Spring 2010 Economic Outlook

8/7/2019 Spring 2010 Economic Outlook

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Economic Outlook

Spring 2010

By: Andrew Bell


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Disclaimer

As with any economic report it is important to address the impossible task of providing acomprehensive forward looking view of the economy. The world is a large place and there are manyparticipants in the political and economic landscape.

There are three areas which are felt to be poorly accounted for in the composition of this report.The UK has seen developments moving extremely fast over the past six to eight months. As such thesituation in that country is considered to be difficult to gauge without a concerted effort to

understand the many different facets that affect both the political and the economic climate.

South Africa represents another country which is being treated by this report as an effective wildcard country. The recent death of a white supremacist leader alludes to more extreme tensionsthan would have been otherwise assumed. The risks tangled up in a resurgence of racisms in SouthAfrica have the clear economic effects that would result from the fallout of open conflict of any type,but there are also risks that racist unrest, sure to be publicised globally, would inflame latenttensions in other parts of the world. As with the situation in the UK, any evaluation of South Africarequires detailed study and contact with local sources, all of these are things that have not beencarried out in the course of writing this report.

India represents a final area of the global economy which is felt to be poorly addressed in this report.

The reason for this is that India seems to be more closely related to the European Union block thanto any one country. The regional differences in India are extreme and even the consistency of acommon language being spoken is difficult to understand. In addition to this the long standing caststructure combined with the tapestry of active political parties make evaluation all the more difficult.Although broad comments can be made about steel consumption, the IT workforce, and a numberof other important things that connect India to the global economy, it would be unrealistic toassume that one can claim understanding of India without a very specific focus on the region,including spending time as an active participant in the economy.


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Summary

Regardless of the claims to the contrary the financial crisis, which looks a lot like a depression, lingerson around the world. The economies of nations that used to be considered engines are performingmore like weights and those that are waiting to take up the slack arent quite positioned to do so yet.

The Euro area is looking sound but undervalued as it faces problems directly instead of putting themoff for later generations. This is how difficulties in economics should be addressed, pain for regionsthat experience the tail end of economic cycles but pain that is addressed and supported by thosewho can offer support.

The UK seems to be on line to do the same thing as the Euro area. Politicians in the new governmentlook like they are addressing problems head on even with ratings agencies axes looming. Again thisis a needed pain which will be shorter and less severe if it is done quickly and completely. To quotethe immortal Jerry Seinfeld as he advises George Costanza (Jason Alexander) about how to deal withdifficult pains:

You should just do it like a Band-Aid. One motion! Right off!

-Seinfeld; The Ex-Girlfriend, First Broadcast: January 23, 1991

Ironically the United States isnt heeding the advice of its own cultural icons. Efforts at recovery inthe US are couched in spin and denial. It is for this reason that the US economy is looking set foranother fall. The administrations and leadership in the country have been trying to avoid any of therealities which they got hit with in the crash of 2008. This is going to cause even more pain aspiecemeal solutions involving continued reliance on debt markets stymies growth potential for thedecades ahead. The financial position of the US public, administrations (federal, state, and local),and companies are locked into debt obligations which are still increasing. This isnt going to leavethe country in a position to be able to pay out the obligations set out under social security, medicare,

and medicade over the next decades. Major defaults on debt might not be certain but should beexpected in the next five years.

The BRIC countries (Brazil, Russia, India, and China) continue to be the leading economic nations ingrowth potential terms. All of the countries have weathered their financial storms well, likely due toexperience with hard economic times, and they are all well positioned to take over in leadershiproles on the global stage. This isnt new news. The world has been abuzz with talk of emergingmarkets for years, or at least since the Chinese expansion caused ocean shipping rates to gainorders of magnitude above anything seen over 150 years of recorded freight rate information (in Fall2003). As these four countries, and a number of others, continue to emerge they will offer anamount of stability, all be it slower growth stability, that the developed nations lack. It is expectedthat within the decade the BRICs will be able to claim justly that they have emerged.

Despite the expected economic churn there will never stop being opportunities for profit. What ismost likely is that investors will just have to be more careful about where capital is allocated and duediligence in risk management and research is going to be essential. As a rule of thumb, looking forglobal companies operating with little or no debt would be a good place to begin.


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Authors Note

A series of unfortunate events. Change is driven, or has been, not by slowtrends but by major events at the correct time.

-Arch Duke Franz Ferdinand

Ive written this report because Im afraid that the next decade will be defined by battles, not byGoogles or Apples, and that few of the global leadership are addressing the mammoth in the corner.

The United States of America is coming apart at the seams and could burst with the slightest politicalshock.

At this point none of this is certain, just far too probable for me to sit back and watch without tryingto do something.

For the most part the report is an overview of the major economic trends which have been deemedimportant chapters of the full economic story. That is not completely the case for the three

appendices which cover US Unemployment, the Tea Party, and Civil Unrest. These three sections arecomponents of what is causing me to lose sleep. The number of unemployed people, their smallgeographic concentration, and the trends toward reactionary and populous organizations all point toextremely high risks of civil unrest boiling over into something completely chaotic.

Writing these sections has taken the majority of the writing time. This is primarily because of whathas turned out to be an incredibly intellectually taxing exercise. Thoughts of how the politics of theUS could go disastrously wrong are not pleasant, especially because of what seems to be a cascadeof escalations just waiting to be set in motion.

In the interest of maintaining some sense of hope and happiness it is important to remember thatopportunities for great things to appear remain even in the darkest of times.

In that spirit it is fitting to remember the closing line from Oliver Stones landmark movie about theculture of finance in the 1980s. This is not the oft miss applied mantra of Mr. Gekko [MichaelDouglas] which proclaims that Greed, for lack of a better term, is good, but is the wise closing lineof the fatherly Carl Fox [Martin Sheen] as he says:

Maybe thats the price, Bud, maybe so. Its gonna be rough on you but maybe insome screwed up way, thats the best thing that can happen to you ... stoptrading for the quick buck and go produce something with your life, create,dont live off the buying and selling of others ...

-Wall Street, 1987

It is through creation, not destruction or accumulation, that prosperity will be assured.


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Table of Contents

Disclaimer 02

Summary 03

Authors Note 04

Table of Contents 05

US Economy 06Unemployment, Debt, and Civil UnrestCapital ControlsOut of the Darkness

Global Finance 09Greece and the PIGSBondsEquity

Global Regions 12CanadaChina, South Korea, Japan, and AsiaRussiaCentral AsiaAustraliaThe Middle EastAfricaEuropeCentral America and the CaribbeanSouth America

Whats Missing? 20Power is Under PricedWater Supplies are ShortClimate Change Research Sidelined

Appendices 22A - US UnemploymentB - Tea PartyC - Civil Unrest Scenarios

End Notes 36


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US Economy

Despite what the flavour of the minute might be in the international news media reports, the storyof the spring is not about gushing oil, health care, or bombs made of fireworks. The story this springis the US economy.

This story began in January as early reports began questioning the strength of sovereign debtmarkets. Attention was diverted for a number of weeks to the growing tensions around a healthcare reform bill seen by Americans as a battle ground issue but seen by the rest of the world as aplayground issue. Obamas eventual victory in getting legislation through that revised what was oneof the most expensive health care systems in the world on March 22nd, 2010 was covered in subtlegloom by the politically motivated violence that occurred around the time of the vote. Althoughminor, it is hard to deny that bricks through windows, cut gas lines, death threats to politicians, andopposition leadership treading the line between rhetoric and inciting violence1 are signs of a deeplydepressed political economy.

From this inflammatory setting the media focus switched to increased tensions in Greece (late

March), the SEC charges against Goldman and Sachs (April 16), a volcano blocking air traffic (April 14 April 21), and a massive oil spill. All of this seems to be rather misplaced attention. Looking at theGreek case gives a good demonstration of why this is.

Until recently bankers tales of daring- do during the Asian, Latin American andRussian debt crises were kept for after dinner drinks. Now, many of those oldemerging markets hands are in high demand during the day, as banks andinvestors ponder the potential effects of the Euro zones debt crisis.

-Economist, Feb. 13, 2010

Greek Government Debt outstanding ~ EU 290bn

- ibid

If the debt is denominated in a foreign currency or held largely by foreign creditors, than a debtcrisis can be compounded by a currency crisis.

