Of Revolutions and Oil

As I was driving home today, I was listening to Hannity's radio show. Over and over, caller after caller kept insisting that this was the beginning of The End, all predicting that the revolutions now sweeping the Arab world will somehow end up in a one pan-Arab Caliphate, Islamist in nature, and that war was a certainty. As for me, I'm not so sure.

Shortly after the Bush Administration began to lay the publicity groundwork for the invasion of Iraq, I read a very prescient piece based on an interview with one Paul Wolfowitz, who at that time was the Deputy Defense Secretary. The piece wisely saw that a burgeoning youth population, high unemployment, corruption and disenfranchisement was certain to incite revolts-- and it went on to predict that most of the Arab world's dictators would fall in revolutions because of these factors. It was hoped by Wolfowitz that once the Arab world saw a functioning, stable, prosperous Arab democracy, they would begin to demand it in their own nations, sweeping away corrupt tyrants and ushering in an era of peace and democracy in the Arab world instead of worse alternatives. Iraq was to be the beacon, leading the way forward. It was certainly a grand throw of history's dice.. a bloody and expensive one at that.

Alas we have arrived, though Iraq certainly was not the beacon Wolfowitz has hoped for-- but neither do you see these revolutions taking place in Iraq. In my humble opinion, this is not about Islam. It's about unemployment and disenfranchisement. In all of the cases so far.. Tunisia, Egypt and now Libya, Yemen and Bahrain-- there were dictators in place, high unemployment and frustration. They were disenfranchised. Now they are (or will soon be) gone. There was today the beginnings of serious demonstrations in Saudi Arabia, a day after King Abdullah threw a ton of money at some of the Kingdom's social and economic problems. For the youth of these nations, it was their first taste of enfranchisement and power-- and they liked it, as well they should. 

Prediction Time !!  I don't see any pan-Arab Caliphate coming. Each of these nations has a differing set of variables and so likely have different outcomes. In Egypt and Tunisia, the Army will hold power for a time. I do believe that elections will be held in Egypt. I'm not so convinced about Tunisia. In Libya, Colonel Qaddafi will lose and will flee the nation, followed by another Army government and shortly thereafter elections. Bahrain is more of a religious thing.. most of the people are poor and Shiite, and the ruling family is rich and Sunni. I think the royal family will be forced to leave, and a Shiite government will take over-- and this will quite likely mean the eviction of the US 5th Fleet. As for Saudi Arabia, I believe that in time the King will be given the choice of a constitutional monarchy (like Britain) or being kicked out completely-- but I'm not convinced it's going to be anytime soon. Algeria is also on the bubble, and I see Boutaflika also being forced into exile. Will these people be able to produce some form of democracy ? I say yes.. Egypt almost certainly, the others not so certain, but it will take hold in a number of these nations. Unknown to most westerners, the vast majority of people in these nations want what we want.. peace, prosperity and democracy. There are huge numbers of educated, young, urbane college grads in the Arab world.. these are the people you see in the streets demanding change, not radical jihadis. But in all of these there is also a radical element.. perhaps a fifth of the population.. who want to turn back the hands of time to the 14th Century. But I say that history moves forward for the most part, Ayatollah Khomeini being one of the few exceptions. I also expect that the mullahs in Tehran will one day be forced to yield power. Forcing democracy is one thing.. providing reasonable employment is quite another. Many of these nations have very high birth rates and (except for crude) no natural resources. What would they produce ? The world only needs so many t-shirt plants. But even a dirt poor democracy is better than dirt poor kleptocracy. This is a situation which will be revisited with increasing frequency on the African continent. 

Now we come to the uglier part of this piece-- crude oil. Today Brent Crude (Europe's main source of crude) touched $120/bbl-- levels not seen since 2008. West Texas Intermediate Crude (the US oil) went north of $110/bbl. Most of this was on the news out of Libya, where today it was announced that the half the nation's crude exports had ceased. There were also rumors that Colonel Qaddafi, never one to espouse reason or sanity.. would blow up his nation's oil wells and turn the place into a gigantic Kuwaiti oil rig fire. Libya usually produces about 1.5 million barrels per day.. total world production is something like 83mm barrels per day. But the world is using much more oil than before; supplies were already tight before this. Algeria produces roughly the same amount as Libya does. Combined, this would be a tough loss, sending prices soaring. Depending on how bad things get-- and they might get very ugly-- we could see $4.00 gasoline again this summer, kneecapping any hopes Obama had of a recovery. If something serious were to happen in Saudi Arabia, look out-- $6.00/gal is quite possible-- and if this lasts for some time, it could be a  "Game Over" event. But talk of such things is still premature. I fully believe that more kleptocrats will be swept away this spring and that $3.50 gas is a reality we're going to have to learn to live with for the short term. Oddly enough, I'm happy for the peoples of these nations who will finally have a say in how they are governed. Let's just hope that it does'nt bring catastrophe upon our own economy in the process.

