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Generational Dynamics Web Log for 27-Apr-2009
In a fragile world, a swine flu pandemic would have geopolitical consequences

Web Log - April, 2009

In a fragile world, a swine flu pandemic would have geopolitical consequences

Also: The big economic impact may trigger new financial crises.

Right now officials are still unsure, but by mid-week they'll have a pretty good indication of how serious the new swine flu outbreak is -- how many people are likely to get sick, how many people are likely to die, and how much the outbreak will affect the economy.

Experts have been saying for years that the world is overdue for a major flu pandemic, such as occurred 3 times in the 20th century. It may or may not be avian (bird) flu, and it may or may not be the current swine flu outbreak, but it's going to happen.

When it does, here are the estimated costs of flu pandemic: Some $3-5 trillion in worldwide economic loss, about 20% of that in the US, and the deaths of 50-100 million people.

In ordinary times, the world might be able to absorb this kind of loss without catastrophic consequences. But things are different today. The world is very fragile. I've described today's world as being in the Age of Great Compromises, because the leaders of every country are committed to maintaining the status quo, for fear that any change will trigger a war or financial catastrophe.

However, today's world is already on the edge of disaster. The Fed and central bankers around the world are running around like chickens with their heads cut off, patching up every financial institution before it can collapse.

An analysis by Ambrose Evans-Pritchard of the Telegraph shows how futile this effort is. Evans-Pritchard frames the growing financial crisis in simple macroeconomic terms: There simply is not enough money in the world anymore.

"The world is running out of capital. We cannot take it for granted that the global bond markets will prove deep enough to fund the $6 trillion or so needed for the Obama fiscal package, US-European bank bail-outs, and ballooning deficits almost everywhere. ...

It looked easy for Western governments during the credit bubble, when China, Russia, emerging Asia, and petro-powers were accumulating $1.3 trillion a year in reserves, recycling this wealth back into US Treasuries and agency debt, or European bonds.

The tap has been turned off. These countries have become net sellers. Central bank holdings have fallen by $248bn to $6.7 trillion over the last six months. The oil crash has forced both Russia and Venezuela to slash reserves by a third. China let slip last week that it would use more of its $40bn monthly surplus to shore up growth at home and invest in harder assets – perhaps mining companies."

This is the stuff of a deflationary spiral. During the bubble there was too much money in the world, causing asset prices to inflate artificially. Today there's a shortage of $6 trillion in the world, just to help economies to survive.

Furthermore, this $6 trillion shortage isn't a static value. Money is vanishing as governments, financial firms and hedge funds reduce leverage and write down the values of the toxic assets in their portfolios. It's quite possible that an additional trillion dollars or so disappears every month. The central banks of the world can't possibly "print money" with quantitative easing that quickly. They simply can't keep up.

And now we face the possibility of a swine flu pandemic that could cost the economies of the world another $5 trillion dollars. This is something that destroys the status quo that the world's leaders want to preserve at all costs.

The Evans-Pritchard article points out that:

"Great bankruptcies change the world. Spain's defaults under Philip II ruined the Catholic banking dynasties of Italy and south Germany, shifting the locus of financial power to Amsterdam. Anglo-Dutch forces were able to halt the Counter-Reformation, free northern Europe from absolutism, and break into North America.

Who knows what revolution may come from this crisis if it ever reaches defaults. My hunch is that it would expose Europe's deep fatigue – brutally so – reducing the Old World to a backwater. Whether US hegemony remains intact is an open question. I would bet on US-China condominium for a quarter century, or just G2 for short."

The above references the great Spanish bankruptcy of 1557, the major bankruptcy that preceded Tulipomania (1637).

But there's an even better historical example -- the Black Plague of 1347-51. Here's a map showing the spread of the bubonic plague:

Spread of Bubonic Plague in Europe, 1347-51 <font size=-2>(Source: urbancartography.com)</font>

Spread of Bubonic Plague in Europe, 1347-51 (Source: urbancartography.com)

According to one history of the Black Plague, "In Milan, when the plague struck, all the occupants of any victim's house, whether sick or well, were walled up inside together and left to die. Such draconian measures seemed to have been partially successful; mortality rates were lower in Milan than in other cities."

These kinds of emergency measures might be taken again, if the outbreak turns into a highly pathogenic bird flu pandemic.

The Black Plague came at a time when things were already terrible in Europe. There had been a huge currency bubble in Italy for two decades, and Italian banks started collapsing in 1343.

In France, the Hundred Years War had been raging, and the English won a huge victory by capturing the port of Calais on August 4, 1347, destroying France's economy.

The biblical book of Revelations characterizes a crisis war with the "Four Horsemen of the Apocalypse": Pestilence, War, Famine, and Death. Europe suffered all of those things in the 1340s-50s, and the continent was devastated.

Today, the world is headed for a new banking and financial crisis, a new world war, and new famines. The swine flu virus might fizzle, but if it doesn't, then it will be the new pestilence.

(Comments: For reader comments, questions and discussion, see the Swine Flu Pandemic thread of the Generational Dynamics forum.

Also see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (27-Apr-2009) Permanent Link
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Generational Dynamics Web Log for 27-Apr-2009 In a fragile world, a swine flu pandemic would have geopolitical consequences

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Generational Dynamics Web Log for 27-Apr-2009
In a fragile world, a swine flu pandemic would have geopolitical consequences