-ibid

These comments on the Greek economy could just as easily be spun to talk about the US economy.The allusion to the currency crises of the past is justified when talking of the US because of the factthat, unlike Greece, it has its own currency and a vote of non-confidence, in currency trade terms, ismore apt to be applied when a full region is in decline, not when a single zone in the currency blocksuffers problems. Not to mention that the Greek debt outstanding is a drop in the bucket compared

to what the US government, not to mention private debt of the US population, has due. 250 bn Eurois about the size of the Bush bailout of 2008, and about the size of the Obama 2009 bailoutpackage.

As the distractions subside it is certain that the US economy is going to be looking far worse than itwas at the opening of 2010. When this happens the risks of a run on the currency return in full force.


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Unemployment, Debt, and Civil Unrest

Unemployment in the US continues to run high yet it is unlikely that the markets have come to termswith exactly how high. The reason is that there is little consistency in what is being reported. Mostreports use the unemployment rate of the country as the basis for any opinions, positive or negative,about the broader economy. Another common reported value is the number of jobs created or lostin a month. The monthly reports are then analyzed by reporters in over simplified terms. It is rarethat more than a couple of calculations are made and it is even rarer that these will be correctlydescribed.

Common misleading reports include looking at strictly month by month, or even week by week, jobsdata. Another common mistake is to compare monthly data to the same data from the year before.What should be done is a comprehensive study which looks at data sets instead of cherry picking oneor two numbers from government releases. Additionally, to understand unemployment a regionalcomponent needs to be addressed, the rate (unemployed per working age person), and the stock ofunemployed people should be included while using the data archives to compare the currentsituation to a number of years past, not just the worst ones.

An additional factor that is playing havoc in the US economy but isnt being discussed any more isthat the US consumer base is broke. Huge swaths of people have no jobs and mountains of personaldebt, in the form of mortgages, car loans, credit card debt, student loans, and unpaid bills. As thecentral banks begin raising rates and inflation sets in the US consumer, who is normally seen as theengine of economic growth for the country, simply doesnt have any disposable income left. A set ofinteractive maps created by New York Federal Reserve show the distribution of debt held by the USpublic exceptionally well. They can be found here:

http://data.newyorkfed.org/creditconditionsmap/

These factors, and a number of others, all begin to move economic analysis away from pure business

and into the field of political science, specifically into the area of study of causes and effects of civilunrest. The population in the US is becoming more and more tense. The recent gains seen by theTea Party movement demonstrate this phenomenon in a way that no theorizing could have done.The group is regional in its origins and without any concrete platform. It is a pure expression ofanger and desperation coming from those who have felt the pain of the depression and are seekingan outlet. The populous nature of the leadership along with the violent tendencies of the rhetoricmake the movement seem to be revolutionary in nature, not to mention the fact that the name itselfdraws on what is often seen as the opening event of the American Revolution, the Boston Tea Party.This revolutionary group has a significant difference from its name sake, the Boston Tea Party had acollection of intellectuals outlining the statutes of a new democratic republic, the present day TeaParty has strong roots in the computer illiterate and globally unaware.

Capital Controls

All of these factors add up to a new way of thinking about economics. The recent report released bythe IMF, Capital Inflows: The Role of Controls, adds even more changes into the mix. The reportdetails the use of government imposed controls on capital inflows to avoid having a country whichgains from sentiment shifts by the holders of hot money end up inflating economically precariousbubbles due to the availability of cheap money. What seems to be completely missed is how easily
http://data.newyorkfed.org/creditconditionsmap/http://data.newyorkfed.org/creditconditionsmap/http://data.newyorkfed.org/creditconditionsmap/


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the same notion could be inverted to become an analysis of the role of controls for capital out flowsin order to avoid runs on a currency.

Currency outflow controls are not new concepts. Joseph Stiglitz, one of the worlds leadingeconomists, argued convincingly for their effectiveness in the Asian financial crises of 1997 as hefound that countries that ignored the IMF policies of the time did much better than those that did

not. His analysis of the global capital markets is quite astute. A government imposed break intrading of their currency allows for sentiment to be mitigated and for fear to subside as tradingorganizations evaluate how rational the slide in a currency experiencing a run really is. What Stiglitzomits from his analysis is that such controls, although beneficial to the greater segment of society,create losers. Investors in a country experiencing a run, much like those caught with money in abank experiencing a run, will be left with little choice other than to lose large sums of money as thevalue of the currency drains away. There is little doubt that as a currency begins trading after havinghad capital out flow controls imposed it will be valued significantly lower than the last momentsbefore the controls are imposed. This leaves those trapped in a currency sitting on the sidelineswaiting for the controlling government to decide when to remove the controls as the value ofinvestments sinks.

Out of the Darkness

Despite what looks like a perfect storm developing history reminds that even in the most chaotic oftimes opportunities remain for those who are hard working and who keep their wits about them.For decision makers to be well served by any kind of forward looking forecast thoughts need toavoid dwelling on evaluating the exact course of future events. The time and effort spent trying toperfect a single forward looking economic prediction would be better spent trying to develop broadstrategies for a number of the more likely scenarios as well as a handful of options for those leastlikely to develop. In this way a decision maker creates a tool box of options which are ready to putinto effect as events unfold.

For example, Canadian decision makers would be well served to consider the effects of civil unrest inthe US in advance of them materializing, as would many others. Case studies of past economicshocks that develop into political shocks shows that such events unfold in a matter of days andweeks after years of build up. Due to the concentration of economic problems an excellent optionfor Canadian officials would be to consider preparing Immigrations Canada and increasing staff atCanada Customs as any tensions that unwind in the US are sure to increase the volume ofimmigration applications.


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Global Finance

Since the early 1980s global finance has become one of the most significant economic sectors in theworld. Efforts to eliminate capital controls, a brain child of Regan, Thatcher, Friedman, and a numberof other open market enthusiasts, have opened up the world to the ebb and flow of financial

sentiment. Unfortunately these flows of capital are prone to the very human emotions of fear andpanic. Thus understanding exactly where fears sit in finance is an extremely valuable skill.

Greece and the PIGS

Despite the noise about the troubles in Europe the outlook for the EU is rather positive, meaningthat investments there are probably undervalued. In the same way that the English language presssuffers from the lingering vestiges of an editorial staff that grew up with a red scare, the last of thefree market drones are discolouring the perspectives of English investors and politicians.

The European Union is pulling together, if grudgingly. They are reacting with civility, compassion andunity. The bankers and the politicians are working hard to help mitigate the suffering of the Greeks

and the Greeks have enrolled in the school of financial hard knocks to learn about debt. The efforts,which seem to be lead by the Germans and the French, are commendable. This crisis seems to be,completely in contradiction to major English publication pundits, bringing Europe together in a waythat would have been unthinkable before. It is possible that the EU will come out of this crisis moreunited than when it entered, even if the Germans pick up a Greek island or two in the chaos. A lot ofthis depends on the compassion of those Europeans who weathered the storm and the thanksoffered by those who did not.

When considering the troubles in Europe it is revealing to think of each of the member countries asUS states. They all share a common currency and a similar history. As much as language barriersremain, a common set of values about how a civil society should operate have been forged out ofthe fires of two world wars. Nothing seems to create peace like a devastating war that leaves all

sides crushed, exhausted, and dead. There seems to be little aggressive vigour left in the EuropeanUnion and this should be seen as a benefit. Going back to the analogy of Euro countries being like USstates, it is comforting to think that if a state were to be on the brink of defaulting on bonds theother US states would come to its rescue.

United we stand non?

Bonds

The bond markets have been the most telling financial indicators over the past six to eight months.What has taken ages to really set in, that sovereign bonds are not risk free, is beginning to actuallyhave tangible results. The bond yield curves of the past six months, especially in the US Treasuries

market, are displaying disturbing trends. Yields have risen significantly and continue to do so. For aperiod in early 2010 US bond markets even saw an inversion of bond yields, where sovereigndiscount rates were higher than corporate rates. This is counter intuitive because it means thatcorporate bond issuers would be able to issue bonds backed by government paper at a profit,something long seen as an economic dislocation. This isnt quite the case, such an arrangement,where the market prefers to hold corporate paper over sovereign debt, is quite rational. It shows amarket that wants to spread risk of sovereign default to other parties. Corporate interests,especially large bond issuing companies, are multi-national and are thus less at risk to problems in a


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single nation. Additionally the market could turn to corporate paper in order to gain from theapparent teams of researchers who should be better versed at understanding the risk beingassumed by investing in sovereign debt. Unfortunately recent history has shown that the Greenspanflaw runs deep in the current corporate and financial climate; those in positions to make decisionsabout the allocation of funds have failed either to understand or act in their own best interest andinstead put aside due diligence for the easy returns of trend chasing speculation.

