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Could the Coronavirus Cause the Next ‘Arab Spring’?

Politics / Pandemic Mar 23, 2020 - 06:36 PM GMT

By: Richard_Mills

Politics

The rich are getting richer, inequality is on the rise, and the middle class, the backbone of the US economy since the 1950s, is shrinking. 

In 2018 the three highest-paid chief executives in the United States earned more than the output of several countries. Tesla’s Elon Musk, Brendan Kennedy, the CEO of pot success story Tilray, and Bob Eger, the boss of Walt Disney Co., made a combined $914 million, more than each of 11 countries that rank among the poorest in the world. 

Celebrities are also raking it in like never before. In 2018 Taylor Swift earned $185 million, Argentinian soccer star Lionel Messi scored $127 million including $35M in endorsements, Mexican boxer Canelo Alvarez earned $94 million, and Swiss tennis star Roger Federer pocketed a cool $93.4 million. 

Star athletes, Hollywood elites, politicians, the rich, all can get tested for coronavirus before the rest of us (and get back tests in a very timely manner). We working class peasants get sent home, no test done, told to ‘self isolate.’ President Trump, when asked about this said ‘That’s life.’ Indeed it is.


“On March 11, the state of Oklahoma used 60% of its testing capacity on NBA players and team staff after a member of the Utah Jazz tested positive, allowing them to bypass the long waits endured by ordinary citizens waiting for tests.”

The middle class is eroding - made worse by a drop in the number of middle-income jobs, through off-shoring and automation. 

The share of adults living in middle-income households declined from 61% in 1971 to just 50% in 2015. Two-thirds of the 11% that were no longer middle class, migrated to upper-income levels, while a third became poorer. 

And that gap continues to widen. The richest 400 Americans now control more wealth than the bottom 60% - it’s the greatest rich-poor divide since the 1920s.

Globalization backlash

Growing inequality is to a large extent behind the negative reaction to globalization that has been morphing into shape over the past several years. 

Modern-day globalization is seen as the inter-dependence of national economies through cross-border movement of goods, services, technology, capital and workers. 

But 175 years of globalization has not resulted in its promised rewards. Income inequality, in the UK and the US particularly, has never been higher, companies have left their home countries to set up factories where labor is cheaper, and the ideal of the European Union offering free movement of labor leading to economic growth has been lost amongst the wave of migrants turning up on European shores. These migrants compete with locals for scarce jobs and are dependent, at least initially, on government handouts. 

Globalization has also been assailed by automation, in particular the increasing use of robotics in factories, which have displaced thousands of well-paid manufacturing jobs. 

How did it all go so wrong? 

In a 2019 column in Marketwatch, Neil Shearing, chief economist at research firm Capital Economics, argues that globalization “peaked” even before Trump’s trade protectionism resulted in the US-China war, which began in the spring of 2018. He notes that Trade of goods and services, as well as cross-border capital flows, rose sharply as a share of global GDP throughout the 1990s and 2000s but then leveled off from around 2010.

Among the reasons Shearing offers for globalization’s peak, are the fact that by 2010, most economies were open and no new major countries were left to integrate into the global economy; that new technologies (like e-commerce) made it less attractive for companies to maintain large, complex supply chains; and that governments started to question the benefits of financial liberalization - the most obvious example being China’s resistance to opening its capital markets to foreign investment. 

He concludes that a more malign form of policy-driven de-globalization — where cross-border trade and capital flows decline as a share of GDP — is looking increasingly likely....

Not just likely, but certain, as shown by the US-China trade war. But Shearing thinks the trade war is only the beginning of a broader backlash against globalization that goes beyond just the United States and China:

After all, globalization has undermined the power of national governments and been blamed for rising inequality, multinational tax avoidance and unwanted migration.

While the likelihood of a period of de-globalization is underappreciated, it is as yet unclear as to the exact form that this could take. At one end of the spectrum, we could see a mild form of regionalization, in which production is clustered in neighboring countries rather than globalized. At the other end of the spectrum, the world could spilt into competing blocs (for example, one led by the U.S. and another led by China). In between, we could see the growing imposition of tit-for-tat tariffs by individual countries.

