Turmoil in the Arab World

After several days of employing astonishing brutality in attempting to suppress the revolt in Libya, Qaddafy has held another one of his utterly bizarre speeches, which you can check out here.  What strikes us as significant about the speech is the frequent invocation of 'al Qaeda' as a supposed instigator the protests, which is a reminder that most of these Arab tinpot dictators have been using Islamic radicalism as a major excuse for the alleged need to keep their tyrannies in place. With this they want to continue to recommend themselves to their Western pay masters (Qaddafy , the former Hitler of the sand dunes,  is a 'good friend' since about 2003). 


We don't want to play down the threat posed by Islamic fundamentalism, but one must recognize that the oppression faced by the people living in these countries is in fact giving it succor. Contrary to the claims of the despots that their iron-fisted rule is required to suppress Islamist terrorism, they are one of the factors increasing its popularity – and not only that, due to their association with the West, they help direct the radicals' hatred in our general direction, generating what the intelligence agencies have dubbed 'blow-back'.

As we noted previously, it is hard to gauge what these revolts will produce in terms of political outcomes and how big a threat to oil supplies will eventually emerge as things sort themselves out, but the financial markets have evidently begun to worry about the potential for a bigger-than-hitherto-assumed disruption.

That said, with Libya front page news for several days even in the backwater we inhabit, we suspect that  things may be on the verge of calming down again, only to likely flare up again at a later stage. In that sense the events in the Arab world share something with the euro area debt crisis – both are 'rolling crises'. Just when it appears as though things have calmed down, the next problem rears its head.

People have chafed under kleptocratic dictators for decades in the Arab world. Now that the genie of revolution is out of the bottle, it won't be easy to put it back. In some countries the ruling class may be able to make deals with the opposition or at least manage to preserve the state's apparatus in its essential features (this appears to have happened in both Tunisia and Egypt – so far, anyway), but Libya seems to be a case where the territory could fracture into several smaller regions ruled by tribal leaders – and it's a good bet that control of oil resources would eventually become a major bone of contention.

Note that the first protests scheduled to take place in Saudi Arabia should take place on March 11 – so there will still be plenty to worry about as time goes on.

Meanwhile, a major Bahraini opposition leader, Hassan Mashaima, has been detained in Lebanon, shortly after having been pardoned by King Hamad bin Issa al-Khalifa (Mashaima was charged with 'forming an illegal organization, engaging in and financing terrorism and spreading false and misleading information' and tried in absentia; note that the 'terrorism' charge has become standard fare in Arab countries if one wants to put away a political opponent and deflect criticism from overseas. The pardon tells us indirectly that the charge was trumped up). Mashaima is the leader of the Haq movement in Bahrain, which is reportedly implacably opposed to the Sunni ruling elite. He was on his way to return to Bahrain from Britain, and it was expected that his arrival in Bahrain would be a momentous occasion. It seems somebody got cold feet and headed him off at the pass.

Bahrain of course is where the US 5th Fleet is stationed.  Its inhabitants are mostly Shi'ites, while the ruling elite consists of  Sunnis, a minority in the country – making for an explosive combination. The Pentagon is casting a wary eye in Bahrain's direction these days.




The WTI crude contract produces a potential reversal candle in Thursday's trading. It could just be short term profit taking – one shouldn't read too much into it before it is not confirmed as a reversal by follow-through selling – but if that happens, then the news flow could be on the verge of quieting down again – click for higher resolution.



5 year CDS spreads on Saudi Arabia, Morocco, Bahrain and Qatar – a small pullback has begun and may also indicate the situation will at least temporarily calm down – click for higher resolution.


A False Sense of Security in Euro-Land

While everybody's eyes are on Libya, euro area CDS spreads have continued their recent 'quiet' move higher. The Libyan revolt has allowed the euro area debt crisis to keep on festering unobserved, so to speak.

There's an election in Ireland, and it's a good bet that whichever party wins it (it probably won't be the Fianna Fail party of the outgoing government) will be under great pressure to renegotiate the EU bailout deal.

A brief summary of where the various parties stand on the bailout and negotiations with bank bondholders (who are almost certain to end up having to take some losses) can be found at the BBC.

Ireland's banks continue to whither on the vine, bailout or no bailout. Depositors have fled and continue fleeing. The argument that Ireland's government has previously employed to justify its 'no bondholder left behind' program was that it feared to be locked out from capital markets when rolling over its sovereign debt if bank bondholders were to suffer losses.  In the meantime it has become an EFSF ward, but bailing out bank bondholders is part of the bailout agreement with the EU as well. Only the Irish tax payers have had no say whatsoever in all of this, but the election may alter that.  Meanwhile it has turned out that last week's emergency borrowing from the ECB was connected to the restructuring efforts of Irish banks – for the details see this article in the WSJ.

Bond yields in the euro area continue to be firm and it seems the correction in CDS spreads is indeed over. Apart from Ireland, the usual suspects are leading the charge – namely, Portugal  (soon to be bailed out) and Greece (already bailed out, but an utterly hopeless case).

