In the US we have slowly debased our currency, the US dollar, and debt levels have risen at all levels of government. Since the US has extensive economic interests and huge reserves of oil, minerals, and agricultural capabilities, it will be a long time before the proverbial “wolf” shows up at our door.
In other countries, like Egypt, however, the wolf comes to the door right away. Egypt has an immense population concentrated along the Nile River and relatively few sources of income. Tourism has been badly damaged by the revolution against Mubarek and the rise of the Muslim Brotherhood hardly is something to put on a brochure at the pyramids, given that they have been known to slaughter their heathen guests in the past.
In order to feed their population, Egypt needs fuel, particularly diesel fuel. While Egypt does have some petroleum riches, they don’t have much refining capacity, so they must import diesel. In order to import diesel, you need “hard” currency, and the Egyptian dollar has been falling in value.
Finally, the Egyptian government distorts the local price of diesel so that it is subsidized, causing all sorts of negative impacts, including a huge black market, queueing, and all the other behaviors inevitably caused by hare-brained policies.
This situation was described in a recent NY Times article titled “Short of Money, Egypt Sees Crisis in Food and Fuel” which you can find here.
In a place like Egypt on the edge of starvation and social chaos, the safety net is thin, indeed, as they summarize in the last quote of the article:
At the empty Mobil gas station in town, attendants said profiteers, hoarders and desperate farmers were already threatening them with knives, clubs and shotguns. At harvest time, “People are going to kill each other,” said Hamdy Hassan, 37, a truck driver hanging out at the shuttered station.
Our understanding of economics in a theoretical basis and our casual acceptance of paper money has blinded most of us from understanding the practical, real-world economics that stands before us. People need goods or services, and they have to trade for it by providing alternatives that are acceptable to the seller.
If your currency is worthless, you need something else to trade, or your country will be bereft of necessary supplies. In this instance, Egypt needs refined petroleum products (diesel) or their entire economy will grind to a halt (and mass civil strife will immediately follow). As their currently depreciates relative to others in the region, their ability to purchase fuel is accordingly reduced.
This can be seen in medicines and fuel in Greece as well and likely soon to be Cyprus; it is assumed that these countries will be able to maintain first world status for their populace but it is difficult to see how that will happen while they have almost nothing to trade in return. One article about Cyprus ended with a quote from a local that if they don’t act as a banking haven “they will all just be selling ice cream and setting up deck chairs” to support any tourists that happen to visit.
With the implosion in Cyprus and likely deterioration of weakened countries like Egypt, Venezuela Argentina with minor home currencies, we appear to be entering a new era where things we’ve taken for granted about smooth business transactions and friction-less international banking and trade are going to be put to a severe test.
Cross Posted at LITGM
The wolf just growled outside the door again.
Under the economic annexes to the 1979 Israeli-Egyptian peace treaty, Israel turned over its only domestic petroleum source [in the Sinai] to Egypt and Egypt agreed to sell to Israel at a set price. Up until a year ago, Egypt furnished 40% of Israeli natural gas. Egypt abrogated that part of the treaty in April 2012 [which says something about the shakiness of the peace between the two countries].
Even at the low, treaty set, price; it was foreign exchange. For Egypt, which imports 60% of the food eaten by its population, foreign exchange is vital. And in Egypt’s current case, absent.
Egypt is never going to get that source of foreign exchange back. Today Israel opened the valve connecting the Tamar offshore gas field to its national gas grid. The estimate is that the Tamar field alone will handle Israel’s natural gas requirements for 20 years. There are 5 other Israeli offshore fields in the process of being opened up.
It is going to be awful hungry along the Nile.
Subotai Bahadur
“….the Egyptian government distorts the local price of diesel so that it is subsidized, causing all sorts of negative impacts….”
If I understand the situation, not so much “subsidized”, as “sold under mandated price controls” would be more to the point since a subsidy is a payment, no?
Spengler (a/k/a David P. Goldman) is all over the Egyptian situation:
“Egypt’s Bankruptcy and America’s Foreign Policy Failure” March 31, 2013
http://pjmedia.com/spengler/2013/03/31/egypts-bankruptcy-and-americas-foreign-policy-failure/
Is his most recent essay on Egypt’s implosion, but he has been on target for about 2 years on this one. Read the above and track back some of his links.
In today’s NYTimes, David Stockman (Budget Director under Reagan) delivers a very negative assessment of the domestic situation. I agree with much of his analysis, but not with many of his prescriptions. Be that as it may, you should read it.
“State-Wrecked: The Corruption of Capitalism in America” By David A. Stockman
http://www.nytimes.com/2013/03/31/opinion/sunday/sundown-in-america.html
“Greece … Cyprus… it is assumed that these countries will be able to maintain first world status”
A quibble: one can’t retain what was never possessed in the first place.
Let the post-apocalyptic wasteland begin.
We must terminate aid to Egypt, not because its government is corrupt, Moslem, anti-Semitic, anti-democratic, anti-American, hate-filled—all those reasons are irrelevant, but because we can no longer afford to borrow money from the Chinese (or debauch our currency by printing new money) and give it away to foreigners.
America has no money to give. Not to Brazilian oil companies, nor Moslem Spring governments, nor performance artists. Broke is broke.
The complexity of the relationships in the region don’t lend itself to easy answers or predictions.
The one thing Egypt has on its side now is closer ties to Turkey and some of the Emirates. There’s concern now that a new Cairo-Ankara-Quatar axis is shifting power in the region. Turkey has bolstered ties with Kurdistan to buy their oil and is expanding its own production. The nothern end of Tamar is in Lebanese waters and is filled with oil. With Syria imploding, there’s rumblings of a resurgence of a Turkish dominated Levant which could put that supply in its sphere also.
“Since the US has extensive economic interests and huge reserves of oil, minerals, and agricultural capabilities, it will be a long time before the proverbial “wolf” shows up at our door.”
WRONG ANSWER. You accept this?
It’s wrong to keep accepting this..and those that do deserve any fate.
NO. Whatever it takes.
A couple days ago I received an eyebrow-raising email from my congressman, informing me:
So America is sending ground troops to Egypt along with the F-16s and main battle tanks?
John Cooper Says:
April 1st, 2013 at 11:44 am
So America is sending ground troops to Egypt along with the F-16s and main battle tanks?
While I do not rule out the desire of Buraq Hussein to support the Muslim Brotherhood militarily; this may be something less sinister.
The 1979 Sinai Peace Treaty ceded the Sinai back to Egyptian sovereignty, and established a Multinational Force & Observers [MFO] to monitor the truce. It is largely, but not completely, American; and our part consists of a HQ and both an Infantry and a Support battalion drawn in rotation from the National Guard. Check with your Congress-critter or state National Guard HQ, but your unit may be taking its turn in the Sinai and not represent either a new commitment to Egypt or a threat to the “peace”. Their job for over 3 decades has been to be a speed bump if Egypt breaks the treaty and attacks Israel. The theory [back then] was that an American president would not tolerate an attack on American troops without responding. The ground seems to have shifted somewhat on that assumption.
Subotai Bahadur
Subotai: Thank you.