unstable world already. The poor economy can only make matters worse. Is political upheaval and social unrest what we have to look forward to in 2009? Is this how the world MUST react to a severe recession? Again, my hope is this can be averted, but I have to point out the downside scenario here because it is very worrying. At a minimum, this is why I have gotten on board with the stimulus bandwagon despite my misgivings about government spending and the potential misallocation of resources.

So, as we head into 2009, I am hopeful that all of the ugly scenarios involving tariffs, competitive devaluations, export subsidies, riots, coup d’etats or the use of military force can be averted. My hope is that economic stimulus will be helpful in cushioning the downside scenarios and that we can start on an upward path by the end of 2009. While I hope I will continue to report events as they truly are.

In any event, because 2008 has been so dreadful, here’s to hoping for some upside in 2009.

Related articles The Major Risks for 2009: Tariffs, Wars, Currency, etc. – Paul Kedrosky