When I was living in Cairo, the transition to winter was sometimes smooth. The beastly oven of summer changed slowly into a bearable fall of cool-warm. The fall moved from the cool-warm to a few weeks of cold, or at least what was cold to Egypt. These were smooth changes. It [...]]]>
When I was living in Cairo, the transition to winter was sometimes smooth. The beastly oven of summer changed slowly into a bearable fall of cool-warm. The fall moved from the cool-warm to a few weeks of cold, or at least what was cold to Egypt. These were smooth changes. It seemed so normal. We even delighted in the cold evenings when we could wear sweaters while sailing on the Nile. It felt like a novelty the first time; then it was comfortable to change with the changes and dig out our sweaters in late November.
The recent cold winds to hit Cairo and Egypt came as a shock to some. These cold winds came from the decrees of President Mohamed Morsi. He was supposed to be the protector and developer of democracy according to many. He has turned out — for many — to be quite different. He essentially grabbed the powers of the judicial, executive and the legislative branches of the baby democracy that is developing in Egypt. He stole the candy from the baby, according to many in Egypt.
Morsi’s Muslim Brotherhood supporters cheered in delight. Just about everyone else felt the cold winds. They also felt that their revolution was falling prey to a manipulative, dangerous and very clever man. The person who the Brotherhood really wanted at first had the last name of Al-Shater, “the clever one”. The real clever one turns out to be the person that many called “the spare tire” — the American-educated “former” leader in the Muslim Brotherhood, Mohamed Morsi Isa El-Ayat. The last part of his name might give some in the west pause, if they are thinking.
Egypt for now is looking more like Iran in 1979 than ever before.
The liberals and intellectuals were the original igniters and leaders of the Egyptian revolution; the Muslim Brotherhood took it from them. There were discussions about inclusivity, but as the Copts, liberals, Wafd and others left, the Constitutional and other committees made no effort to reincorporate them. There was a collective crocodile sigh and the leadership went on with the committees.
The press, other media, academics, government officials and more are being packed by members of, or loyalists to, the Muslim Brotherhood. Discussions about applying a somewhat strict version of Sharia in Egypt get more heated by the day, while the opposition apparently continues to be sidelined from the game. The extremist Salafis seem to have more voice in the new Egypt than the academics or even the experienced umdas (village leaders) in some areas.
Sectarian tensions are mounting. The recently elevate Pope of the Copts has stated publicly that he rejects the mounting power of the extremists and wants his flock to be considered full members of Egyptian society. Given that the Copts make up around 8-10 percent of the country, that makes sense.
A working democracy requires inclusivity. It needs a sort of equality supported not just voting, but other civil and social rights too. It took the United States over a century to move toward greater voting and other rights for minorities. These were hard fought battles that started with the bloodiest war in American history, the Civil War, and went on into the 1960s with the various civil rights and voting acts. This process is ongoing.
Democracy is a fragile thing; extremism is its worst enemy. Al Ahram provides a translation of President Morsi’s recent decrees here:
“We have decided the following:
Article I
Reopen the investigations and prosecutions in the cases of the murder, the attempted murder and the wounding of protesters as well as the crimes of terror committed against the revolutionaries by anyone who held a political or executive position under the former regime, according to the Law of the Protection of the Revolution and other laws.
Article II:
Previous constitutional declarations, laws, and decrees made by the president since he took office on 30 June 2012, until the constitution is approved and a new People’s Assembly [lower house of parliament] is elected, are final and binding and cannot be appealed by any way or to any entity. Nor shall they be suspended or canceled and all lawsuits related to them and brought before any judicial body against these decisions are annulled.
Article III:
The prosecutor-general is to be appointed from among the members of the judiciary by the President of the Republic for a period of four years commencing from the date of office and is subject to the general conditions of being appointed as a judge and should not be under the age of 40. This provision applies to the one currently holding the position with immediate effect.