Another telling sign in the bond markets is that the successful issuance of bonds at auction hasbegun to be questioned. Not so long ago there was hushed concern that the US might fail to fullyissue the treasury auctions they had planned. This isnt as much of a problem as it was a few monthsago as the Treasury department has begun to lower the amount of debt being issued per auction,something that hasnt been done since about July 2007. This step is broadly seen as a positivemeasure because it indicates that public finances are improving, which is in line with the officialreason for the draw down, that tax revenues are increasing which reduces the need for debtissuance. What doesnt seem to be questioned is how much of this decision was based on avoiding afailed issuance if supply and demand factors lead to a spike in the yields needed to be offered by theTreasury.

A closing point in the bond market analysis deals with Credit Default Swaps (CDS), effectively bondinsurance policies. These contracts, which are still primarily traded over the counter (OTC) in anunregulated environment, were at the heart of the financial disaster of 2008 yet have somehowmanaged to recede from the limelight once again. Understanding that the rates these contractstrade at has some relation to market expectations of default means that they provide additionalinsight into the expected performance of bond issuing entities, both corporate and sovereign. Thesemarkets were alight before the failure of many of the biggest institutions which collapsed in thewarning shots of September 2008. They were active again as Iceland ramped up the eventualcollapse of its debt obligations.

In order to effectively use data and trends from the CDS markets to gauge future expectations of

debt default, data sets of CDS rates and trade volumes in the six to eight weeks before majordefaults need to be studied. The Icelandic case in particular represents an excellent chance tounderstand how well CDS markets are evaluating risk as the rates for sovereign CDS protectionspiked for a number of specific countries in the run up to the Icelandic default. From memory thesecountries were Iceland, Ukraine, Pakistan, Spain, and Portugal. If memory serves, Icelandic paperwas consistently the most expensive to insure.

This alludes to the effects of contagion in global bond markets. A very rough estimate based on thispossibly flawed analysis is that 20% of the market fears are well founded while the rest representonly speculative reflected fears. It is as if the markets can identify something going wrong but arentexactly sure what is off. Much like a person opening a fridge only to be hit by a terrible smell, it isclear that something stinks in there but only detailed inspection will show which of the left overfoods has grown a beard of mould. Expanding any such study to watch for the accuracy of marketsto pick the looser, as they did successfully by pricing Icelandic debt insurance higher than that forother nations, would provide an outstanding financial forecasting tool; as would study of cause andeffect financial behaviour models. Did perceptions doom Iceland and other bond issuingorganizations or were perceptions simply rational expressions of conditions which existed and werealready well entrenched?


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Equity

Equity markets around the world remain the most difficult segments of the global economy to either

analyse or predict. With few barriers to entry for either firms or market participants, and just as few

barriers to transactions, there is no wonder that these volatile beasts are running rampant through

corporate and personal balance sheets.

The spread of global media networks has given more people access to financial related information

than ever before. Unfortunately the prevalence of access to information has precluded any

prevalence of media literacy. The faster that the world adopts information distribution technologies

the harder it is to keep the users of these technologies up to date about things like critical evaluation

of source reliability. There are still vast numbers of people around the world who are only just

becoming internet literate and who seem to take the view that if something can be found, in writing,

in photos, or in video, on the internet it must be true.

Additionally the spread of internet technology and the development of secure trading platforms,

from groups such as E-Trade to the proprietary trading software developed by major banks, has

added legions of non-professional investors to equity markets around the world. A benefit of this is

that the group think of past equity market movements will be reduced as diversity of opinion

expands. Unfortunately a new kind of group think is developing. This new social herd is based less

on releases of unemployment numbers, durable goods sales, and bond yields but more on

reactionary casual reading of mass market investing news (Mad Money or Glen Beck for example).

The negatives associated with this new trend lie mostly in the increased chances that a panic will

catch hold and that a run on equity will be magnified if it does happen.

As emerging markets become developed markets over the next decade this trend of mass access to

both information and near instantaneous trading is expected to increase the volatility of globalequity markets while decreasing their adherence to rational market responses to economic and

political shocks. Evidence of this trend can be seen in the changing nature of seasonality on global

markets. Over the past decade the lulls associated with the Western calendar, such as the run up to

start of the school year in September or the break over the course of Christmas and New Years Eve,

have begun to change. More and more the period of about December through to mid-February has

become a slow period as the world moves from the Western holidays in December to Chinese New

Years and Brazilian Carnival. Although still in the early stages it is expected that these changes will

continue.

For these reasons equity is expected to be extremely volatile and irrational for the next decades.


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Global Regions

The following is a tour around the world of recent developments along with longer term trends andsome small amount of forecasting.

CanadaThe author of this paper is Canadian. Canada is perfect. Watch out for bears and moose, they areseen inside the city limits of our capital. :P

China, South Korea, Japan, and Asia

As much as the notion of grouping even two of these countries together, not to mention implyingthat the rest of Asia is homogenous, is contentious at best, this grouping has been done for a verydeliberate reason. The Asian economies look sound compared to almost everywhere in the world.

The Chinese struggle with growing pains and the stresses of liberalizing an economy and politicalsystem long held up as a model for totalitarian rulers around the world. The political censorship andoppression continues to an extent but seems to be trending toward openness, even if it is a trendthat might take decades to work out. Fears that such trends might not continue, or that they couldeven reverse, are unfounded and poorly thought out. Even the more conservative members of theChinese leadership seem to have come to terms with the fact that electronic communication and theassociated economic benefits for the whole society bring an amount of forced openness which isnearly impossible to reign in. The economic gains and political risks associated with a societybecoming computer / media literate are almost exactly the same as those faced by Europeans asGutenberg opened up the world of text to the masses with his first movable type.

The South Korean situation looks decent all things considered. The country has done well to investin productive infrastructure and has even developed a number of globally competitive production

niches. Tensions with the North remain but Kim Jung Il is steadily getting older. It seems reasonableto expect that his successor will be more versed in the benefits of trade over international co-erosionand it seems unlikely that a successor will choose to increase hostile rhetoric beyond what KJI hasbeen flaunting over the past decade. Say what you will about the way KJI has treated his ownpeople or his constant use of brinkmanship to blackmail the world, he has not, given currentknowledge, moved beyond his borders. There is something to be said about a leader who choosesnot to send his troops out of the country.

***Last minute edit***

It is difficult to gauge exactly what the recent sinking of a South Korean military vessel is going to doto the region. Global opinion seems to be that the North sunk the vessel deliberately yet that claim is

denied. It could have been a rouge incident or it could have been another test of the limit which KJIcan get away with. The situation remains questionable as of this writing.

Japan looks likely to struggle along as it has for decades now. The conservative culture of banking,finance, and business appears to have had a dampening effect on the fallout from the financial crisiseven if it did leave Japan sitting on the outside of the party around the turn of the century. There issomething to be said about Japanese restraint, no matter how it materialized. Another culturalfeature of Japan that looks set to help the economy over the next decades is the very unique


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Japanese fascination with all things robotic (a trend shared by the South Koreans, if sources arecorrect). This has resulted in the specialization of the country in a rather unique branch of math,control theory, which seems to be just starting to hit the world stage in terms of applications. Fieldsfrom Climate Change research to financial regulation will eventually begin adopting this branch ofmath which will make the experienced robot creators invaluable to the countrys economy.

With the exception of Thailand, the rest of Asia seems to be holding course relatively well. Case bycase differences are certain to exist; for example the size and religious zeal of the Indonesianpopulation remains an uncertain factor in forward looking economic analyses; but generally the pastyear has seen relatively few major changes from business as usual. The political struggles of the Thaipeople should be seen as a potential risk but the relatively small size of the Thai economy makes thematter mostly internal and shouldnt add to massive global risks of economic disruption. Thesituation should be watched none the less as there is always a possibility of unforeseen escalations ifwarning signs are ignored.

