If the US goes, won’t the rest of the world be even worse?

October 21, 2011
Ulan Bator, Mongolia


Today was one of those days when the PT lifestyle was… less than glamorous. It took nearly 24-hours of travel dealing with weather delays, in-flight diversions, and mind-numbing airline incompetency… but I’ve finally arrived to Mongolia. As I write this, it’s a balmy -7 Celsius (19F) outside.

Despite the terrible weather, I’m excited to spend the next several days here sniffing around a few private placements and hopefully having some killer barbecue. More on Mongolia next week, let’s move on to this week’s questions.

First, Jennifer asks, “Simon, you’ve been writing a lot lately about the prospect of social unrest in the developed world, including the US. You suggest that international diversification is a great way to protect against this threat. But if there’s social unrest in the US, won’t there be total chaos everywhere else?”

Not by a long shot. I’ll explain–

It’s true that economic decay and social turmoil are inextricably linked. We’re seeing signs of that now all over the world– the violent protests in Greece, the Arab Spring, and now the Occupy Wall Street movement.

In a recent paper, economic historians Jacopo Ponticelli and Hans-Joachim Voth studied fiscal restructurings over the last nine decades. They gathered data from dozens of countries– the UK, Switzerland, Yugoslavia, Russia, Denmark, Hungary, etc. and measured increases in riots, crime rates, and strikes.

The results showed a clear positive correlation. GDP declines and the imposition of austerity measures went hand-in-hand with social instability. The more severe the economic disorder, the worse the social unrest.

The insolvent nations of the developed world are going through a severe depression right now… and as politicians continue to talk of more bailouts, more money printing, and more stimulus programs, it seems like things are only going to get worse.

Each of these nations– Italy, Japan, Ireland, the United Kingdom, the United States, etc. is so heavily indebted that their interest payment obligations has become a vice grip on economic growth. Greece, for example, blows through roughly 10% of GDP just paying interest on the national debt.

It becomes very difficult… almost impossible… to generate any meaningful growth when 10% of your entire nation’s productivity goes out the door before you even get out of bed in the morning.

What’s more, most of these countries are in the position where they have to borrow money just to pay interest on the money they’ve already borrowed. The United States is very solidly in this position.

This makes debt accumulation exponential— it rises at a faster and faster rate, simultaneous with flat (or negative) economic growth. One day when confidence in this Ponzi scheme finally vanishes, borrowing costs will skyrocket, hastening the endgame and consequent social turmoil.

Thing is, most developed countries are woefully unprepared to deal with such turmoil. Places like the United States may have reached the zenith of consumerism, but most people have scant clue of how to function without their creature comforts.

Hardly anyone grows food, knows anything about automobile maintenance, generates their own electricity, or can actually ‘make’ something by hand. Few people have ever seen blood in the streets, hyperinflation, or a complete breakdown of the social structure.

In stark contrast, many countries in the developing world have experience with all of these. They’re inherently mistrustful of their governments… they hoard precious metals and raise chickens in the backyard. Many people still work manual labor jobs and have the skills to be able to build and fix things themselves.

I’m not trying to make a blanket statement about every single person in these countries, but rather generalize societies’ capabilities to deal with the knock on effects of economic decay. Western culture simply does not embrace self-reliance.

Ironically, it is the ‘poor’ countries that are much better positioned to deal with chaos. What’s more, they’re also fundamentally stronger economies with high savings rates, low debt levels, and strong growth potential.

The hard truth is that, while the United States leads the world in things like debt, bombs, and foreign military bases, many of the world’s developing nations have much better insulated economies to ward off the social consequences of economic deterioration… and their societies are more capable of handling it.

This is why I’ve selected Chile for the site of our resilient community, a place where we can grow our own food, control our own water supply, and generate our own energy.

Next, Elizabeth asks, “Simon, you’ve been fairly negative on the euro. I have a question though. European leaders are meeting right now to fix the euro and work out a solution. Doesn’t this give you any confidence that they can fix it?”

Not in the least, and I’m amazed that these rumors of plans are giving the market a boost.

Think about it– the people who are responsible for the problem to begin with are having a ‘meeting’… and that’s supposed to inspire confidence??

A bunch of politicians sitting around talking about how to fix an economy is like a bunch of zoo keepers trying to figure out how to perform open heart surgery. It’s not going to happen.

Last, Hugh asks, “Simon- it’s clear you travel all the time, and I understand you have a number of passports. Which passport do you use when you travel?

It depends, it’s usually country specific. Coming into Mongolia this evening, I used my US passport simply because the US is one of the only nationalities that doesn’t require a visa to enter Mongolia.

Conversely, going to a place like Brazil, I’ll use another citizenship like my Western European passport. US citizens require a visa (and heavy fees) to enter Brazil, but with my European passport I glide right in.

This is one of the many, many benefits of having multiple citizenships, it certainly makes travel much more convenient. More options always mean more freedom.