Article IV:
The text of the article on the formation of the Constituent Assembly in the 30 March 2011 Constitutional Declaration that reads, “it shall prepare a draft of a new constitution in a period of six months from the date it was formed” is to be amended to “it shall prepare the draft of a new constitution for the country no later than eight months from the date of its formation.”
Article V:
No judicial body can dissolve the Shura Council [upper house of parliament] or the Constituent Assembly.
Article VI:
The President may take the necessary actions and measures to protect the country and the goals of the revolution.
Article VII:
This Constitutional Declaration is valid from the date of its publication in the official gazette.” (Emphasis supplied)
The paragraphs in bold and italics are the ones that are really worrying and angering so many in Egypt. They are also the ones that have sparked violence on the streets of Cairo and in many other places in Egypt. They have spurred a call for the impeachment of the President. They have instigated a strike by the judges in the country that will further paralyze a legal system that has been in various forms of paralysis for decades. That strike is also due to the firing of the chief prosecutor, who was apparently replaced by a judge with Muslim Brotherhood sympathies.
The Egyptian stock market tumbled yesterday and had to be shut down. It had a relatively feeble increase today. The cold winds seem to be keeping investors away. The sense of risk is still there. If more negative events take place, the market could fall again.
Demonstrations and counter demonstrations are being called. There will likely be more violence, more worry and anxiety amongst Egyptians and more hardening of opinions across the ever-widening political divide in this great country gone astray.
The fact that top judges have said they are planning to meet with President Morsi is a hopeful sign. Of course, after all the hard feelings, I am not sure what could come from that. The journalists union may call a strike; there were fist fights and loud yelling matches in the journalists’ union building yesterday. The organization that represents a lot of the fellahin or peasant farmers in Egypt stated its anger at Morsi’s decrees by saying the servitude of the peasants was over. The younger people are still fired up. The ULTRAs, the soccer fans for Ahly, Zamalek and others who were a major part of the disturbances and demonstrations since the early days of the revolution are also out in the streets again and looking for a fight.
The Muslim Brotherhood has called for a pro-Morsi demonstration. The anti-Morsi groups have called for other demonstrations. The offices of the Muslim Brotherhood have been attacked in many areas, including in Damanhour in Behaira Province, where one really would not expect such violence. A 15-year-old boy died in that attack.
Those thinking about investing in Egypt will likely shy away even more. Tourism will be shattered if this does not settle down soon. The winter season is the most important for tourism in Egypt. The IMF loan and some of the foreign aid packages for Egypt could also be in jeopardy. Capital flight is likely to increase. Unemployment and inflation are likely to get worse. The sense of hope in the county will likely be worsened. This is most important for the youth in the country. They have mostly very hard, impoverished and frustrating lives. They are also the demographic that could drive the country into another revolution for the poor, the unemployed and the hungry.
A cold wind indeed has come to Egypt.
One can hope that the cold winds will subside and warm a bit before the politics of Egypt freezes over into immovable camps. One can hope that there will be true dialogue and a moving forward for the country in many ways.
The revolution was the greatest event to take place in a very long time for most Egyptians. Many died and even more were injured. A post-revolution Egypt needs to be for all Egyptians, as many in the opposition have stated.
The Muslim Brotherhood should be listening and listening hard to what is going on. Winning a hair-thin election is not a mandate. There are many people in Egypt — all over Egypt — who do not like and do not trust the Muslim Brotherhood. Their time in power could be very short if they do not respond to the calls for equity, inclusiveness and great open-mindedness. Many also see the Morshid, the spiritual leader of the Muslim Brotherhood, Mohammed Badei, as the man behind many of the decisions made by President Morsi. This is proving to be very dangerous for the stability of Egypt.
Egypt is a complex country facing a very challenging future. If it cannot move towards democracy and prosperity in a more stable and efficient way, great trouble lies ahead. The cold winds of November 2012 could be warm in comparison to what’s waiting.
Sawt means voice and vote in Arabic. If positions in Egypt harden and more and more people are left behind or shoved aside, the voices of even the so-far-silent could get much louder.