More and more Greek citizens seem to be engaged in a 'pay strike' in reaction to the austerity measures and due to a general sense that politicians and otherwise well connected people are a bunch of thieves whose attempt to impose financial  hardship on the population lacks genuine authority. Waste and corruption meanwhile are so endemic in Greece that rooting them out seems a Sisyphean task. Kyle Bass' story about the Greek hospital that employed 45 gardeners but curiously lacked a garden is testimony to this. As noted in a recent press report , the so-called 'I won't pay' movement is now rapidly spreading across Greece.


“They blockade highway toll booths to give drivers free passage. They cover subway ticket machines with plastic bags so commuters can't pay. Even doctors are joining in, preventing patients from paying fees at state hospitals.

Some call it civil disobedience. Others a freeloading spirit. Either way, Greece's "I Won't Pay" movement has sparked heated debate in a nation reeling from a debt crisis that's forced the government to take drastic austerity measures — including higher taxes, wage and pension cuts, and price spikes in public services.

What started as a small pressure group of residents outside Athens angered by higher highway tolls has grown into a movement affecting ever more sectors of society — one that many say is being hijacked by left-wing parties keen to ride popular discontent.

A rash of political scandals in recent years, including a dubious land swap deal with a rich monastery and alleged bribes in state contracts — has fueled the rebellious mood.

At dawn last Friday, about 100 bleary-eyed activists from a Communist Party-backed labor union covered ticket machines with plastic bags at Athens metro stations, preventing passengers from paying their fares, to protest public transport ticket price hikes.

Other activists have taped up ticket machines on buses and trams. And thousands of people simply don't bother validating their public transport tickets when they take the subway or the bus.

"The people have paid already through their taxes, so they should be able to travel for free," said Konstantinos Thimianos, 36, an activist standing at the metro picket line in central Syntagma Square.”


Good luck to Greece's government with ever paying back the country's staggering mountain of debt. It should be clear that it simply isn't going to happen. The popular mood is not exactly in favor of austerity. As it were, it should not happen anyway. A debt restructuring would be the quickest way to create a  sounder foundation for growth.

Portugal meanwhile faces large debt rollovers from March to June. This may well be the occasion when it is forced to join the other sovereign zombies in the EFSF sub-prime CDO. From a recent missive by Dennis Gartman we learn that Portugal must raise the rough equivalent of 1.9%, 2.7% and 2.9% of its GDP on March 18th, April 15th and June 15th. It seems Belgium is under similar  pressure, with rollovers amounting to about 5.3% of its GDP having to be dealt with between mid March and mid April. Belgium remains under a caretaker government at present, and is the nation most likely to join the PIIGS stable as its 6th bona fide member.




5 year CDS spreads on Portugal, Italy, Greece and Spain – Portugal's and Greece's are  setting the pace again, just as they did in the last rally phase – click for higher resolution.



The Markit SovX index of CDS on 19 Western European sovereigns – knocking on short term trendline resistance from below. So far the recent correction still looks like another successful test of a breakout, similar to the July correction – click for higher resolution.



Iceland, Depositors and Big Banks

The Icelandic to and fro over whether to compensate the U.K. and Netherlands for their bailout of  'Icesave' depositors has continued as well, with Iceland's president vetoing a deal proposed by the Althingi (parliament). The presidential veto is rarely invoked, but president Grimsson feels the matter is too weighty; a presidential veto automatically refers the question to a popular vote by referendum. Naturally, Icelanders can be expected to vote it down again.

Depositors took a risk when investing with Icesave – they should have known that if it sounded too good to be true, it probably was. The global 'hunt for yield' that had infected everyone in 2006-2007 ensnared these individuals as well. There is a good case to be made for Icelanders to thumb their nose at the notion of paying for the bailouts. First of all, these were contracts between private parties – Iceland's tax payers did not ask anyone to deposit money with Icesave, and they sure didn't promise anyone a bailout. They also didn't demand from the U.K.'s and the Netherlands' governments that they should bail out anyone.

The sums involved are staggering for this small nation – it would pay for decades. The abrogation of responsibility of depositors introduced by deposit insurance schemes – deemed a necessity everywhere to keep the inherently insolvent fractionally reserved banking system going with as little perturbation as possible  – has transformed most people into  irresponsible fools when it comes to gauging bank risk.

It ultimately makes for both unsound borrowing and lending, as it seduces bankers into acting more irresponsibly as well (since they generally don't have to fear bank runs). This in turn  leads to the now all too familiar situation where in the end 'too big to fail' institutions get bailed out after producing monumental cock-ups. This helps keeping bad stewards of capital in business and coerces people who had nothing to do with the situation, namely tax payers, into paying for other people's foolish decisions.

Kansas Fed president Thomas Hoenig had some interesting remarks about the banking system in the US  following the implementation of the Frank-Dodds regulations. In his opinion there was no lasting solution at all, and we fully agree with that assessment. The 'too big to fail' banks have simply become even bigger, which means that they are even more likely to be bailed out again if they take undue risks and falter once more.  Hoenig thinks the big banks should be broken up. His entire speech can be found here (pdf).

Hoenig is one of the few Fed bureaucrats evincing worry over the future of free market capitalism. This apparently makes him a 'maverick' in the eyes of the financial press.

