The Arab Spring and the American Economy

DailyForex.com Team

The Arab Spring has been bearing its first fruits of late, with Tunisians and Moroccans electing what are being termed "?moderate Islamists" and the Egyptians having gone to the polls as well to elect the Muslim Brotherhood while Syria slips into civil war.

Meanwhile, the American economy continues to teeter on the brink, with Congress' super committee failing to come to an agreement on cutting spending. These two events combine to create what might be called a "?perfect storm" which could see shocks happening to the world economy.

The 1971 Oil Shock

In order to understand how the advent of the Arab Spring may affect the world economy, we need to go way back in history to 1971. Back then, the United States was facing problems similar to those it is facing today; namely, a shaky economy, an unpopular war and the threat of rampant inflation.

In order to solve these problems, President Nixon decided to unilaterally pull the United States out of the Bretton Woods agreement, which had previously mean that the dollar was pegged to gold. From then on, the dollar became a fiat currency, worth something only because the United States government said it was worth something.

The result was that OPEC began pricing their product (namely oil) in gold in order to recoup the losses they incurred from Nixon's allowing the dollar to float. This meant that the price of oil shot up, further depressing the world economy.

Oil Set to Rise Again

Today, I see oil set to rise again as the confidence in the US dollar combines with the continued shakiness in the Middle East and threatens to disrupt supplies. In essence, now that Syria is set to fall, I believe a domino effect may be set into motion where other Middle Eastern dictators and monarchs will begin to see their own fortunes flagging. This, combined with the fact that the American dollar is under siege right now means that a single conflagration could easily produce oil shocks which make the 1971 crisis look tame by comparison.Inflatable Air Track

The Possible Sparks

The big issue of course is that there are currently so many possible sparks. There is of course the Iranian nuclear crisis, with Israel threatening to attack and the Americans talking about the possibility of joining in at least. There is also the chance that Syria's unrest could spread to nearby Saudi Arabia, the world's second largest oil producer, thus causing a steep drop in production.

All this is to say nothing of the fact that some oil producing nations have been making noises about the idea of pricing oil in Euros, which would cause a massive disruption to the world economy. In other words, we truly are teetering on the brink, with a single spark able to push the world economy over the edge.

Islamists May Try to "?Punish" the United States

I'm not at all convinced that the democracy experiments spreading in the Middle East will last. While I certainly hope that they will and wish the peoples of the area the very best of luck, I fear that the democracies that have been created may become a sham in the style of the Iranian democracy, where the real power is held by unelected clerics.

This fact combined with the fact that the Islamists have never exactly been very big fans of the United States could mean that oil producing nations may well try to "?punish" the United States by trying to again price oil in gold or possibly in Euros (again of course, all this depends on the Arab Spring spreading to major oil producers, which has not happened yet).

How You Can Profit

Given all these possible problems, I'm not convinced that the world economy is out of the woods (in spite of recent announcements from the European Central Bank which seem to be helping to defuse the Euro crisis) and I believe that someone may well blink before it's all over.

This will mean that those who buy oil futures could potentially make some good money. I'm also suggesting the possibility of shorting the dollar. Given the combination of a possible Islamist push to remove the dollar as the world's reserve currency and the chance for oil shocks from disruptions if the Arab Spring spreads to major oil producing countries, I'd say these are both good bets for those who can afford to take serious risks with their money.

The safe money will likely be in oil stocks though, as these are likely to go up no matter what happens, though the profits may not be as great here. Either way though, the Arab spring and the American economy are combing to place our world in what the Chinese like to call a curse of "?interesting times."

DailyForex.com Team
The DailyForex.com team is comprised of analysts and researchers from around the world who watch the market throughout the day to provide you with unique perspectives and helpful analysis that can help improve your Forex trading.

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