- Paul Sullivan is an internationally recognized expert on security issues including energy security, water security and food security in the Middle East and North Africa. He is an economist by training and a multidisciplinary public intellectual by choice. He is an Adjunct Professor of Security Studies at Georgetown University.
]]>The Iranian rial has been in free fall for the last few days. Inflation has been ramping up for the last few months as the rial has lost more than 50 percent of its value over the last year. Unemployment is up to maybe 25 percent plus, and quite a [...]]]>
The Iranian rial has been in free fall for the last few days. Inflation has been ramping up for the last few months as the rial has lost more than 50 percent of its value over the last year. Unemployment is up to maybe 25 percent plus, and quite a bit higher in some of the poorer parts of the country.
Iran’s oil exports have been slammed by sanctions. Even with Iran’s attempts to sneak some out in various ways, such as registering tankers in Mongolia of all places; the sanctions hunters found out about that one fairly quickly and shut it down with some diplomatic moves in Ulan Baator.
Then there is the purchase of 2 million barrels of stranded oil in Sid Krir in Egypt that the Egyptian government wants to purchase. US-Egyptian relations are not exactly the best these days and President Morsi visited Tehran recently. He might have embarrassed his host by mentioning his views on Syria, but he still went. Egypt also looks like it might be working towards improving relations with Iran. Turkey may be buying some oil from Iran with gold or other barter methods. Other states may be setting grain and goods for oil barter arrangements.
The financial system of Iran has been hit hard with the sanctions. The closing down of Iran’s access to the SWIFT system was significant. This may have done more damage to Iran’s ability to do business internationally than many of the other sanctions combined. The sanctions focused on persons and banks are good politics, but have historically not been that effective. Closing the country from a major clearing house is like slamming a large financial door in their faces.
Indeed, Iran is in a tight spot. I would expect runs on banks to follow on to this if the government cannot stem the flow of the psychology of financial contagion that seems to be sweeping the country. The government is clearly in a panic. They are blaming the usual “outside forces” and “22 conspirators” who of course were arrested quite publicly today. Then they blamed the black market money changers in the bazaars of Tehran for the collapse. This last one makes less than no sense. The bazaaris do not exchange enough money to make this sort of a dent in the US dollar-Iranian rial exchange rate. The currency drop has a lot more to do with hyper-expansive monetary policy pushing inflation. There is clearly a sense that there are way too many rials chasing at a faster velocity the goods that are in stock and are flowing into Iran. See this article for some supporting monetary and other data.
The huge rise in the stock market of Tehran is also due to nominal reasons, as we economists would like to say in such circumstances. The money flowing into the economy via the policies of the Central Bank of Iran has pumped up not only the prices of goods, but also stocks. This huge increase in money supply has also pumped up the price of land and housing in Iran. Also driving the stock, land and housing costs is the shortage of alternative investments. Sanctions have taken a bit out of the Iranian economy on that account.
Iran’s economic policies have actually magnified, not countered, the effects of the sanctions. One of the major culprits was expanding the broad money supply by 100 percent in the last 5 years.
This said, what is happening now shows not only the results of sanctions but counterproductive economic policies and more. The current economic status of Iran also shows how the credibility of the regime is weakening.
I am certain that there are many people in Iran who are questioning the worth of the country’s nuclear program and especially the leadership’s global defiance on this issue in light of the growing resulting problems they’re facing.
Developing about 90 percent of the entire nuclear fuel cycle is very expensive. This could have been costing Iran about 10 percent or more of its GDP for many years. That is 10 percent that could have been invested in industries that produce jobs, agriculture, education, and more.
Expansive nuclear infrastructure development is not necessary given the existence of global trade in low enriched uranium for nuclear plants. It is also unnecessary given the small amount of raw uranium that exists in Iran. This is also counter-intuitive given that Iran flares off the equivalent of four nuclear power plants of 1200 MW each of natural gas.
There are many reasons why Iran’s government should focus on its economy and its people, rather than on defiant nuclear brinksmanship.