In other words, a world in which physical walls, and trade walls between countries, is more common - witness Trump’s push to extend the wall on the United States’ southern border - and impediments to trade within countries, such as the political battle between British Columbia and Alberta, over the right to control the flow of Canadian oil.    

Rise of nationalism 

For many the fruits of capitalism have shown up as spoilt goods. It’s harder to buy a house, get ahead, save for retirement. Working people are angry at how globalization has left them behind. 

Social upheaval is occurring in a greater number of countries. We’ve seen it in Chile, France, Spain, Germany, the UK (Brexit), Algeria, Iraq, Lebanon, Egypt, Russia, Hong Kong, Venezuela, Chile and Bolivia.

Especially in developing nations, ie. South America and Africa, where politicians are  pressured by their base, to enact policies that benefit everyday citizens. Inequality is a key driver of what is often a government-led attempt to download wealth from rich corporations to the poor. 

Donald Trump and other right-wing populists particularly in Europe such as France’s Marine LePen, Viktor Orbán from Hungary and Norbert Hofer, leader of Austria's far-right Freedom Party, have said enough of globalization - it’s time to go back to the idea of the nation-state, where local workers and industries are protected, and the rest of the world is walled off. 

Trump’s contempt for the UN and other multilateral bodies is an example of nationalism, as was the pro-Brexit movement in the UK which argued that remaining in the European Union was not in Britain's best interest. 

The Bank of America summarized the anti-global, pro-national shifts in the Trump presidency, just over a year after taking office. They included the imposition of travel restrictions on certain Muslim states; withdrawing from the Paris Agreement on climate change; backing out of the Trans-Pacific Partnership; tearing up and renegotiating NAFTA; imposing tariffs on Canadian paper, washing machines and solar panels; and on imported steel and aluminum. 

Indeed Trump’s ‘Make America Great Again’ credo is naked nationalism - clothed in the hostility of a trade war with China that has made the Trump administration many enemies abroad, especially in Europe, and put it on a collision course with its largest trading partner. Despite a phase one trade agreement signed in January, hundreds of billions of tariffs on either side remain. 

It should be noted that nationalism in Europe has for decades been seen as a dirty word, since it was “national socialism” in Italy and Germany that gave rise to Hitler and Mussolini. The birth of the European Economic Community through the Treaty of Rome in 1957 was primarily to bury the idea of nationalism in Europe. Its earlier incarnation, the Treaty of Paris of 1951, created the European Coal and Steel Community, whose aim was to pool French and German steel production in order to strengthen Franco-German cooperation and banish the possibility of war. 

As the European Community evolved into the European Union, European elites stood by a vision of “the European” whose characteristics included a preference for free trade, open borders, and so-called progressive ideas like same-sex marriage. Now that is all being questioned, the best example being the 2016 referendum in the United Kingdom, where a majority voted to leave the EU. 

A 2019 article in the journal ‘Foreign Affairs’ states: 

Nationalism and nativism are roiling politics on every continent. With the election of President Donald Trump in the United States, the growing power of right-wing populist parties in Europe, and the ascent of strongmen in states such as China, the Philippines, and Turkey, liberals around the world are struggling to respond to populist nationalism. Today’s nationalists decry the “globalist” liberalism of international institutions. They attack liberal elites as sellouts who care more about foreigners than their fellow citizens. And they promise to put national, rather than global, interests first.

To the average person this “new nationalism” has only occurred within the past five years. But a deeper reading of history shows something similar occurred at the turn of the 20th century, when globalization was just starting to gain a foothold in North America and Europe. It’s also interesting to place the coronavirus into this paradigm; when you look at closed borders, social distancing, heightened fear and paranoia, suspicion of others, covid-19 is intensifying the inward-thinking, tribal mentality that over the last few years has become “the new normal”. 

World War I analog

Globalization could be traced as far back as the 13th century with Marco Polo’s adventures on the Silk Road and the establishment of early trade routes through China, the Middle East and Eastern Europe (the Silk Road terminated in Istanbul). European exploration that led to the discovery of the New World in the 1600s was another early manifestation, where thoughts, goods and people (including slavery) were shipped across oceans. 

The modern idea of globalization took shape in late 19th-, early 20th-century Britain. 

