10 March 2011
Andy Xie, a board director at Rosetta Stone Advisors, is a man worth listening to. The 49-year-old former Morgan Stanley Asia-Pacific chief economist published an article — “Apocalypse Soon” — on his blog in August 2008, that foresaw what was about to happen.
The article detailed how the entire western financial system was about to implode. Exactly one month later, financial markets went into meltdown after Lehman Brothers was forced into bankruptcy.
Well, Xie — who is seen as a member of the Austrian School of economics — is at it again. The MIT-educated economist has produced a powerful and well argued account of the state of the global economy and the politico-economic future that (probably) awaits us on Beijing-based financial news and information website, Caixin Online.
In the comment piece, Xie wrote that the West’s policy of seeking to inflate away its economic troubles through a mix of neo-Keynesian economic stimulus and quantitative easing (akin to money printing) is utterly selfish and bound to end in tears. He argues such measures have given a veneer of continued prosperity to a privileged few, and enabled delegates at the World Economic Forum in Davos to congratulate themselves. But he said the chimera of success is only being achieved at the expense of the many and jeopardizes the sustainability of the global economy.
He argues that the policies, and Fed chairman Ben Bernanke’s QE2 in particular, are unleashing economic demons that have started to leave a tide of socio-economic destruction in their wake. And he predicts this dangerous tide is liable to turn into another tsunami unless the policies are reversed. He said there is strong evidence to suggest that QE2 has triggered the worldwide commodities, food and fuel price inflation that sparked riots and protest movements across North Africa and the Middle East.
Xie argues that Ben Bernanke’s Federal Reserve and Mervyn King’s Bank of England are so oblivious to the dangerousness of their approach that they will probably only rethink it once the streets of Whitehall and Washington D.C. are in flames. Xie writes:
“Popular revolts are spreading to other Arab countries and even to Iran. The chances are that the region will undergo a complete political transformation in a year or so. The affected region has over 400 million in population. Its global significance cannot be underestimated. It may be the biggest global change in two decades. Social revolutions have complex social backgrounds. It usually involves multiple pressure points that fester for many years. The tipping point involves some trigger. In this case the rapid inflation, especially food inflation was the trigger….”
He explains that ‘crony capitalism’ and autocrat-controlled monopolies across the Arab world have tended to exaggerate the impoverishing effects of imported inflation on the standard of living of the masses, and therefore fuelled the appetite for change on the Arab Street. He predicts that autocratic regimes in resource-poor Arab states including Algeria, Jordan, Syria, and Yemen will have been toppled by December 2012.
“Inflation and income inequality are an explosive combination” says Xie, who adds that given the outlook for rice prices, instability may well spread to Asia and the US as well. Xie accuses the global elite who gather in Davos every year of being almost as myopic as were the world’s bankers in 2006-07. “The 2008 financial crisis didn’t convince this ruling class of the error of their ways. They poured more money to bail out the financial institutions that played the wrong hand in the money game at the wrong time. The bailed-out billionaires gathered this year in Davos again to celebrate the survival of the system.”
There are other great lines in Xie’s piece including these:
“The financial crisis in 2008 didn’t stop the practice of economic management by printing money. Burning streets will.”“There is a point when social tension boils over. … As inflation keeps rising, more populations could cross this threshold …. policymakers hope [they can] revive the bubble.”
“They have succeeded in shifting the bubble from the Western property market to other asset classes including property in emerging economies … We know that bubble bursts can’t stop the printing of money. It leads to more money printing …”
“The central bankers in the West can’t feel the pain of the suffering so far away. The fire, however, will eventually burn beneath their feet. Maybe the Fed will change its mind when the streets of Washington burn like Cairo’s.”