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Risk on the Rise as Political Leaders Give in to Mob Rule - FT

Risk on the Rise as Political Leaders Give in to Mob Rule - FT

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Published by: news4you on Oct 26, 2011
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10/26/2011

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MARKETS INSIGHT
October 24, 2011 2:32 pm
Risk on the rise as political leaders give in tomob rule
By Ray Dalio
 We are in the midst of a deleveraging, we are nearly out of ammunition and we are at eachother’s throats. Being in a deleveraging and nearly out of ammunition is a very difficultposition to be in. But, being at each other’s throats is our biggest problem.Our character and our political and social systems are now being tested in ways that havetypically been tested in past deleveragings. In deleveragings bad economic conditionstypically lead to emotional reactions, social and political fragmentation, poor decision-makingand increased conflict. When this occurs in democracies, the checks and balance system, which is intended to yield the best decisions for the whole, can stand in the way of thoughtfulleadership and lead to ineffective “mob” rule. This dynamic can lead to a self-reinforcingdownward spiral.Frustrations increase, the established ways of doing things come under attack and frustrationsover the ineffectiveness of government creates the perceived need for someone to gaincontrol of the mess. Plato spoke of this dynamic. It was the reason Hitler was elected in 1933.In our opinion these types of risks are now emerging and should be taken into consideration when trying to figure out what may lie ahead. Rather than trying to resolve disagreementsthrough thoughtful discourse, people are now trying to grab power to beat and suppress theiropponents. Tensions between the rich and the poor, capitalists and socialists, those in and outof power and different factions in each group are now intensifying in a manner that is classicin deleveragings. Politicians who are fighting for power in a political year are fanning theflames and are increasingly willing to do risky things (like shutting down the government) inpursuit of their missions and popular support.This growing populism will have important implications for monetary, fiscal and tradepolicies and will significantly increase risks of a markets downturn and a global depression.Regarding monetary policy, the mob is at the gates of the Federal Reserve and wants to grabcontrol while those on the inside are in disagreement about what should be done. Fedchairman Ben Bernanke and those who helped him save the country from depression are now under siege. These challenges are being faced in different forms by most central banks at thesame time as they are nearly out of ammunition – i.e., their capacities to ease are very limited
Risk on the rise as political leaders give in to mob rule - FT.comhttp://www.ft.com/intl/cms/s/0/ed4439d4-fbeb-11e0-9283-00144feab49a...1 of 210/25/2011 9:32 PM

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