During this period of global capitalism’s infancy, there was a free market for goods, capital and labor. In an oddly prescient remark, famous economist John Maynard Keynes said, “the inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth.”

With economies connected by free trade, globalization proponents thought, wars would be unnecessary - a contemporary version being Thomas Friedman’s “Golden Arches Theory” whereby no two countries with McDonald’s restaurants would go to war. 

In a Bloomberg opinion piece, Author Pankak Mishra draws an eery parallel between the current state of affairs, and the sudden onset of World War I: 

The First World War not only brought the period of friction-free globalization to a gruesome end. It also cruelly exposed an intelligentsia which had believed in irreversible progress and now was forced to acknowledge that, as an embittered Henry James wrote to a friend in August 1914, “the tide that bore us along was then all the while moving to this grand Niagara.”

As with our own crisis, the seminal crashes of the 20th century — the First World War followed by the Great Depression — were harder to grasp because their principal causes were set in motion decades before, and largely neglected by mainstream politicians and commentators…

Democracy, whether as an emotive ideal of equality or as representative institutions based on a widening adult male suffrage, had steadily become the central principle of the modern world, especially as industrial growth generated new inequalities.

Repeatedly frustrated, the aspiration for democracy helped fuel the rise of both left and far-right political movements, pitting them against established ruling elites.

The firebrands found their most committed supporters in the exploited populations of then-rapidly growing cities. Filled mostly with people freshly uprooted from the countryside, sundered from traditional livelihoods, and forced to live in urban squalor, the world’s great cities had started to become hotbeds of discontent in the late 19th century...

Once the series of economic shocks that began in the late 19th century climaxed in the Great Depression, the elevation of the far-right to power, and intensified conflicts between states, was all but guaranteed.

In our own conjuncture, all ingredients of the previous calamity are present, if ominously on an unparalleled scale.

Take a look around and what do you see? Alt-right populists in power in Europe and the US, and an invigorated nationalism, exemplified by ultra-patriotic leaders each espousing their own form of nativist rhetoric, including Russian President Putin, US President Trump, Chinese President Xi, and Philippine President Duterte. 

Each is planning on advancing their nationalist agenda unencumbered by the trappings of globalization or multilateralism. One could say that Trump, to a large extent, has succeeded up to this point. However the coronavirus threatens to derail the real estate tycoon’s plan for re-election; with only eight months to go, Trump’s beloved stock market bull is dead, supply chains are interrupted, and consumer spending which makes up 70% of the US economy has fallen off a cliff, amid covid-19 fear. 

Economies aren’t working properly, hampered by the extreme measures taken by governments to contain the virus’ spread. Many are predicting a global recession and the dreaded D word (Depression) is being uttered by the most pessimistic. 

But as Mishra, the Bloomberg author argues, it’s all familiar stuff to students of economic history. The media and the politicians have collective amnesia when it comes to recognizing that the prescriptions for multiple malaises have remained the same in much mainstream politics and journalism: more economic “reforms,” largely in the direction of global free markets, reheated Cold War slogans about the superiority of “liberal democracy” over “authoritarianism,” and aspirations for a return to “decency” and “global leadership.”

We see this reflected in the attitudes and decisions of central bankers, who seem to believe that all it will take is another big shot of liquidity, chased down with more interest rate cuts, to beat back covid-19’s assault on the global economy. These people are calling the plays from the Great Recession playbook. But they don’t realize the game has changed and so has the winning formula.

How do 0% interest rates help the average person not even invested in the stock market? How does the IMF loaning developing nations a trillion dollars, putting them even further in debt, help their impoverished citizens? 

How does a liquidity injection help people hunkered down in their homes, hoarding groceries, worried about their jobs, paying the rent, covering the heating bill? 

These are extraordinary times, and extraordinary times call for extraordinary measures.  The main problem, which the coronavirus is exposing with alarming alacrity, is debt.  

Indeed as Jayati Ghosh writes in Project Syndicate, even if the pandemic's economic impact is contained, it may have already set the stage for a debt meltdown long in the making… 

Today’s financial fragility far predates the COVID-19 “black swan.” Given the massive accumulation of debt in both developed and developing countries since the 2008 financial crisis, it has long been clear that even a minor event – some “known unknown” – could have far-reaching destabilizing effects. Yet, until recently, rising asset prices – owing to a long period of extraordinarily loose monetary policies in advanced economies – disguised mounting debt levels. 