The Iranian leadership may find that their brinkmanship is about to bring their country to the brink.
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About 32 percent of all stock trades in the US stock markets are being done “off market” in “dark pools” and other confidential “trading platforms”. Trading on well-known markets such as the New York Stock Exchange and NASDAQ has been dropping precipitously.
The “dark pools” have taken over some increasing [...]]]>
About 32 percent of all stock trades in the US stock markets are being done “off market” in “dark pools” and other confidential “trading platforms”. Trading on well-known markets such as the New York Stock Exchange and NASDAQ has been dropping precipitously.
The “dark pools” have taken over some increasing chunks of the market shares that used to go to these and other major exchanges. Also, as the article from Business Week points out, massive amounts of money have fled the normal stock and other equity markets due to a lack of confidence and trust in those markets.
This video from the Wall Street Jounal explains what “dark pools” are. Most people are likely very much in the dark about them.
To put it simply, “dark pools” are pools of liquidity and financial capital that are flowing from one trader to another. One customer of a broker might need to move a large amount of a certain security, stock, derivative, bond or bill without it being noticed on the public markets. ”Dark pools” are confidential, secret and certainly not registered with the SEC or on any public notice boards of the trades.
If the large trade were to flow into the data banks of the algorithms of the high frequency traders — who really run the market to a very big extent — then the price of the security the trader wants to move can drop rather quickly. So, it is thought by these surreptitious security traders that one can retain more value by keeping the trades secret. “Dark pools” have been developing in China, the EU, and even in places like Indonesia, the Philippines, and all across the world.
Increasing development of the dozens of confidential platforms is in part a response to the development of high speed trading. High speed trading has a huge influence on the stock markets in the US and in many other countries. As the risks to trading have increased with the faster diffusion into the marketplace of high speed trading, so too have the “dark pools” and other surreptitious trading platforms developed.
There have been many instances of obvious mispricing of securities by some of these black box algorithms, such as sending the price of many well capitalized companies heading towards penny stocks in the matter of seconds during “flash crashes”, as happened in May 2010. One of the biggest energy companies in the world, Exelon, was deemed almost worthless on the markets for a moment. Proctor and Gamble became a penny stock.
One of the main reasons behind this flash crash was the high frequency trading companies’ algorithms (hyper complex mathematical stock and derivative trading models) kicking in to react to an order to sell 75,000 E-Mini Standard & Poor’s 500 futures contracts. If this seems somewhat to very obscure to you do not get worried that you are out of the loop on what is really going on in the stock, futures and derivatives markets. My guess is 99 percent of the people in the US, if not the world, are pretty much clueless about what is happening and who is doing what.
It is not just the existence of “dark pools” or of high speed trading that lends to huge potential volatility — even worse is the combination of the two. There is an increasing opacity to securities markets while at the same time an increasing dominance of very complex, black box mathematical algorithms that trade at velocities that are beyond the comprehension of just about everyone, including some of the people who are at the top of these trading companies.
One of my biggest concerns about high frequency trading is that the models, the algorithms used for trades, may not be built to handle major commodity price shocks, such as what may occur with an invasion of Iran and the response and counter-response that may happen after that.
One only has to consider the 1998 collapse of Long Term Capital Management (LTCM) that was sparked by the combination of the East Asian Financial Crises in 1997-1998, the default of Russia and the collapse of the ruble, as well as other complex factors, to see how this may happen again.
Please note LTCM was established by a bunch of Nobel Laureates and had some of the best and brightest “rocket scientists” of algorithm development on their staff. This article from CATO also discusses the government sponsored and constructed bailout of LTCM. Sound familiar? This was in 1998.
I find the potential robustness of these models in times of even moderate stress to be suspect.
We can now add in the problems that could result from the “dark pools” to the “high frequency trading” to those of the shadow banks that I mentioned in a previous article.
Indeed, the risks to the toppling of asset values and economies via oil and other commodity shocks are looming if there are any serious military shocks, most particularly if significant oil facilities such as Ab Qaiq are seriously damaged in the medium to long runs.