**EDIT** The situation in Thailand has become much worse. Police have opened fire on protestorsand three were killed. A Canadian Journalist was hit in addition to a number of others. The major

source of concern surrounding the increasing tensions in the country is that it is yet another stickbeing thrown on the fire of revolution around the world. As Rosa Otunbayeva, interim leader of therecently revolted Kyrgyzstan, pointed out when referencing the revolution:

Revolution is infectious.

Russia

Russia, like it has been doing for years, looks to be relatively self-sufficient. A large population with asizable number of highly educated economic participants ensures that labour supply issues wont bea problem and a massive resource base, including some of the worlds largest oil reserves, ensuresthat materials wont be in short supply either. Additionally a strong financial position and prudent

management of central bank assets over the past decade, and in particular through the financialfallout that began in 2007, has left the country well positioned to emerge from the crisis in acontinued position of global political and economic clout.

Risks remain in many areas of the Russian economy including questions about corruption and crimein the many decentralized domains of the massive country. With the replacement of Putin aspresident there has been a slight shift in reported acts of authoritarian policies but there seems to belittle doubt about the fact that he remains a significant player in Russian politics and economics whileacting in his position as prime minister of the Duma.

Although coverage of developments in Russia has been muted over the past six to eight monthsthere is still considerable ground to cover in the Western media with respect to addressing Russia as

a rational self-interested country deserving of the same respect as any other country. Until theseissues are addressed and corrected the Russian economy is likely to continue to be undervalued dueto the perceptions forwarded by a Western media that still sees red when looking at a civilizationthat pre-dates every drop in the bucket excuse for a country thats come into being in the pastmillennia (see Kievan Rus, circa 988 AD).

It is apt to remember the words of the CAPITALIST Arthur Jensen [played by Ned Beatty] as heeducated Howard Beale [Peter Finch] about how the world actually works, even in communistRussia:


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What do you think the Russians talk about in their councils of state? Carl Marx?They get out their linear programming charts, statistical decision theories, min andmax solutions and compute the price cost probabilities of their transactions andinvestments, just like we do.

-Network, 1975; http://www.youtube.com/watch?v=3BVqIjKyJh0

The speech and the movie might be over the top but there are elements of truth in both. Therearent many differences between states participating in the global economy anymore. A breed ofcivil society has been developing since the end of the cold war which is slowly mending thedifferences between countries that had been driven by ideology for so long. As this culturaldevelopment progresses it seems extremely likely that the undervalued Russian economy will seerespectable gains.

Central Asia

Central Asia represents the most volatile region in the world. There is no question that the vast oilwealth of the region, the collection of totalitarian regimes, and the recent toppling of the Kyrgyzstangovernment have made the area a veritable powder keg. Add to the mix a US air base in the middleof the floundering Kyrgyzstan, some Kremlin interest in the insurgency (but claims of non-involvement beyond broadcasting facts), the failed state of Afghanistan in the south, the nucleartensions tied up in Pakistani fighting, a revolution ready Iran, and a Chinese administration wary ofoutside interference and instability on its usually quiet Western front and all of a sudden LutzKlevemans The New Great Game becomes more prophetic than it was at the time of printing.

From the Chinese point of view, they would like to be able to claim that all was quiet on theirWestern front. A stable central Asia offers China a direct link to oil reserves that could be pipeddirectly to the dragons heart without any chance of major outside interference in the flow of crude.This dream remains a difficulty as Chinas West, a desert away from the major population centres

along the great rivers, has lingering cultural tensions between the predominantly Han Chinese newcomers and the Islamic minorities with ties to the Slavic populations in Central Asia and theethnicities of South Central Asia. At this point tensions are simmering but escalations have becomemore likely since the Kyrgyzstan revolutions. Revolutionary ideas spread.

The Russians, claims Sergi Karaganov, head of Russias Council on Foreign Defence Policy , havelargely stayed on the side lines. He offered the following about the Kyrgyzstan problems:

Have we benefitted from the Kyrgyzstan revolution? No, because now we haveone more problem. Kyrgyzstan is a failed state, a potential source of Islamicfundamentalism, terrorism and chaos in the region.

The Russian case does seem rational. Instability in a region that is already chaotic could escalatequickly, especially as the West has averted its eyes, choosing to focus on Greece, oil spills, andanything else they can get News on that doesnt require more than passive consumption and theexpression of sad sentiments. The Russian administration has no such luxury. The American air basein the middle of Kyrgyzstan has been kept open long past the original temporary time frame it wasslated to exist for. American intervention in Central Asia could turn nasty fast as the US is wellknown to be struggling to secure oil resources and the schizophrenic US population is liable to electa tough president to follow on Obamas consolatory demeanour. Thus volatility in the region couldeasily explode into a conflict that Russia has no interest in getting into.
http://www.youtube.com/watch?v=3BVqIjKyJh0http://www.youtube.com/watch?v=3BVqIjKyJh0http://www.youtube.com/watch?v=3BVqIjKyJh0http://www.youtube.com/watch?v=3BVqIjKyJh0


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The American interests have been rather clear for the past decade. They need an air base in theregion in order to wage war in Afghanistan and only one country was willing to let them in. That wasKyrgyzstan, a country now reeling from a revolution that started in a copper mining town. Althoughthe new interim leadership has not called on the Americans to close the doors of the air strip, thiscould easily happen if another group takes power. It is worth mentioning that the past presidentwho was run out of the country was an American ally, or as close to it as ever appears in the region.It is difficult to know exactly what would happen if the Americans lost the base in Kyrgyzstan. Thewar efforts in Afghanistan would change completely as the only resupply point for troops on theground would be the carrier groups stationed in the Indian Ocean, and each of these re-supplymissions would require crossing Pakistans air space.

There is also the seldom discussed question of oil which haunts talks of US military positioning inCentral Asia. As early as the initial invasion of Afghanistan in 2001 it was well known that a sidemotivation of the assault was that then Vice-President Dick Chaney had an interest in claimingAfghanistan as an American dominion so that pipelines could be run from the Central Asian oil fieldsto the ocean (and world markets, read: USA) without constant difficulties in dealing withautonomous nations such as China, Russia, or Iran. (Pakistan through Afghanistan is the only way to

run a pipe line without very direct interference from one of those three nations.) All of this suggeststhat there will be some very well funded resistance to the closure of the US air base, even if the USadministration sees it as a foreign affairs nightmare from which it would like to wake.

Unfortunately, the best way to frame the Central Asian nations is as the Balkan States, circa 1914.They represent tremulous countries with governments seeking strength through internationalalliances to global super powers; the super powers are jockeying independently to secure powerrelations with the small regional governments; the region is filled with a host of self interested geo-strategic actors; and no nation wants to see the balance of power shift away from them. It is earlyto get a complete picture of the situation but this region merits more attention than it has receivedin the press over the past year or more.

Australia

There is no question that Australia looks set to prosper in the near and midterm. Massive resourcereserves, a relatively small population, costal paradise locations for tourists, and easy access toglobal markets for iron ore make the country a relatively sound economic actor. Racist tendenciessurface from time to time but seem to represent only very slight risks. So long as the country is ableto confront these difficulties before any tensions brew with the larger populations of IslamicIndonesians or Chinese / Indian trade partners there will be little chance that such intolerance causesany real economic or political harm.

The one troubling element in the long term outlook for Australia is that they have been havingmassive problems with fresh water supply. Melbourne in particular has had to confront the problemof running out of drinking water in an all to Mad Maxian way 2. The continued droughts that thecountry has experienced could also cause problems if they intensify; something that is probablegiven how low on the list of concerns climate change has become since the onset of the globaleconomic disaster that began in August 2007.


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The Middle East

The Middle East continues to struggle with a number of difficult issues. Israeli and Palestinian backand forth has been subdued when compared to the high tensions of the past ten years butcontinued violence has been plaguing both sides. A recent very public assassination debacle byIsraeli security force MOSAD has probably ratcheted up underlying stress in the region, but that hasyet to have any visible effects. In all likelihood the Arab states just see it as standard practice forIsrael, which might actually dampen the effects. Syria has been relatively quiet since getting theirarmy forced out of Lebanon and having a suspected nuclear site bombed by Israeli airplanes.