The Paddy Ponzi

Ireland's situation is terrible. A country of only 4 million people, Ireland's banks have loaned out nearly $867 billion.. much of it to real estate developers.. and many of Europe's largest banks provided much of the money to the Irish banks in the form of loans and deposits. These banks and their hundreds of billions in bad loans are guaranteed by the Irish government, which asked for IMF/EU help to deal with the mess. Remember that the Irish government, which has guaranteed hundreds of billions, only takes in about $37 billion/yr in tax revenues (most of which goes to Social Security and their Medicare systems).. it's rather like watching a ground squirrel try and catch a falling hippo.

Apparently the IMF and Irish government are not keeping up with the losses. In yesterday's Irish Times, we catch a hint of how the Irish banks are keeping themselves afloat. Here's how it works: In Europe, a bank may borrow from Europe's Central Bank {ECB} if you have some investment grade (A or better) bond in which to give the ECB, who then waits for the bond to mature and cashes it in. So... Irish banks began issuing bonds to themselves and turning them over to the ECB as collateral. Thats rather like going to Kinko's, printing up a legitimate looking bond, and giving it to your bank as payment for a loan you are about to take out.

All the bonds mature in April and May when the details of the banks’ plans to sell off assets and shrink the size of their businesses must be agreed under the EU-IMF bailout deal.

Bank of Ireland issued the largest amount, €9 billion, on four bonds on January 26th. AIB issued €2.63 billion on January 25th, Irish Life and Permanent €3.1 billion the following day and EBS building society €1.7 billion on January 28th.

Bank of Ireland raised a further €980 million on another bond on February 10th.

The bank said that the issuing of the bonds represented “a technical adjustment” replacing sterling bonds backed by UK mortgages as the ECB stopped accepting sterling loans as collateral from the start of the year.

AIB said that “own-used” bank bonds could be used as collateral from the ECB if Government guaranteed. The banks have leaned more heavily on central bank funding from Frankfurt and Dublin due to the loss of deposits and the closure of the markets to Irish-issued debt.

Banks in Ireland had borrowed €126 billion from the ECB at January 28th, representing almost a quarter of all borrowings drawn from Frankfurt by euro zone banks.

The Central Bank in Dublin has provided a further €51.1 billion to the Irish banks through exceptional liquidity assistance (ELA) at this date on ineligible ECB collateral.

Guess who guarantees that additional €177 billion ? You guessed it.. the Irish people. This is a shell game, pure and simple, designed to buy time and possibly pawn off some of the previous losses onto the ECB's books. Bernie Madoff would give them an award from prison. The bill is coming due in May.. I'll leave it to my readers to guess how this will end. But before we get to April, there is an election in Ireland.. and the government of PM Brian Cowen will certainly collapse. It remains to be seen if the new Irish government will honor the IMF agreement.. an agreement that Ireland should probably reject. 

Onto another ponzi closer to home.. here's a video of my favorite economist, the outstanding Kyle Bass, on how we in America are doing:

Obama's Budget & Islamic Revolutions

President Obama today delivered his 2011 Budget proposal to Congress. Here are some of the "highlights".. the deficit this year will be (by far) the largest on record.. $1.6 trillion, just over 10% of our entire GDP. The US Government will in effect spend three dollars for every two they take in. There will be some haggling amongst politicians on "discretionary spending", which amounts to only 15% of the budget. You'll hear words like "painful" and "deep" from politicians. But the 85% of the budget.. and the fastest growing segment of it.. entitlements and defense, are completely off limits. Nobody will touch these programs with a ten foot pole. Social Security, Medicare and other entitlement programs consume 60% of all federal spending.. $2.1 trillion. In contrast, the federal government expects to take in $2.2 trillion in tax revenues. Obama's budget also expects federal revenues to grow by leaps and bounds.. it expects federal revenues to grow from $2.2 trillion this year to $3.0 trillion by 2013.. an increase of some 27% in only two years. Uh huh. By 2015, they'll grow to $3.6 trillion. Just who will be loaning us these vast sums to keep our government solvent ? The largest purchaser of government bonds is.. The Federal Reserve. Simply put, of the $1.6 trillion the US Gov't needs to borrow, approximately half will simply be printed funny money. QE3 and rising Bond interest rates are a mathematical certainty. Look for the US 10yr Bond to hit 4% by mid summer's eve. Here's the scary part.. the Office of Management and Budget expects interest payments on this national debt to rise from $180 billion this year to over $800 billion in 2020. Stephen Lewis from Monument Securities says "The US is pushing it's luck. Markets sense that Obama is unwilling to cut spending before the 2012 election. The Fed may have to stop QE because of rising commodities prices.. and if that happens, the market will react very negatively".