It is not just an attack of Iran that would shock the markets, but what follows after that. Iran is unlikely to back down and cower. It will counter attack. The Iranians have stated this quite clearly.
The effects of these shocks could also be magnified due to the fragility of the global economy. That volatility can be further magnified by the fall of the assets that back the shadow banking systems of securities and derivatives. This could be made even worse via high frequency trading and the increasing opacity of markets via “dark pools”.
One might expect large investors to initially flock to the “dark pools” to dump their securities. This may be kept quiet for a short while. However, sooner rather than later, the expected huge movements of assets that will be attempted to be dumped to preserve value will be noticed and talked about. Then the high frequency trades kick in full force. Add to this the fall in assets backing up the hundreds of trillions of dollars in derivatives and you have quite a problem.
Can you imagine the “flash crash” developing into a “smash crash” from a spreading conflict in the Gulf?
I really wonder how those black box computer programs would respond when the price of oil goes beyond the outer boundaries of their assumptions – and stays there.
Many markets have become too fast, too incomprehensible, and too opaque for the average investor and even for most governments. Some of these markets may be heading toward a dangerous tipping point on some issues not far in the future anyway.
A war in an area with 70 percent of all known commercially available conventional oil reserves and all of the excess oil capacity in the world may help that tipping point to arrive faster and in a more furious way.
Very few know what is really happening in the “dark pools”. Very few know what is really happening inside those black box algorithms of the high frequency traders. Shadow banking remains in the shadows.
Policy recommendation: governments and others need to look more into these dark regions to fully analyze certain strategic economic, political and other decisions. The world economy has changed vastly even in the last few years with massive liquidity traps and small reactions to monetary and fiscal policy than in the past and the existence of many great unknowns that contain massive amounts of assets within them. These policy responses need to be global as well as national given the massive international flows of money each day, often in the trillions of dollars if one also adds in foreign exchange transactions.
This odd amalgam of the old and new financial systems may be resilient to normal shocks and small shocks, but big shocks could make things rather bad indeed.
Governments and others need to understand and navigate in the dark corners of finance — and there are many of them — in order to understand what might happen next.
]]>Last Sunday former President Bill Clinton asked the CEO of Walmart if he would open a store in Libya.
Surely Libya needs more jobs and needs to get its economy going, but I am not sure how a Walmart would do that. A large proportion of the goods that [...]]]>
Last Sunday former President Bill Clinton asked the CEO of Walmart if he would open a store in Libya.
Surely Libya needs more jobs and needs to get its economy going, but I am not sure how a Walmart would do that. A large proportion of the goods that Walmart sells in the United States are imported into the United States, not made there. Seventy-five percent of the foodstuffs in Libya are imported from elsewhere. Libya has no real manufacturing base. Libya’s supply chains are hardly up to the task for feeding into a group of Walmarts. Most of the managers and even greeters may have to be foreigners initially. The people setting up the supply chains would also likely be non-Libyans given the complexity of what needs to be done and the lack of applicable training for most Libyans.
The finance for the setting up of the Walmart(s) would have to be via foreign direct investments likely from the United States. Those investments would need some insurance from the Overseas Private Investment Corporation. There would also need to be lots of cooperation and aid from the US government and the Libyan government regarding security for the initial buildings and the entire supply chain within Libya. Maybe the World Bank, the International Finance Corporation and others could be involved in developing the basic infrastructure and connections needed. Effort would also be required for improving the capacity of the Libyan government to handle economic development and the development of businesses.
Physical as well as financial security would be keys to the success of a Walmart in Libya. It would not take much for some trucks or even a store to have problems. Walmart is definitely an American brand and there are lots of Salafis and others who would want to do damage to anything representing an American brand. Consider what happened to the French Carrefour markets in Tunisia during its revolution. Think of what happened to outlets of major American food chains like KFC during the recent riots against that repulsive anti-Islam film. Think of the increasing anti-Americanism amongst some groups in the region and you can see that there could be some physical security issues.