According to renowned economist David Rosenberg, and us at AOTH, the only policy prescription that will work now, is debt default. 

(To learn how this would roll out, read about our three-step plan to beat covid-19 and fire up the economy through a massive global infrastructure build-out) 

De-globalization multiplier 

Over the past couple of months we have been reading regular news reports about how the covid-19 has impacted supply chains. No surprise, considering that China, the epicenter of the outbreak, accounts for 35% of global manufacturing output, and is the world’s largest goods exporter. Considering China’s heft in the world economy, its many trading partners, and regular travel between the Chinese Mainland and the Chinese diaspora settled across the planet, the coronavirus outbreak couldn’t have happened in a worse country. 

The fast-spreading disease that jumped from animals to humans, now infecting about 200,000 people and killing nearly 8,500 in 165 nations, is triggering emergency lockdowns and injections of cash not seen since World War Two. 

As another recent article in ‘Foreign Affairs’ put it, The new coronavirus is shaping up to be an enormous stress test for globalization. As critical supply chains break down, and nations hoard medical supplies and rush to limit travel, the crisis is forcing a major reevaluation of the interconnected global economy. Not only has globalization allowed for the rapid spread of contagious disease but it has fostered deep interdependence between firms and nations that makes them more vulnerable to unexpected shocks. Now, firms and nations alike are discovering just how vulnerable they are.

Yes indeed. Global trade is for most companies these days predicated on “just in time” deliveries. 

Receiving goods only as they are needed reduces the cost of storing excess inventory and requires producers to forecast demand accurately.

Examples include car-parts assembly plants; food distribution networks where fresh produce must be grown, stored, refrigerated and transported to maintain peak freshness; container shipping where goods are transported in multiple modes - ocean carrier, train and/or truck - then arrive at a port to be loaded onto a vessel with minimal delay; and Amazon, which revolutionized online commerce through a highly efficient and robotized system of packaged good delivery.

For most companies, most of the time, JIT works very well, as long as there are minimal disruptions to the chain of supply, all the way from the material in its rawest form, down to the finished product that is delivered to the end user. It is for the most part an efficient, cost-effective, common-sense way to run a business. 

Enter a disruption, however, and the average JIT system falls apart quickly, and spectacularly.

When JIT fails, the negative effects on production lines, delivery schedules and especially on a company’s reliability, can have a severe impact on operations and involve a number of unexpected and hidden costs or fees. 

Worse, there is no fail-safe alternative for when a supply chain breaks down.

Previously, goods would move throughout a regional or national economy. Globalization has created an intricate web of interdependence, with national economies subsumed into a vast global network of suppliers. 

Foreign Affairs gives the example of car manufacturers in Europe worried about shortages of small electronics because a single manufacturer was forced to suspend production at one of its plants in Italy. Global production of laptops reportedly fell as much as 50% in February, cell phone shipments could be reduced by 12% next quarter.

In fact, the breakdown in supply lines, supposedly made more efficient by globalization, is becoming in some places a matter of life and death. In Seattle, hospital workers ran out of surgical masks and have been fashioning protective gear from office supplies.  

Reagents, a crucial part of coronavirus testing kits, are running low or out of stock in several countries. The shortfall has delayed the production of test kits in the United States - adding to the pressure on the White House for being too slow to jump on containment measures. Supplier dependence is also being exposed by covid-19. The Chinese government bought up the country’s entire supply of masks from local manufacturers who supply half of the world’s medical masks, causing a supply crunch in other countries in need, including the United States. 

Foreign Affairs states: 

These beggar-thy-neighbor dynamics threaten to escalate as the crisis deepens, choking off global supply chains for urgent medical supplies...

As policymakers around the world struggle to deal with the new coronavirus and its aftermath, they will have to confront the fact that the global economy doesn’t work as they thought it did. Globalization calls for an ever-increasing specialization of labor across countries, a model that creates extraordinary efficiencies but also extraordinary vulnerabilities. Shocks such as the COVID-19 pandemic reveal these vulnerabilities.

