The potential for global unrest upsetting financial markets is rising. From the Middle East to Asia ill winds are blowing. Last week in addressing the United Nations Israel’s prime minister drew a red line threatening military action if Iran produces weapons grade materials for a nuclear bomb. This corroborated my March blog post “Iran’s Nuclear Rubicon” where I argued fears over a military strike on Iran this year were unwarranted, as such action was unlikely until Iran crossed the red line or Rubicon of assembling weapons grade materials. My Iran mollification, along with my prediction from my March 2011 post “Forecasting the Reckoning” that risks in China were unlikely to occur until after that government’s 2012 power transfer should be of lesser comfort as 2012 moves into the rear view mirror and time passes. Looking around the world, global pressures are building and the risks of events negatively impacting financial markets is rising.
China’s economic successes are well known. Less so is the case around the immense challenges the country faces in remaining on a path of progress. These challenges go beyond an over-reliance on exports, the high likelihood of an export led development model faltering during the transition from an export-focused to more consumer-focused economy, a sizable real estate market bubble and significant levels of low credit quality debt in the financial system, as mentioned in my previous post on China’s Economic Dark Side. In addition the money created in relation to China’s holdings of foreign debt represents a substantial liability and inflation risk, as articulated in my earlier post “Big Risks on Central Bank Balance Sheets”. What is more, China’s economic challenges extend to societal issues to such an extent that the country’s history of periodic periods of revolutionary implosions may very well repeat.