Financial security may require that the payrolls, insurances, cash flows for inventory, maintenance, upkeep and more be kept offshore in part for a while. As the security and banking capacity situations in Libya change this could change. There could also be some significant foreign exchange risk involved, especially if the new Libya becomes more unstable and cannot get its economic act together. However, a good risk management team could hedge this if they knew the country well.
There are also some inherent financial and physical risks by simply being in North Africa and near Egypt and Tunisia, two countries that are still in the midst of trying to find their ways. Their revolutions are likely far from over. There is also a problem with Al Qaeda in the Maghreb and other AQ-like groups floating around the region. The instabilities to the south of Libya are hardly comforting.
Even so, my sense is that President Clinton’s heart was in the right place even if his logic needed a bit more work.
Libya needs foreign investment. There is a lot that American companies can do in Libya.
There are many people in Libya who are pro-American given that we helped their country gain some independence from the wretched regime of Qhaddafi. Many of the expatriate leadership of Libya of the older generations spent some time in the United States. We could gain a lot by helping some of the younger people, appropriately vetted, to get scholarships to visit and study in the United States. Sometimes the best way to make friends and future allies is to give them a good experience in the United States and provide high-quality education and training. There are great opportunities even within the massive and volatile risks of Libya.
That said there are many people in Libya including some militias, extremist groups, pro-Ghaddafi remnants and more who do not like the United States, to put it mildly.
It will be vital to understand the overall environment on the ground of who is who and where they stand before moving forward. It may be a big mistake to write off Libya because of the vicious and evil behavior of a few when the majority of the country could benefit. But we need to be sure.
However, dropping Libya as a place to help may end up delivering it to the extremists and that is a very bad idea.
There is another side to the Walmart story. What about all of the small mom and pop stores, green grocers, kiosks and others in Libya who may be put out of business due to the Walmart. Many of these have been put out of business here. How would Libyans react to being put out of business by a massive American company?
On the other hand, if Walmart and other US companies take the leap into the new North Africa they could help develop countries and their people while at the same time making serious profit. However, the Walmart model may not be the best one to start out with.
Indeed, there are risks. Normally in such situations the only companies that come in are the oil and gas companies or other major energy companies that have vast experience working in conflict and post-conflict zones.
Maybe President Clinton was trying to get a discussion and debate going in US business communities as well as in the government about how the US could help the economies of these hurting countries in a (hopefully) post-conflict environment. This is an important thing to consider even if the situation looks dismal from afar.
Developing the economies of these countries will be far from easy and there are likely to be many bumps along the road – some of them very steep and risky. However, with the right incentives and the right risk management, it may be possible to make a difference and to do well by doing good.
Perhaps there could be some tax breaks and free land to build on in return for training and educating Libyans and increasing the percentage of Libyans working at the Walmart or other such stores. There will need to be some give and take. I know that the tax breaks and free land (for a limited time of perhaps 10 to 20 years and then the lease fees kick in) are contentious. But Libya needs to move forward and get its people — especially its young people — employed. Maybe the United States could improve its reputation in the region by doing just that.
You make more friends by creating jobs than dropping bombs. Developing a better security situation in a region via real strategic thinking can involve a lot more than just the military and the State Department. Sometimes businesses can make a big difference.
However, many businesses need to be sure that they are not going to walk into mine fields before they move forward with serious investments.
There is a certain menace attached to Libya now. Violent extremists created that. Should we give up on the rest of the Libya because of the people who want to destroy it rather than build it up?
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Shadow banks may control about 25 to 30 percent of the word’s financial system. They may be about 50 percent of all banking assets in the world. I say may in both of those sentences because it is hard to tell how big this financial sector is. The United States may [...]]]>
Shadow banks may control about 25 to 30 percent of the word’s financial system. They may be about 50 percent of all banking assets in the world. I say may in both of those sentences because it is hard to tell how big this financial sector is. The United States may make up about 40 to 50 percent of all shadow banking. However, shadow banking is spread throughout the world.
