The Economy, the Markets & the Breakout of Democracy in the Middle East?

Perspective by Neil Chaudhry (Written February 24, 2011)
In the last three years, we have gone from a near-death meltdown of our financial system leading to the biggest recession since the Great Depression; to questioning our free market system; to a V-shaped economic recovery; to a record high commodity prices; and now, to a breakout of democracy in the Middle East countries.

The meltdown of our financial system was caused by the financial engineers of our society who thought they could “create wealth” by pushing paper (bundled in the form of risky mortgages). Those engineers were actually able to sell mortgages to very “smart people” in the United States and in Europe. Interestingly, virtually NONE of the banks in Asia and South America (and oh by the way Canada, aye?) bite on those CDO (Collateralized Debt Obligation) financial products. Now we wonder who the “smart ones” were. The developed, western countries, the premier experts of capitalism, who were the dominant players of finance for decades, suddenly came under scrutiny and mistrust here and around the world. In fact, this led many to question the free market system and the US financial policies. Did we not regulate properly? Did we allow easy credit for too long? Do we have too much freedom for our banks & corporations to do whatever they want? Will capitalism always be prone to bubbles and bursts? Can one of these bursts take down the entire nation? The Pentagon actually had rated the financial crisis as the biggest threat to our national security in 2008-2009 timeframe.

Then some great steps by the United States government. We “bailed out” the financial industry, and then the housing industry, and the auto industries which were decimated by the financial meltdown. This started the V-shape recovery in the economy. Although the unemployment rate is still high after two years, the stock market has climbed back, the earnings are awesome, and the corporations are flush with cash (over a trillion dollars in cash, highest ever recorded.)

Thanks to QE’s (Quantitative Easing), the US Federal Reserve for the past one year is flooding the system with dollars since interest rates can’t be lowered anymore and we don’t want to fall in the way of Japan – in a deflationary spiral. Well, if we combine QEs with the growth in the emerging markets and the recovering US economy, we now have commodity prices going up sharply all over the world. Copper, gold, silver, corn, wheat and oil are all hitting new highs. In the US due to its large size, (most people don’t realize this but we are still the largest economy – we are bigger than Japan, China, India, Germany COMBINED with respect to total annual GDP) and due to higher labor costs, we don’t feel the effect of high commodity prices nearly as much as the smaller countries where material costs are a big part of their total costs.

So, in countries like Egypt, Libya, and Tunisia, food and raw materials are a big part of their costs. Rising prices have a much bigger effect on loss of living standards. High rate of inflation combined with years of dictatorships or autocracies that neglected the living standards of the masses…what we get – revolutions!

What is most interesting in all of this, well two things: one, during the immediate onset of the financial crisis, despite the fact that it was our financial instruments (made in USA) that caused the financial collapse, the world gravitated to the US dollar; second, since most world commodities are priced in US dollar and the Fed’s QE policy devalues the dollar causing world raw material prices to go up, potentially leading to major uprisings in poor countries…well guess what those countries want, they want a democratic way of life with USA & Turkey for example as their economic role-models (Turkey by the way is one of the most free, market-driven, capitalistic economies of all the Muslim countries.) Ironic but true! Despite what happens, this shows the power of capitalism and democracy. This shows the United States is still the most powerful nation with one of the best governance and economic systems in the world! And this you will not hear in our popular media.

The views expressed are personal, NOT the company’s or buyCASTINGS’ or anyone else at the company. We like to hear your views too. Please email Neil: nchaudhry@buyCASTINGS.com

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