Iran has been one of the most politically volatile countries in the region over the past decade. Themass uprising and the relatively violent state suppression of opposition protestors has fuelledspeculation of another revolution brewing in the Islamic state. This potential could cause tremors inthe whole region. Regardless of the countries international relations and the brinksmanshippracticed by Ahmadinejad over the course of his terms in office, Iran still represents one of the moststable Gulf States. A failure of their government doesnt seem to be desirable for even the worst ofIrans enemies. This is probably because of the very real possibility that an even more extreme

faction will take power in the country. A disturbing potential as the countrys nuclear researchcontinues in what could be the late stages of weaponizing; a claim repeated dodged by Ahmadinejadand his administration but which has been under constant pressure since about 2003.

Saudi Arabia has been surprisingly active in international press coverage terms over the past year orso. The normally reclusive kingdom has made a number of waves in good and bad ways. Mostsignificantly the Saudis have begun to become concerned about the situation facing Yemen as thecostal state shares a large boarder with Saudi.

Iraq has been unusually quiet in the news over the past six months or so. It is probable that theEnglish media is just plain worn out of reporting the violence but it also seems to have slowed overthe winter months like most years. Casual notes point to continued difficulties between the three

major ethnic groups in the country and the possibility that they are manoeuvring in preparation for aUS withdraw is all too real. It is hard to forget that it took relatively little time for the Kurds ofNorthern Iraq to organize a 150,000 man strong armed force to patrol the region.

Turkey has been struggling with very typical Turkish problems. The secular military and the Islamicpolitical parties have been at odds recently and the Kurdish groups in the South continue to flare upin separatist ways, fuelled by men, guns, and money from their brethren in Northern Iraq. No doubtthe Turkish authorities are wringing their hands over the prospect of a US withdrawal from Iraq andwhat could quite easily become a Kurdish drive for autonomy from the three major countries inwhich they are spread. Kurdistan seems to resonate with many people in Northern Iraq, SouthernTurkey, and Western Iran.

Africa

Africa remains largely unchanged in terms of the course it appears to be taking. Regional difficulties,including significant problems in the Congo, Uganda, Sudan, and Somalia remain unresolved whiletensions in Rwanda, Zimbabwe, Guiana, Ethiopia, Nigeria, and a number of other nations continueto run high. Unfortunately for African residents, this is, and has been for a number of decades,business as usual.


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One striking development involves the early stages of Chinese investment in African nations. Thesehave primarily been in East African countries, such as Zambia, but the Chinese administration hasmade no secret that it views sound relations with African nations as important foreign relationstargets to be met in order to secure resource streams for the expected continuation of Chineseeconomic expansion. A novel element of this policy of relationship building is that the Chinese aretaking risks and investing in resource processing facilities located in the countries that have theresources. It is clear that the Chinese have learned from European colonialism and Americanglobalization efforts and have calculated that the risks that a foreign country will cut ties withChinese investors is minimal if enough good will exists from the shared benefits of economic growthwhich come along with choosing to locate resource processing facilities abroad. Only time will tell ifthis policy, along with the rather contentious policy of dealing with Sudan, will reap the rewards thatare expected.

Another development of note is that the growing race to secure oil reserves has brought addedfocus on Africa. Although some of the North African countries have long been known to containvaluable reserves, with access to the Red Sea and the Mediterranean Sea, the African oil story isreally unfolding on the West Coast. International attention has been diverted from this region for

the past decade or so with only slight attention drawn from the British organized, South Africanstaffed, Zimbabwe disrupted coup attempt on Equatorial Guinea years back along with the peskyflare ups of the Nigerianoil work force. It isnt well understood why this is the case. Its possiblethat the area has already been spoken for as a protectorate of types but that is far from certain.What does seem evident is that it seems like an ideal region for the US to seek trade partnersbecause of the easy shipping route from West Africa to the Gulf of Mexico and because of the largenumbers of American citizens who could be sent to Africa on business who have ancestral ties to theregion. With smart political and business efforts this trade could be quite profitable for all countriesinvolved.

A closing African note involves the rising tensions around the mouth of the Red Sea. Somali pirateshave been acting up enough to draw increase global attention and now Yemenis factions are

beginning to flex their muscles on a global scale. If the two nationalities, linked by Islamic ties, wereto begin to seriously organize there is a strong chance they could effectively shut down Red Seashipping. This may be fanciful at present but the costs of having global trade routes compromisedmakes the possibility of escalating tensions quite an economic risk.

Europe

Despite the noise about the troubles in Europe the outlook for the EU is rather positive, meaningthat investments there are probably undervalued. In the same way that the English language presssuffers from the linger vestiges of an editorial staff that grew up with a red scare, the last of the freemarket drones are discolouring the perspectives of English investors and politicians.

The European Union is pulling together, if grudgingly. They are reacting with civility, compassion andunity. The bankers and the politicians are working hard to help mitigate the suffering of the Greeksand the Greeks seem to be enrolled in the school of financial hard knocks to learn about debt. Theefforts, which seem to be lead by the Germans and the French are commendable. Angela Merkel isdisplaying stern motherly compassion for which she is no doubt under appreciated. This crisis seemsto be, completely in contradiction to major English publication pundits, bringing Europe together in away that would have been unthinkable before. It is possible that the EU will come out of this crisismore united than when it entered, even if the Germans pick up a Greek island or two in the chaos. A


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lot of this depends on the compassion of those Europeans who weathered the storm and the thanksoffered by those who did not.

A closing bright spot for the EU is a small rumour that Dominique Straus-Khan (DS-K), former FrenchSocialist politician and current lead at the IMF, could return to his home country to run for top office.If this happens it would be a significant gain for the EU, even if he isnt successful. DS-K has done an

excellent job reforming the IMF and it would be hoped that some of the better points of the IMFsrather right wing staff added to his (DS-Ks) understanding of economics. Its probable that he hasdeveloped an understanding of global finance that no one else has ever been able to achieve.Bringing this understanding to the public over the course of an election might be intellectuallyrevolutionary.

Central America and the Caribbean

Central America and the Caribbean, regions far too often ignored by global economic analysis, offersa very interesting set of case studies. The many different islands each have distinct strategies fordealing with space concerns, idyllic tourist settings, and a selection of different natural economic

endowments. The collection of isthmus countries have similar concerns but also have to deal withhaving neighbours and being caught in the nasty position of being staging areas for black marketimportation into Mexico and the Southern US. And then Panama has North Americans mostsignificant waterway.

With the exception of the crumbling social order in Haiti most of the countries in this region look setto continue with the economic conditions theyve been seeing for a decade or so now. Slight risks ofconflict are present in Panama as it represents a major trade route for a number of different trans-national interests as well as representing THE choke point for the US navy. It is surely a longstanding nightmare of the Admiralty in America that conflict, natural disaster, or construction failureruins the canal and divides the fleet.

South AmericaSomehow South America seems to consistently be left off of the global radar. In some ways thepeople of these countries have benefited from the lack of attention but investors would be welladvised to consider exactly how much of an effect this has had on depressing asset values in all ofthe South American countries.

Brazil is clearly the leading economy on the continent. With wood, iron ore, people, proprietaryadvanced nuclear technology, and now an off shore oil reserve of mammoth proportions the countryis looking set to move forward for many decades. Risks remain in the massive violent cities of SaoPaulo and Rio, and to a lesser extent the capital Brasilia, but these are not the type of issues thathavent been confronted by nations in the past. It is well noted that London, Paris, New York, and a

number of other cities have had slums in the past and have seen them clear up through all manner ofdifferent mechanisms. Its also important for investors to remember that slums are sources ofcreativity, innovation, determination, and entrepnurialisim. Even more important is that the livingconditions in Brazils fevelas, along with the size of each, means that there are many basic productswhich are already being produced in the rest of the world that could easily be sold to those in needto make their lives better. This is not charity, it is an investment opportunity which requires findingbasic products (toothbrushes?) which already have mass production infrastructure in place and canbe sold at near cost to millions of people.


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Argentina, Chile, and Peru seem to be continuing on with solid, if not spectacular, economicperformance. The days of disappearances seem to finally be receding into distant memories and thefinancial performance of each country has levelled enough to continue to improved credibility.

Columbia continues to be devastated by the war on drugs. No easy solution exists to the three partywar that has been going on since Regan decided that cocaine was morally wrong. After so many

years of enforced prohibition powerful interests have developed on both sides who are profitingfrom the war and have little interest to see it fade. Additional tensions between Colombianadministrations, the FAC, and the Chavez administration in Venezuela continue to ratchet up theconflict on the Eastern boarder of Columbia.