Shadow banks are not as regulated as regular banks. They also go about gathering capital for lending in a different way than regular banks. They often securitize assets such as commercial and residential mortgages, corporate bonds, consumer loan packages, and the like. Shadow banks also find other assets and derivatives of those assets to back up their securitized debt instruments. Many use US Treasury bills and other sovereign debt (the debt instruments of many nations and their equivalent of Treasury bills, for example) to act as risk mitigation and collateral in the “loan” making process.
Shadow banks also rely on something called the repurchase (repo) markets to liquefy debt and other assets in the short run – even though most of these assets are long run ones, like mortgages and long term bonds. Simply put, repos are a way to quickly pay off short term debts and also to get some of the debt off the books of the shadow banks either overnight or even for longer periods.
Ok, this is all very complicated. Frankly, for the shadow banks that complexity has protected them over the years. It has also led to some very big crashes because the people who should have understood what was going on did not. That includes many governments and even some of the leadership of the shadow banks themselves.
So what we have is a large massive part of the world financial system basing its capital on sliced and diced assets with sometimes questionable risk calculations and even sometimes questionable valuations of the assets. How much might it be? How does $40 trillion dollars sound?
The valuation of the assets could be a real problem if there is a war with Iran that gets out of hand and leads to significant damage to oil and gas fields and facilities in the Gulf. If energy prices spike and spike again for the short run, the market could bear that. If the oil and gas prices spike and stay way up in many markets then we have a much bigger problem.
One of the mechanisms of asset destruction in the shadow banking system can be a huge increase in energy prices followed by recessions or worse in many places, including in the already fragile EU, China and the US. Other commodity and goods prices will be affected as well.
Many shadow bank assets are heavily leveraged. Does this sound familiar? Leveraged shadow bank assets took down the US and part of the world economy when the housing market went bust in 2007-2008.
Many shadow banks are heavily into derivatives and even derivatives of derivatives. If the underlying assets of the derivatives collapse due to falling economies then the derivatives collapse along with them.
It is quite possible that under some war and conflict scenarios attached to scenarios of oil and gas prices that the economic impacts of a protracted and quite damaging war with Iran could be magnified well beyond the normal way this is considered.
Shadow banking is huge. It needs to be considered in calculations about military conflict. The losses could be gigantic on the financial markets.
Some shadow banks might benefit from war if some of the sharpies in the shadow banks have already set up derivatives and options as hedges betting on a war. They cash in if the war happens.
Either way some people in the shadow banks could lose. Some could win.
The regular folks lose. The top guns in the shadow banks will drive their Ferraris. The regular people may end up selling apples.
You see, a war with Iran now would be very different than if it happened in 1979. Back then the shadow banking system was tiny. Derivative markets were tiny compared to what they are now. The leverage and risk inherent in sometimes unstable sliced and diced assets in the tens of trillions was just not there.
Is this something to think about? I surely believe so. I am going to look much more deeply into this situation and hope to have more to write about it to clarify and educate, hopefully before possibly catastrophic events take place.
Policy conclusion: take great care and do your homework on the realities of the risks within the world economy before stepping off the cliff toward a potentially very costly war.
To read more about shadow banking try:
]]>It is clear that Syria is getting worse. It is clear that the United States, Russia, China, the Gulf Cooperation Council, Egypt, Israel and just about everyone else can do nothing to retrieve Syria from its inevitable collapse into yet another failed state in the region. There was a time a [...]]]>
It is clear that Syria is getting worse. It is clear that the United States, Russia, China, the Gulf Cooperation Council, Egypt, Israel and just about everyone else can do nothing to retrieve Syria from its inevitable collapse into yet another failed state in the region. There was a time a few months ago when something could have been done.
However, as has been the case in joint international strategic operations in the Arab Spring, even if something is tried it will likely be too little, too late, too disjointed, too disputatious and a real mess.
