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