Harvests at risk 

One of the most alarming effects of the pandemic, likely visible to every single shopper who has been to the grocery store in recent days, is the prospect of a complete break in the grocery supply chain, resulting in a food shortage. 

Assurances from grocery giants like Loblaws, that supplies will flow unimpeded (we already know that isn’t true, otherwise why so many empty shelves?) haven’t stopped widespread hoarding, as residents confront the reality of being confined to their homes for weeks, through a government-imposed “shelter in place” order. 

Food producers aren’t so sanguine. They’re worried about how international travel restrictions will prevent migrant workers from traveling out of their home countries, places like Mexico and the Caribbean, to work at fruit/ vegetable farms and slaughterhouses of developed countries. 

The problem is fast becoming an issue, as spring planting time in the Northern Hemisphere nears. 

“If our borders are closed for a short period of time, even to the migrant workers, there will be trouble getting the crops in for the season,” said Steve Bamford, president of Toronto Wholesale Produce Association, quoted in a CBC article, Wednesday. 

“It's a huge impact for our growers — not just Ontario, but nationwide. There is no way that we would be able to farm without our migrant workers. I can’t put it any clearer than that,” he said. "We will run into a big food security issue if that happens.”

News reports last week were already warning about higher produce prices. 

Growers in China, Australia, New Zealand and the United States are also concerned their migrant workers will be grounded. Kiwi pickers in New Zealand are reportedly in short supply, travel curbs may cause shortages of some vegetables in Australia, and in Canada, meat processors that rely on temporary foreign workers to fill chronic labor shortages are threatened. 

Italy, currently in lockdown, with a health care system overwhelmed by the number of covid-19 cases, employs around 370,000 workers from abroad during the spring harvest - which as luck wouldn’t have it, has come earlier this year. Border restrictions threaten a lack of agricultural labor. In Germany, asparagus and strawberries could be left rotting in the fields. 

There won’t be anyone to harvest the crops,” Bloomberg quoted Robert Guenther, senior vice president for public policy for the United Fresh Produce Association. “It will be devastating to growers and ultimately to the supply chain and consumers. They won’t have the food.”

Just let that sink in for a moment. They won’t have the food? A supply pipeline that has run uninterrupted for, well forever, something we North Americans absolutely take for granted, could be about to spring a leak, in the form of foreign workers, unavailable to do the jobs Canadians and Americans consider beneath them. 

Labor mobility is touted as one of the best things about globalization. Not so, when borders are closed, and local workers aren’t trained or aren’t willing to pick fruit and veggies for a wage. 

Arab Spring? 

It doesn’t take a large leap of logic to see what could happen next. With fruit, vegetables and meat either too expensive or simply unavailable, due to shipments being canceled or delayed, there could be long line-ups to get into grocery stores when they open.

Those lucky enough to get their beef, chicken, carrots and bananas will be okay until the next shipment. What happens to the unlucky ones? The prospect of food riots is not hard to imagine. 

Remember, the Arab Spring started over a shortage of bread. 

When grain prices spiked in 2007, bread prices in Egypt rose 37%. Chronic unemployment meant more people depended on subsidized bread, but the government didn’t make any more available. This led to social unrest that eventually unseated President Mubarek.

The Tunisian uprising started in more dramatic fashion, when a young man running a vegetable stand set himself on fire to protest corruption. Many believe his act of self-immolation was the start of the Arab Spring. 

Conclusion 

Could border closures owing to covid-19 lead to bread riots in the streets of Vancouver, Calgary, Winnipeg and Toronto? It seems implausible yet… who could have predicted the wild events of the last two weeks? When people are starving, all bets are off the table. A Canadian Arab Spring? Why not? 

The coronavirus is provoking a lot of fear and anxiety but it is also showing the vulnerabilities of global supply chains which are only as strong as the weakest link. When just-in-time deliveries fail, every link in the chain is affected, from the very top to the very bottom. 

Covid-19 is a good opportunity to look at back-up plans, and it’s also a wake-up call to the financial system’s vulnerability which, as we have shown, is so over-leveraged that we are literally on the edge of debt catastrophe. 

The world appears to be teetering on a precipice but it’s one of the best times I’ve seen in a long time for investing in precious metals.

By Richard (Rick) Mills

www.aheadoftheherd.com

rick@aheadoftheherd.com

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