Venezuela remains firmly in the grip of president Hugo Chavez. His populist governance style seemsto still be pulling weight with the people but his forced retreat from anti-Bush showmanship to theday to day grind of actually governing seems to have shown quite clearly where his skills really sit.On a global scale the country continues to court allies in a loosely developed anti-American camp. Itseems probable that the election of Obama has been responsible for the loss of momentum for thisgroup. Regardless, Venezuela continues to be strongly tied to Iran, Russia, and Cuba which is a

positive thing in economic terms. This limited set of trade partners probably reap considerable gainsfrom their global network even if the trust that has been formed was done at a time when economicbenefits were trumped by political strategies.


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Whats missing?

These last sections consider three issues which are likely to be central in the economic and politicallandscape in the coming century but have been sidelined by the daily news. Consideration of thesefactors isnt essential or pressing but must be remembered in forward looking decision making.

Power is Under Priced

Chances are that power prices around the world are vastly underpriced. As we begin to gain a betterunderstanding of just how difficult it is to maintain power infrastructures in even moderatelyenvironmentally sustainable ways, it is becoming clear that the distribution and creation of powerhas been under priced.

The massive blackout of the Eastern Seaboard of North America gave an early warning about howwell the Western world can operate without power distribution. Off grid thinking has only grownsince that disturbing demonstration. Chances are that regions that have been used to statemonopolies on power generation and transmission stand to be hit the hardest. Ontario in particular

has a long history of power pricing subsidies that the public doesnt even know exist.

A rule of thumb when doing any kind of economic analysis would be to consider the effects of aninstant doubling or quadrupling of electrical power prices. This will reveal specific sensitivities tounexpected up swings in power pricing.

Water Supplies are Short

The supply of fresh water around the world has been an issue of growing importance for years now.Stories of shortages and disputes arise from time to time in the news media but are usually givenlittle attention. The public has little concern about problems that other people have getting drinkingwater so long as their taps still pour out potable liquid. What is being missed is just how wide spread

the problems have become. Running down the list of complaints which have surfaced in theinternational press shows the global nature of the problem.

Disputes have arisen between the Mexicans and US interests.

The flow of the Nile is heavily regulated by the 10 nations which have access to its waters, being leadby Egypt which has the most to lose and the most force to bring to bear on countries that shriektheir agreements.

A number of Chinese waterways face pressure from growing populations. Most notably the Mekonghas been disputed by the nations downstream from China including Laos, Thailand, and Cambodia,Vietnam.

Melbourne is having problems with depleted aqueducts.

A number of Persian Gulf States have been investing heavily in desalination technology to satisfygrowing demand from increasingly wealthy and assertive populations.

Bolivia had significant problems with fresh water supply when Bechtel attempted to gain a stranglehold on all of the water flowing in the country.


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Florida and California have almost no fresh water left. California has even reached the point ofburning every year. It might be worth beginning to consider how much water has been exported inconnection with years of trade in fruit and vegetables, both water rich products (the watermelontrade is a dead give away from this angle).

Humans cant go more than about 24 hours without water under normal circumstances. Notions of

rights to fresh water are utopian. Rights to anything only exist so long as supplies of that thing areabundant, all bets are off when vast numbers of people are unable to find water.

Climate Change Research Sidelined

Regardless of the public humiliation that climate change science has suffered in the past year thefact remains that the world appears to be continually warming. The hot winter of 2010 has been lostin the public memory thanks to a chill that is clinging to North America. Yet it needs to beremembered that Montreal only got three significant snowfalls over the winter of 2010 and one ofthem was in late April.

What seems to be consistently misunderstood is exactly what climate change really means. Climatechange science, despite the near obsessive focus on warming effects of green house gasses, is abouttrying to understand how human activity changes the planets climate, aka: weather. Even the mostardent green house gas researchers will (should) note that heating is not the only problem, nor theonly effect which human produced emissions are having on the climate. What is a problem is fast, ingeological terms, changes to climate stability. The environment can and will adjust to changes solong as they arent fast enough to be considered shocks.

The real focus of climate change research should be, and seems to be, on the fact that from allaccounts temperatures have fluctuated in a certain range; even the ice ages didnt cause deviationsfrom these ranges like what we have begun to discover in the past two hundred years. Despite errorconsiderations and what seems like some good old academic protectionism, the fact remains that

since the industrial revolution there has been a disturbance in the environmental status quo whichhas been accelerating exponentially. Even errors and manipulation could only reduce this fact toslightly lower rates of exponential change, which is akin to a doctor saying Theres good news, thepatient isnt as dead as I thought he was.

A necessary and simple way of looking at the problem of climate change is as follows. Around theturn of the 19th century, as the industrial revolution took hold of massive parts of the world,humanity began burning things faster than ever. This burning accelerated astronomically with theadvent and popularisation of travel based on the internal combustion engine. Now it just might bepossible that the heat from all this burning is catching up with us, literally.


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Appendices

Appendix A - US Unemployment

Unemployment in the US is probably the biggest single risk to the global economy. It is well

documented that throughout the history of civilization negative economic shocks such asunemployment, decreasing standards of living, excessive debt, and inflation (the loss of wealththought to be secure) all contribute to civil unrest. For this reason an initial analysis of theunemployment in the US needs to be as factual as possible. That is the intention of this firstAppendix.

It must be noted that all reported unemployment numbers are misleading. It has been a longstanding tradition, based on sound economic principles, that the US reports only a portion of theunemployment. Loosely, the reported number is a tally of people in the US, between the ages of 18and 65, who are willing and able to work, are actively seeking work, and have been unemployed forno more than six months. This represents a very clear problem when evaluating the severity of theUS labour market conditions because unemployment rates, as reported today, significantly

understate the size of the unemployed segment of society as compared to the numbers reportedand estimated from the Great Depression. As a rule of thumb adding 5 percentage points to thecurrent reported unemployment rates gives a rate which can be compared to the Great Depressionreports. This addition has not been done in this report.

The data set collected and analysed was taken from the publicly available information on US censusand Bureau of Labour Statistics websites (http://www.census.gov/popest/counties/ andhttp://data.bls.gov/map/servlet/map.servlet.MapToolServlet?survey=la). This report makes no claimsat understanding the collection methodology nor being able to analyse the validity of the numbers.This report only analyses the data which was collected. All data sets, in a more workable format, areavailable to any interested party by request. This is done in order to ensure that the analysis iscorrect by offering others the chance to reproduce the results.

The goal of this analysis was to gain insight into the geographic component of the stock ofunemployed people in the US. This is in contrast to the two methods of reporting on the labourmarket that are most frequently used; the reporting of unemployment rates, the percentage of thepopulation in any region that is unemployed, and unemployment flow data, changes in the levels ofunemployment stock by region.

These reporting methods consistently leave much to be desired. Regions where high unemploymentrates prevail rarely have high numbers of unemployed people because they usually have such smallpopulations. That the unemployment rates can rise abnormally from standard economic businesscycle events, like the closing of a factory or the failure of a local business, shows how small

populations can see extremely elevated unemployment for short periods of time and how this is notproblematic. Flows are even more deceiving because of the fact that they are consistentlypresented as valid indicators of the broad economic health when in reality they are simply indicationsof, usually short term, trends. Recent examples of this abound as recent flow changes look positivebut only because they are compared to the devastation of the past years and the stock ofunemployed people who still need work are not considered.

To speed the analysis and to gain a graphical perspective on the unemployment situation in the USthree categories were developed based on relatively arbitrary divisions. These divisions are: A. Hot
http://www.census.gov/popest/counties/http://www.census.gov/popest/counties/http://www.census.gov/popest/counties/http://data.bls.gov/map/servlet/map.servlet.MapToolServlet?survey=lahttp://data.bls.gov/map/servlet/map.servlet.MapToolServlet?survey=lahttp://data.bls.gov/map/servlet/map.servlet.MapToolServlet?survey=lahttp://www.census.gov/popest/counties/


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Counties counties with more than 150,000 unemployed people. B. Simmering Counties counties with between 20,000 and 150,000 unemployed people. C. No Classification counties withless than 20,000 unemployed people. The divisions were mapped, county by county, on state mapsdownloaded from the Perry Castaneda Library Map Collection at the University of Texas. Thecolour code applied indicates a hot county by colouring it red and indicates simmering counties bycolouring them yellow.

