We don’t know yet whether political contagion in the Middle East will spread to other countries. The turmoil may yet be contained and recede, sending oil prices back to lower levels. But there is a serious chance that the uprisings will spread, destabilizing Bahrain, Algeria, Oman, Jordan, Yemen, and eventually even Saudi Arabia.Horrendous Track Record
Even before the recent Middle East political shocks, oil prices had risen above $80-$90 a barrel, an increase driven not only by energy-thirsty emerging-market economies, but also by non-fundamental factors: a wall of liquidity chasing assets and commodities in emerging markets, owing to near-zero interest rates and quantitative easing in advanced economies; momentum and herding behavior; and limited and inelastic oil supplies. If the threat of supply disruptions spreads beyond Libya, even the mere risk of lower output may sharply increase the “fear premium” via precautionary stockpiling of oil by investors and final users.
The latest increases in oil prices - and the related increases in other commodity prices, especially food - imply several unfortunate consequences (even leaving aside the risk of severe civil unrest).
First, inflationary pressure will grow in already-overheating emerging market economies, where oil and food prices represent up to two-thirds of the consumption basket. Given weak demand in slow-growing advanced economies, rising commodity prices may lead only to a small first-round effect on headline inflation there, with little second-round impact on core inflation. But advanced countries will not emerge unscathed.
Indeed, the second risk posed by higher oil prices - a terms-of-trade and disposable income shock to all energy and commodity importers - will hit advanced economies especially hard, as they have barely emerged from recession and are still experiencing an anemic recovery.
The third risk is that rising oil prices reduce investor confidence and increase risk aversion, leading to stock-market corrections that have negative wealth effects on consumption and capital spending. Business and consumer confidence are also likely to take a hit, further undermining demand.
If oil prices rise much further - towards the peaks of 2008 – the advanced economies will slow sharply; many might even slip back into recession. And, even if prices remain at current levels for most of the year, global growth will slow and inflation will rise.
Over time - but this could take years - consumers could invest in alternative energy sources and reduce demand for fossil fuels via carbon taxes and new technologies. Because energy and food security are matters of economic as well as social and political stability, policies that reduce commodity-price volatility should be in the interest of producers and consumers.
But the time to act is now. The transition from autocracy to democracy in the Middle East is likely to be bumpy and unstable, at best. In countries with pent-up demand for higher income and welfare, democratic fervor could lead to large budget deficits, excessive wage demands, and high inflation, ultimately resulting in severe economic crises.
So a bold new assistance program should be designed for the region, modeled on the Marshall Plan in Western Europe after WWII, or on the support offered to Eastern Europe after the collapse of the Berlin Wall. Financing should come from the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, as well as from bilateral support provided by the US, the European Union, China, and the Gulf states. The goal should be to stabilize these countries’ economies as they undertake their delicate political transitions.
The stakes are high. Unstable political transitions could lead to high levels of social disorder, organized violence, and/or civil war, fueling further economic and political turmoil. Given the current risk-sensitivity of oil prices, the pain would not be confined to the Middle East.
The US has a horrendous track record of negative benefits when meddling in the affairs of other countries.
- Our CIA trained Bin Laden.
- We supported Hussein under the ridiculous theory "the enemy of my enemy is my friend", supplying him with chemical weapons he used in a war against Iran.
- We supported a corrupt Shah of Iran, overthrown in the Iranian Revolution.
- We failed to see even days before they happened, recent event is Tunisia, Egypt, Libya, Yemen, and other countries.
- The War in Vietnam was a disaster.
- The war in Iraq caused massive destruction but did nothing but make more enemies.
- The current war in Afghanistan is an ongoing disaster.
Yet, somehow Roubini thinks we can butt in here successfully.
Funding From Where?
Roubini calls for funding from the IMF with "bilateral" support from the US and others. That is a backdoor way of saying US taxpayers.
If a Marshall Plan for the Mideast is needed, let Saudi Arabia, Iran, and Iraq fund it entirely. For starters it's their region and their oil. They have the oil revenues, not us. Moreover, our offers of "assistance" typically come with strings attached that inevitably cause further ill from someone. There is no need to go down that path again.
The IMF's track record is as bad if not worse. History clearly shows that countries that take "assistance" from the IMF live to regret it.
Even if we did have the money (which we don't), we have no business telling Mideast countries how to run their economies. What the US does have is a budget deficit of $1.4 trillion and blood from butting in our noses where we do not belong.
I propose a more sensible action: cut all US funding for the IMF and its economic terrorist policies that have wrecked numerous economies, the latest victim being Ireland.
Roubini needs to stick with economic and risk analysis where his analysis is generally quite good, and away from socialistic and interventionist solutions that are repeatedly and hopelessly off the mark.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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