Washington, DC, March 30, 2010 --  

Two years after the financial crisis began spreading around the world, serious cracks in the status quo risk eruption into destructive crises.

Somewhere over the steamy waters of the open Atlantic, halfway between Brazil and West Africa, a tiny but fateful event took place. Something triggered clouds to form and winds to begin to swirl. Texans meanwhile went about their daily business, unaware that up to 12,000 of them were two weeks away from a violent death. It was August 1900, and the city of Galveston would soon be flattened by the largest hurricane in American history. Although life would go on, things would never be the same again.

The unstable atmosphere over the Atlantic tropics is similar to the economic conditions two years after the global financial crisis. To date, no sweeping changes have hit the world. Oil continues to flow to Europe, Asia, and America. Cheap consumer products continue to move from East Asia to the rest of the world. And software, high-end products, and financial services continue to be produced in Europe and North America. Regimes in each region are largely unchanged from the days before the crisis started.

But serious cracks have formed in these systems -- cracks that make them unstable and vulnerable to sudden changes.

China is under serious political pressure from the United States¹ (and economic pressure from its growing foreign reserves) to let the yuan rise against the dollar. But doing so would make China's low-end exports less competitive, risking the jobs of millions of Chinese workers. This move could suppress the country's already sagging growth rate, and undermine the regime's tenuous deal with the masses -- the people tolerate a repressive government in return for ever-rising prosperity. If the Yuan rises, the regime could be in trouble.

An even more immediate problem is faced by the oil-rich regimes in Venezuela, Russia, Iran, and parts of the Middle East. Oil prices have dropped sharply as demand plummeted during the economic slowdown -- from a peak of $140 per barrel down to $40, before recovering to $80 per barrel this week.² Unable to keep as much money flowing to their restless populations, these regimes are in a race against time. Will the world economy and demand for oil recover in time to save them from public wrath?

In Russia, recent weeks have seen the largest anti-government protests in a decade.³ Even larger anti-government unrest has been gripping Iran almost nonstop since elections last June, and the popularity of Venezuelan president Hugo Chavez has been flagging as a result of Oil-price inspired currency devaluation and an unrelated energy crisis causing rolling blackouts.⁴

Meanwhile, in Europe and North America, mounting public debts are putting the Western economies at risk. After a piling on massive new public debts in the wake of the economic crisis, Western governments are starting to have trouble paying for them. Greece has regularly been in the news for facing default -- unable to pay to service its debts at the high interest rates demanded by investors wary of its ability to pay. And in the biggest debt market in the world, the United States, investors spooked analysts by unexpectedly demanding a jump in yields on 10-year bonds last Thursday.⁵

Interest rates on both continents are bound to rise as the economy recovers, forcing governments to pay much more to service their massive debts, creating a widespread debt crisis in the Western world. Speculative action by bond vigilantes could force this day of reckoning to come at any time-- pushing North America and Europe into a period of high interest rates and inflation.

Any one (or all) of these economic regions -- China, oil producers, Europe, or North America -- could soon be thrown into chaos by an unforeseen event that coalesces unstable conditions around an unstoppable and potentially destructive trajectory. Alternatively, if chance looks kindly upon the status quo, these cracks in the world economy might mend before any of these potential crises have a chance to erupt.

If the old adage is true that a flutter of a butterfly's wings can trigger a hurricane, then it's time to declare hurricane season for world governments and economies. Observers hoping to brave a coming storm would be well advised to keep a sharp eye on current events.

Notes:

1. Washington Post, China Shows New Divisions on Yuan, March 30, 2010

2. US Energy Information Administration, Europe Brent Spot Price FOB (Dollars per Barrel), March 30, 2010

3. Christian Science Monitor, Russia protests: Thousands rally in 'Day of Wrath' against Putin, March 21, 2010

4. Financial Times, Chavez Faces 'Dante's Inferno' of Challenges, Ecoanalitica Says, March 16, 2010

5. Business Week, Supply fears start to hit Treasuries, March 26, 2010