From this the following observations were made:

1. The first observation is hardly unexpected. The largest concentrations of unemployedpeople in the US are centred on the major urban centres. There is almost no large city in theUS which doesnt have a concentration of unemployed people in the city or surroundingcounty.

2. Counties which reported high unemployment rates almost invariably had low over all stocksof unemployed people. This has striking implications because of the fact that policy makersin the US seem to have been making decisions based primarily on assisting regions with highrates of unemployment while ignoring those with high numbers of unemployed people but

lower rates of unemployment.3. On a state by state level, a number of states have avoided building up large stocks ofunemployed people.

4. Some states have massive numbers of unemployed people.5. A number of high unemployment geographic regions stick out which cross state lines in

many cases.

Analysis

NOTE: Data for DC was not found in time for submission to this report.

It is easiest to start by identifying states which have somehow avoided building up swaths of

unemployed people. The following tables contain lists of states which contain either few or nocounties which are simmering (as of February 2010.)

States without Simmering Counties

Hawaii Montana North Dakota South Dakota

Vermont West Virginia Wyoming

States with 5 or less Simmering Counties AND no proximity to unemployment centres

Alabama Alaska Arkansas Idaho Iowa

Kansas Kentucky Louisiana Maine Minnesota

Mississippi Nebraska New Hampshire New Mexico Oklahoma

Tennessee Utah

From an economic perspective it is probable that these states have weathered the storm well for areason. Finding out why would likely give an indication about how well they will do in the future bydetermining if they are able to continue as they had been.


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The next set of states that are parsed out are the ones which are facing very serious unemploymentproblems. These states are ones that have either hot counties (+150,000 unemployed people in thecounty) or states that have high levels of unemployment spread between counties. Smaller statessuch as Rhode Island are included here because of their proximity to other massive pools ofunemployed people. This is done because it is assumed that the small regional distribution ofunemployed people will have significant effects on the stability of states in the coming decade.

States without Hot Counties not included in the lists above

Colorado Connecticut Delaware Georgia

Indiana Maryland Massachusetts Missouri

New Jersey North Carolina Ohio Oregon

Rhode Island South Carolina Virginia Wisconsin

States with Hot Counties

Arizona California

Florida Illinois

Michigan Nevada

New York Pennsylvania

Texas Washington

Regional Components of Unemployment Concentrations

An analysis of the above troubled states shows that a number of larger regional concentrationsseems to have materialized as the free flow of labour has largely ignored state boundaries. Theseregions are loosely summarized below.

South West Coast

States: California, Arizona, Nevada

Population Unemployed people Unemployment Rate

Regional Total 46,200,527 5,736,065 12.42 %

Hot County Total 31,590,009 3,739,392 11.84 %

Simmering County Total 12,585,378 1,711,538 13.60 %(Hot County Total is the number of people / unemployed people residing in hot counties. Simmering County Total is the number of people/ unemployed people residing in simmering counties.)

North West CoastStates: Washington, Oregon


Regional Total 10,489,852 1,142,754 10.89 %

Hot County Total 1,916,441 166,730 8.70 %

Simmering County Total 6,002,743 664,974 11.08 %


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Central

States: Colorado

Population Unemployed people Unemployment RateRegional Total 5,024,748 417,040 8.30 %

Hot County Total - - -


Texas

States: Texas


Regional Total 24,782,302 2,082,076 8.40 %

Hot County Total 8,312,619 714,590 8.60 %


South East

States: Georgia, Florida, North Carolina, South Carolina


Regional Total 42,309,306 5,046,381 11.93 %

Hot County Total 6,742,368 783,869 11.63 %

Simmering County Total 21,154,174 2,517,451 11.90 %

The Mid-West

States: Michigan, Illinois, Wisconsin, Ohio, Indiana


Regional Total 46,500,668 5,677,174 12.21 %

Hot County Total 8,418,393 1,076,733 12.79 %


The North East

States: Maryland, Delaware, Pennsylvania, New Jersey, New York, Rhode Island, Massachusetts,Connecticut


Regional Total 58,603,643 5,809,812 9.91 %


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Hot County Total 7,818,394 863,068 11.04 %


Distilling this information once again identifies exactly where the real problem areas are in the US;the North East, the South East, The Mid-West, and the South West. Each of these regions has morethan 5 million unemployed people (5.8 million, 5.0 million, 5.7 million, and 5.7 million respectively).This is a massive stock of people who dont have any income and dont have anything to do all day.Thus the question arises: what exactly are these 22.2 million people doing all day?

Appendix B - Tea Party

The Tea Party is a difficult movement to pin down. It is not, as many of the self described membersmight claim, a grass roots movement. The recent history of the Tea Party can be traced to anappearance on CNBC by Rick Santelli3 where he suggested that in June 2009 Chicago should have anew Tea Party on Lake Michigan. From there Fox NEWS and a company called FreedomWorks tookover the organizational elements of the movement to put together what turned into the 9/12 march

on Washington, DC. The march was massive, a parks services count putting attendance at around1.2 million people. Observation of the numbers makes that sound like a high side estimate. Theseprotests were specifically made to have the appearance of being grass roots and spontaneity but theuse of a major TV network and a company headed by some of the elite of the US to mobilize supportmakes those claims specious at best.4

Reaching further back, only slightly at that, finds another figure at a central point in the developmentof the movement that has become an organization. Texas Congressman Ron Paul carries a lot ofweight with the Tea Party movement. His straight talking, small government, no holds barred run forthe GOP presidential nomination in 2008 saw him taking the spotlight in a number of events (even ifthe media tried not to give it to him), including a host of all candidates debates. The other GOPcandidates fell flat in response to his direct and challenging statements. Educated observers of the

debacles set in motion by Paul could clearly pick out the fact that other candidates were so offbalance that they resorted to ridicule instead of addressing Pauls, quite on point, concerns.

As a politician and a leader, Paul could loosely be described as a Libertarian. He advocates localgovernance with minimal centralized powers. A number of his positions could well be termedRegionalisim in their nature and draw on converging thoughts about local governance .Unfortunately advocating increases in local powers and diminutions of federal authorities has left avacuum in Pauls understanding of global finance, governance, and international relations. Hishostility to the Federal Reserve is particularly disturbing because as he bemoans the system of fiatcurrencies currently being practiced it becomes glaringly obvious that he is doing so with gapingholes in his knowledge. The general nature of his complaints and his failure to address point by point

criticisms exposes these holes. The problem with his complaints is not that he is questioning what isor has been happening, it is that he is doing so without performing the due diligence of reading aselection of the publicly available material from the organizations he attacks. His understanding ofmonetary policy is basic at best yet he advocates sweeping reforms that would make the New Deallook like a pork laden rider that no one noticed.

The broader Tea Party organization that has developed from Paul and Fox News bears much incommon with Pauls politicking. There are a number of good ideas, sound fiscal positions based onavoiding deficit spending and cutting out a number of redundant entitlements. Unfortunately


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whereas Paul is strikingly in need of study on topics he doesnt understand well, the broader TeaParty is just plain ignorant to a number of issues that require a sound basis in study, critical thought,and global understanding.

But the Tea Baggers are not well known for their intellectual prowess, their name itself, an urbanslang term for a sexual act, betrays their lack of computer literacy; early searches for Tea Baggers

would have resulted in very different results than they would today. It is this ignorance which makesthe Tea Party an extremely wild card in any evaluation of the US and, by extension, the globaleconomy.

They [the tea baggers] have no agreed platform and no unified national orginisation.

-Economist; Feb. 13, 2010

they [tea baggers] see themselves as revolutionaries ... They want to take back anAmerica which they say has been going wrong for generations.

-ibid

[Colorado Rep. Representative Tom] Tancredo denounced the cult ofmulticulturalism and accused immigrants of swamping Americas Judeo -Christianvalues. This is our country, he declared to wild cheers, Take it back!

-ibid

A revolutionary group, with not so subtle racist tendencies, no actual platform, and an ignorancethat seems to think that immigrants in the US are not Christian is a particularly bad mix. The level ofignorance is astounding; they dont seem to realize that Mexico has more Catholics per capita thanalmost any region of the US.