NY Times Still Economically Illiterate

We have found out to our chagrin that Paul Krugman is not the only Keynesian deficit spending advocate infesting the pages of the New York Times. A certain David Leonhardt tries to prove – with the help of a single, highly dubious data series, namely GDP – that Germany's economy is 'suffering due to austerity' while America's economy is much better off due to the government having spent the country into near fiscal oblivion. Any German reading the article is either braying with laughter or wondering if maybe the author confused Germany with some other country.  Germany is of course booming, a fact that apparently has convinced  Krugman that it would be wise to no longer mention it  – his last column on Germany was written in August of 2010 and uses the same misleading statistic – GDP – to help make his non-points. One thing we do agree with is that Germany can hardly be accused of being particularly austere. We suspect in fact that the current German boom is at least in part yet another artificial  boom brought on by the way too easy monetary policy of not only the ECB but central banks around the world. So it would not be entirely correct to cite Germany as a paragon for the success of fiscal austerity – but it should be noted that the decision to put the brake on deficit spending has of course had a salutary effect on the economic recovery. Government spending, as we have pointed out previously,  is a burden on the economy and hinders recovery. If you follow the link above, scroll down a bit to the heading 'Economic Stimulus Spending Harms the Economy'. Along similar lines, here is a post on the topic of 'regime uncertainty'.

Mr. Leonhardt should perhaps attempt to explain the rousing successes Japan has enjoyed in trying to combat its 20 year long economic downturn by spending itself into a fiscal black hole. Its deficit is set to soar above 200% of  GDP – and it still has absolutely nothing to show for it all.

Meanwhile, to take Germany as a counter-example to the alleged success of US deficit spending is so transparently ridiculous that one truly wonders what the man was thinking – if indeed he was thinking at all. 

One of the major claims the Keynesian deficit spenders are making is after all that the spending should produce employment. On that score, we note that Germany's unemployment rate has fallen to an 18 year low and that the country is facing a worrisome shortage of skilled workers by now. In the US, we have the Fed engaging in a second round of massive money printing on account of its belief that monetary pumping can help lower unemployment and underemployment remaining close to depression levels (note that the unemployment rate has lately declined for only one reason – the purely statistical shrinking of the work force, as more and more people have simply given up looking for work. Had the total labor force remained unchanged at its peak level, the U3 unemployment rate would now be at 13% instead of 9%).

What is really interesting though is that a fairly large number of commentators at the NYT is no longer prepared to accept the Keynesian swill without challenging it. We actually took the time to look at all the comments, and while the Krugmanite sycophant brigade is still in the majority and a number of respondents seem intent on conducting the debate along political party lines (which is totally misguided), there are a number of thoughtful and critical responses to Leonhardt's article, quite a few of which make use of reasoning Austrians would approve of.

This is important because it proves not all is lost. The cause of economic liberty  is still gaining ground.


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2 Responses to “Observations on Recent Events”

  • Really interesting stuff; it seems like the ideologies of the Ottoman Empire are only now being challenged with sufficient strength to yield a new civilization.

    “This is important because it proves not all is lost. The cause of economic liberty is still gaining ground.”

    True, but have you noticed the peculiar edge to the shunning of Keynesian doctrines and the embracing of (some) Austrian insights? The ferocity is as dogmatic as the former Keynesian dogmatism and the intellectual rigor of the Austrian school is almost completely ignored. This leads me to believe that the new believers in freedom will quickly turn 180 degrees in the coming years. A couple of examples of this weird trend:

    The large volume of Prechter-critics seem to believe that he’s some kind of idiot who doesn’t understand money, credit, and -in particular – Austrian economics. But of course that’s nonsense, he’s actually taking a pretty conservative Austrian view by saying that extinguishable money substitutes are always extinguished eventually.

    When Marc Faber was on bloomberg the other day, the presenter stated that “the viewers are mainly Austrian”. Really? It seems just as the words “liberal”, “free market”, “conservative”, “libertarian” … have been perverted, so are “Austrian”, “freedom”, …

  • Floyd:

    The platforms of the Irish politicians are rather discouraging.
    Almost as delusional as in the US. Gov doesn’t create job. Need to distinguish structural deficit vs. the overall debt. All are wimps about stance vs. the EU.

    Oppressive regimes often foster radicalism. The Arab world may support this view.
    However, it is a mistake to blame the West for that. The West didn’t put Mubarak, Ben-Ali, Saud and Qaddafi in power. Nor did it maintain their regimes (well, unless one insists on counting the couple of $1B foreign aid).
    The West would interact with whoever is in power given the thirst for oil and urge for perceived influence. [I doubt that it is real, though].

    For what it worth, I don’t recall radicalism under the Soviet Bloc, or wasn’t the USSR oppressive enough?
    Nor under the rule of the PRC, Myanmar, and North Korea.

    I suspect that there are additional factors in play.
    The predominant one is demographic.
    Large cohort of young males without prospects is an explosive brew, regardless the reasons.
    And, indeed, the size of the 15-30 age cohort in the Middle East is unprecedented. And, they are severely unemployed.


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