I watched an interview a year or so ago with Nouriel Roubini, an economist at NYU who predicted the economic collapse in 2008 and has become somewhat famous for that prediction. In this interview, he predicted that the Republicans would win at least one of the two Houses of Congress (which they did) and that when this happens, deficits would explode because the Democrats refuse to slow spending and the Republicans refuse to allow tax hikes.. and the path of least resistance is to just keep borrowing. Alas we have arrived. Instead of blaming politicians, I'd like for all of my readers to look in the mirror. If given a choice between electing a politician who says "Sorry guys.. the economy is screwed six ways from sunday and the best option we have is to slash social security and end the foreign wars. This is gonna hurt" and another one who says "I believe there are good options and we wont have to raise taxes or slash social security" nine out of ten Americans will vote for the second guy who's simply blowing sunshine up their rears. It's you and me that send these slicksters to govern us.

This money printing is already having an effect on us.. food and gasoline prices are spiking and will keep going upwards at a dangerous level. We'll see $3.50/gal gasoline this year, and I also believe we will not see them under $3.00 for some time. Brent Crude went over $103/bbl today, the highest since 2008. In 2012, should things keep apace, $4.00 will be the norm. Food prices will  continue to go upwards. But as I've said before, this inflation.. especially with food.. will hit other places on the globe especially hard. Tunisia and Egypt have recently found this out. Other governments are increasing their food subsidies to try and keep the price of food to reasonable levels so as to keep hungry masses from rising up against their governments. Many will begin defaulting on foreign debt rather than see their own people go hungry. It's not only the Islamic world that is feeling the pinch. China today released their inflation numbers.. and food inflation has risen by 4.6%.. in just ten days. Something's gotta give. I look for Venezuela to begin having problems pretty soon as well after a decade of mismanagement by Comrade Hugo.

Which brings me to point B in today's discussion.. the ongoing revolutions in the Islamic World. Today, there were violent upheavals in a number of Muslim nations.. Algeria, Yemen, Bahrain and Iran. Of these, two are of serious concern to the US.. Bahrain (home to the US 6th Fleet) and Iran. In Bahrain, a very rich country, the people were not upset so much by rising food prices as they were demanding a change in how they are governed. In Iran, where the demonstrators numbered in the tens of thousands, the police let loose volleys of tear gas and rubber bullets.. and the demonstators responded with rocks and bottles. That section of Tehran now resembles Beirut after a few Hizbullah rockets finished redecorating. My guess is that the Bahrain problems will pass without much more trouble.. fat, rich people make bad revolutionaries. But the ones in Algeria and Yemen are serious business and these governments might be in some trouble. As for Iran, we shall see.. there was a serious uprising about a year ago when the results of an "election" were announced. The Islamic regime was able to supress that one. Today's mayhem was the biggest demonstration since last year's. This friday will be a good test of wills in Teheran.. if the protesters number in the hundreds of thousands.. in combination with rising food prices.. Ahmed-need-a-jihad could be in some serious trouble. The Islamic regime itself might survive if they put a moderate guy like Rafsanjani in power and hold fair elections. But if this weekend is a dud, there's a good chance this uprising will fade much like the last one did.

In a greater context, much of what is going on in the Islamic world is about more than just food prices; it's about democracy, greater opportunity and justice. Many commentators here are worried about Islamic revolutions sweeping the Arab world, with visions of the entire region becoming rather like Iran. In truth, it's about something that we Americans take for granted.. liberty, justice and prosperity. The people at risk in all of this are the leaders of nations who do a bad job of providing these basic human desires. In Tunisia and Egypt, pro-US cleptocrats was swept from power. In Teheran, anti-US Islamist mullahs look to be in some trouble. On a grander scale, if many of these regimes are swept away, the end result might be an Islamic world that cares more about economic opportunity and justice than it does about wiping out a group of Jews hanging out in a small corner of the neighborhood. In my view, we do not need to fear these movements. In this context, Obama's early on ditching of Mubarak and his speech extolling democracy and human rights in the region looks like it was dead on.