So long as all the increased wealth which modern progress brings goes but to build up great fortunes, to increase luxury and make sharper the contrast between the House of Have and the House of Want, progress is not real and cannot be permanent.
-- Henry George, "Progress and Poverty," 1879
The civil unrest in Egypt over the past couple of weeks has generated a lot of discussion in the economic community. Aside from the more immediate and obvious concerns over human rights, debates have arisen over whether central bank policy has contributed to the food inflation and income inequality that are cited as instigating factors for the uprising. Further questions have centered around whether or not what’s happening in Egypt is so different from what’s happening in North America and Europe.
I’m not sure how all of this will play out, but I have noticed three themes that have surfaced as the crisis in Egypt has unfolded that could have parallel implications for those of us who are feeling smug about the economic and political stability in our own part of the world. If any of these factors start to worsen in our domestic economies, the markets will quickly come off of their QE-induced high.
According to the OECD, the gap in prosperity between the rich and poor has been growing over the past two decades. This fits in with the major 2011 theme of bifurcation that I wrote about as the New Year dawned. It should seem obvious that this type of trend can only continue for so long before those getting the short end of the stick decide that they’ve had enough. Although the general standard of living in Egypt falls far below that of North America, income inequality in the U.S. is actually worse than it is in Egypt.
There’s a list of income inequality by country that is put out by the CIA World FactBook. It ranks countries according to something called the Gini Coefficient. If you give the country with the worst inequality a ranking of 1, Egypt comes in at number 92 while the U.S. is up at 42. So income disparity is worse in America. Incidentally, Canada comes in at 100 and the U.K. at 92. At 133 and 134 respectively, Norway and Sweden have the least income inequality of those on the list.
The problems in Egypt demonstrate how quickly a simmering pot can suddenly come to a full boil and make a huge mess of things. Seemingly isolated protests in Tunisia, which resulted in the overturn of the government there, somehow morphed into mass riots and an economic shutdown in Egypt. Before we knew it, governments in Jordan, Qatar, Syria, Yemen, Saudi Arabia and Israel were on high alert for spreading violence and/or collateral damage.
There were even reports that China was blocking news from Egypt via Internet searches to avoid parallel protests which would dwarf those in the Middle East to date. Many took this to mean that the Chinese authorities are paying attention to the events in Egypt and are at least a little worried that their own citizens may try to bridge the income gap by force as well.
The financial crisis of 2008 taught us that we are all connected. Global finance is more interconnected than ever, and small ripples in one corner of a market can sometimes produce a tsunami that affects us all. The funny thing about tsunamis is that you often don’t see them coming. They can happen on the most beautiful days and they occur in places that are usually nowhere near the epicenter of the earthquake that spawned them.
Get at the Roots or the Weeds Will Keep Growing
It’s probably safe to say that most of us support democracy and admire the protesters who are trying to achieve it as peacefully as possible in Egypt. Who wasn’t moved by the images of demonstrators dropping everything to pray together? There were even reports of Muslims pledging to protect Christians on their holy days and vice versa. If only our political leaders could show the same poise.
Still, a brief report by STRATFOR, which I read courtesy of John Mauldin, pointed out that we don’t yet know how all of this will turn out. Other insurgencies that began with pro-democracy movements were successful in ousting the incumbent regime only to cede power to more radical movements later. The peaceful protesters do the hard work of clearing out the old regime only to provide entrée to factions that may be even worse. STRATFOR emphasizes that we need to find out who is really behind the unrest before we can figure out how it will end.
In the wake of the global financial crisis, politicians and regulators assuaged public outrage by promising reforms that would prevent such a crisis from occurring again. But not much has improved. We haven’t even managed much of a regime change. Many of the bankers, regulators and politicians who drove the policies that led to the crisis are still in their chairs. Many of the big banks are even bigger. Too big to fail is still a major systemic threat.
For all of the protests we saw in the streets, and in the courtrooms and Congressional hearings, not much has changed. The “heads I win tails you lose” compensation game is still going strong on Wall Street. Many worry that another financial crisis is inevitable, only this time we will have exhausted all of our options for fighting it.
While the situation in Egypt is different enough from our own that we can’t draw direct comparisons, some of the parallels above are worth noting. How much longer will the American public tolerate government-subsidized success for large corporations while many are running out of unemployment benefits and over 40 million Americans are on food stamps? There has to be a tipping point somewhere.
Will it be a rise in bond yields, another flash crash, a sovereign debt crisis, or spreading geopolitical unrest? Maybe. But it could also be something as simple as a seemingly innocuous news item about a family struggling to make ends meet or a new round of bonuses on Wall Street.
When will the tipping point occur? We have no way of knowing that either. It could be a month, a year or five years from now. What we do know is that unsustainable trends can persist much longer than we think, that they always end eventually and that it’s really messy when they do. The lesson for investors is simply that complacency is not healthy for bulls or bears and that there are some seismic rumblings out there that bear watching.