But this casual observation begs to question exactly how much the Tea Party is really gaining fromthe use of radical racial rhetoric? Or how much of the rhetoric could be broadly categorized asscapegoating, be it toward immigrants, bankers, or liberals. History has shown that a people whoare economically imperilled and ill educated will be easily swayed to action against easy targets byleadership who are willing to provide targets for the angry, impoverished, and heavily armed.

... which leads nicely to Sara Palin.

Although she has yet to officially become a leader of a segment of the Tea Party she has an avidfollowing in the group. She has delivered a number of speeches to adoring supporters in the partyand continues to comment on their recent victories in the GOP primaries. This is disturbing becauseshe is absolutely ignorant to history and the global interactions of government, business, and NGOs.

Her ignorance has left her the subject of an FBI investigation after a number of her comments, andthose of other public figures of prominence on the Republican side of publicity, were seen to beinciting political violence that materialized around the signing of Obamas health care reforms.

Democrats decried heated Republican rhetoric, including 2008 vice presidentialnominee Sarah Palin's Twitter comment urging supporters, "Don't Retreat,Instead -- RELOAD."


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A Palin Facebook post continued the firearms theme, featuring a U.S. maptargeting 20 members of Congress who backed the healthcare legislation, usingthe crosshairs of a gunsight to note each of their home states.

-Reuters Canada, March 24, 2010

These difficulties are a real shame because there are many elements of Sara Palins Wassilasensibilities which are needed to bring reality to roost in a set of North American (Western?)leadership; a leadership which has never worried about having enough money in their bank accountsto cover the groceries they are trying to buy; many of whom might even be at a complete lossnavigating the aisles of the same. The act of governance, and even leadership in business, requiresan understanding of the broader population which has long been ignored by those setting policy.This isnt about giving lip service to the working people of a nation, it is about joining them, aboutbending down to do a bit of physical labour before telling people the best way to do physical labouror commenting on how much money labour should be getting.

From across the ocean a recent article in the BBC does a good job of examining these diversetensions that are playing out in the formation of the budding Tea Party rule book.

Workshops included "US Govt Bankruptcy - Facts for Citizens Who Don't HaveFinance Degrees" and seminars such as "Comparisons between the currentadministration and the Marxist dictators of Latin America".

-BBC, http://news.bbc.co.uk/2/hi/americas/8503348.stm

As can be seen above, the group is well aware of the fact that the US government is bankrupt butthey are joining the discussion through red tinted glasses and with the memory of gnats. Yes, thefederal government is broke, no it doesnt really have anything to do with the Obama administration,Marxists, or apologizing. The source of the bankruptcy can easily be traced back to about 1975 orearlier, when the consolidated debt outstanding (sum of debt held by all segments of US society) in

the US reached 150% of GDP (as per Z1 reports on debt outstanding published by the FederalReserve).

The financial obfuscation, a result of debt decentralization, is not the fault of anyone but is simply aconsequence of advanced financial markets. The ability of individuals, organizations, andmunicipalities to participate in debt markets in North America is unrivaled in the developing world.This means that traditional methods of evaluating the financial health of a country fall flat becausethey only look at the position of the Federal government of a region. This has resulted in theinflation of consolidated debt, the sum of debt held by all segments of a country, to levels thatwould have set off warning bells decades ago if they had been reported as debt obligations offederal governments.

We have a president that goes around apologising for us. For what? If it wasn't forus most of the countries out there would be destroyed," she [Gail Dorody, anIllinois Truck driver] says.

-ibid

The ignorance displayed by members of the Tea Party who feel that apologizing for Americans is abad idea shows exactly how closed a portion of the membership is to anything outside of their
http://news.bbc.co.uk/2/hi/americas/8503348.stmhttp://news.bbc.co.uk/2/hi/americas/8503348.stm


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region. These feelings, that there is no need to apologize, shows that they have yet to come toterms with the fact that the war in Iraq, the death of millions of people, and the outright LOSS ofthat conflict has left the country broke and without allies in the international community. Acceptingthat there is a very valid case for international prosecution of members of the Bush administrationwould be a first step to realizing exactly how much of the global chaos that is unfolding right now isdue to the policies enacted in the name of the Tea Party members, policies they very clearlysupported by voting G.W. Bush into office a second term.

Yet it must be accepted that these feelings, that the US has somehow saved most of the countries inthe world, are broadly prevalent in some of the sizable backwards pockets of the US; and these arethe people who are moving on Washington to take it back.

"The goal is to take over the carcass of the Republican party and reform itaccording to its original principles. They were good principles, ones we all believedin," says Dr [Dan] Eichenbaum [running in North Carolinas Republicancongressional primary].

-ibid

This is probably one of the most telling lines of the whole article. The Tea Party is devoutlyRepublican, and much of the ire being vented by the members is directed at some unseen otherRepublican who have corrupted the party. The Tea Party represents not American infighting, butRepublican infighting. What is still to be seen is exactly what this amorphous group will do if theygain sizeable representation in the Republican Party. Another telling part of this quote is that adoctor, a supposedly upstanding and educated member of society, is unaware that his support forsome unidentified principles is pandering populism. Until these principles are clearly laid out themovement will remain little more than that, even if they win the presidency.

Current Advances

The GOP primaries for the 2010 midterm elections are currently underway and the Tea Party, orrepresentatives strongly backed by the organization, is gaining significant ground.

To date only three GOP primary victories have gone to Tea Party members or RNC party membersbacked heavily by the Tea Party. These victories are as follows: Rand Paul has won GOP nominationas a Senatorial candidate in Kentucky; Sharron Angle has won the GOP nomination as a Senatorialcandidate in Nevada; and Raul Labrador has won the GOP nomination as a House Representativecandidate in Idaho. Additionally, in Utah an incumbent Rep. Senator was ousted in party primariesby Tea Party backed Mike Lee and another candidate.

Rand Paul, Texas congressman Ron Pauls son, has made waves outside of the GOP even before hisvictory. In January the Economist was aware of his presence and even quoted him on a number of

issues.

Mr. Paul junior spent his student years in North Carolina agitating against taxes,and his campaign is heavily staffed by founders of a local tea party

-Strange Meetings, The Economist, January 30, 2010

Rand, much like his father, blends populism and insight. As will be addressed later, Rands commentsabout the state of the US dollar and the possibilities of extreme governments are on point.


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What happens to our country when you destroy a currency? Out of theWeimar Republic, they elected Hitler.

-Rand Paul, ibid

As alarmist as this may sound it is far from off base, the situation in the US is dire and the success of

the Tea Party stands as an ironic confirmation of Rand Pauls fears.

Similarities

But the current wave bears similarities to the 1890s and 1930s. Back then,populists drew strength from anger with bankers and their governmentenablers for impoverishing workers, farmers and businessmen.

-ibid

As with any analysis the past offers an insight into the present and suggests the future. The TeaParty and many of the leadership personalities, much like the economic circumstances of today, bear

similarities to many events, groups, and people of the past. But these similarities are just similarities,shared traits that are suggestive at best. In all cases it must be clearly stated that similarities dontmean that history will repeat itself; it would be naive and dangerous to imply this. Instead similaritiesoffer tools, starting points even, from which a set of future scenarios can be derived. This isimportant to keep in mind as many of the similarities of the current period hearken back to some ofthe worst times in recent history. To imply that these things WILL happen again is alarmist but toignore the fact that something similar COULD happen is to be dismissive.

The most disturbing features of the Tea Party movement are those that it shares with the early yearsof Fascism. For example, the following quotes are all easily applicable to the situation in the UStoday with some slight modification to the groups, regions, and people being described.

A violent nationalism soon engulfed much of Germany, a nationalism bitterlyhostile to other nations and races, and to any creed of pacifism orinternationalism.

-The Rise of Fascism, FL Carsten, 1982, University of California Press

The economic crisis had set in, the number of unemployed mounted quickly, andthe future was to lie with those who stood for extremist solutions.

-ibid

None of them [Fascists] made a serious attempt to develop a Fascist philosophyor spent much time on theoretical pursuit.

-ibid

Each individual experienced an exaltation of his ego, he was no longer theisolated person of former times, he had been incorporated into the mass, hewas part of the people, and his person, his hitherto unnoticed person, had been

given meaning.

-Steven Zweig, Austr

Documents

Spring 2010 Economic Outlook