The Syrian opposition is a dysfunctional lot. Don’t expect too much from them. They don’t trust each other. Frankly, after the Butcher of Damascus has met his fate, which could likely mirror that of Ghaddafi’s or Mussolini’s, the opposition will more likely be shooting each other than talking about how to put the Humpty Dumpty of Syria back together again.
Lebanon looks like an extension of the nightmare. The Palestinian issue will be pulled into the Syrian nightmare. Jordan looks like it is on the edges of it now. Turkey is well into it in its Southeast. Iraq could easily fall prey to the ghosts of its Sunni-Shia divide found in Syria.
The Israelis are focused on Iran, whereas they should really be far more focused on Syria. The GCC states, especially Qatar and to a lesser extent the UAE and Saudi Arabia, have walked right into the Syrian nightmare thinking they could be part of the solution. Even the President of Egypt seems to think he has a solution. Egypt is trying to reconfigure its strategic position in the region. Starting with trying to solve the Syrian problem will likely not be a winning beginning.
There are now tens of thousands of Syrian refugees. There will be more. There could be thousands more killed and maimed before this year is over. The anger, resentment, bitterness and ethno-religious animosities that are developing could be the seeds for more disasters to come in the region. The Balkanization of Syria is almost complete.
The so-called experts should stop asking silly questions about the existence of a civil war. This is beyond a civil war. This is a rolling slaughter.
Al Qaeda is involved it seems. Other extremists are pouring in. This situation may be fuel for the Salafists and other extremist groups in the region to gain more power as well. Syria could also be a rather well-placed safe haven for many violent extremist groups.
But, world leaders, you really must not worry. Don’t stay up at night trying to “solve” the situation. It is too late.
Frankly, the so-called world community failed the Syrians. In turn they have failed the Lebanese, Israelis, Jordanians, Iraqis, Turks and so many others because of how they have dropped the ball on the Syrian conflict. They not only dropped the ball; they watched it roll away as they had meeting after meeting.
Talk is cheap. The blood of the children in Syria is not.
]]>The economy is clearly the most important problem facing Egypt today. Unemployment and underemployment are vast. Tourism has been shattered by recent events and may take a long time to get back on track. Foreign investments have dropped and have even turned to a net outflow from the country rather than [...]]]>
The economy is clearly the most important problem facing Egypt today. Unemployment and underemployment are vast. Tourism has been shattered by recent events and may take a long time to get back on track. Foreign investments have dropped and have even turned to a net outflow from the country rather than a net inflow into the country. Many domestic investors have also become quite wary and are considering leaving Egypt. This is especially true of some of the major Coptic Egyptian and conservative Muslim investors who are anxious about what the future may hold with the rise of the Muslim Brotherhood. The liberal and “secular” investors are about as wary and anxious as some of the Copts. There are some younger investors who see this as an opportunity. Some of the Muslim Brotherhood people are considerable business people and view the anxiety of some as an opportunity.
Even so, foreign exchange reserves are hemorrhaging from the treasury. Most of the government run factories and firms are in dire need of reform, refitting or even shutting down. The economy in general is in need of great reform toward more international competitiveness. If this is not done, Egypt will be in even worse shape in the future. The privatization and structural adjustment programs of the 1990s are looked down upon by many in Egypt due to the massive corruption that was brought along with these programs. However, the last thing Egypt needs now is to go back to the time of Nasser, nationalizations, 95 percent tax rates and the destruction of the business and landowning classes.
Egypt has to find its way to a more prosperous future and the United States and others could be of some help if they become more practical partners for this change. The focus should be on jobs, investment, education, technological change, and the practicalities of getting things done – not on the misty and often unproductive goals of “good governance”. This term has a bad reputation amongst many Egyptians I met during my recent 6 week trip because, they say, the US talked about helping with good governance and really did nothing as Hosni Mubarak and company robbed and oppressed the country. Many Egyptians are also quite suspicious of non-governmental organization (NGOs) in general and governance NGOs in particular.
The US will need to try to develop some sort of relations with the new leadership of the country. In the past, there was little real contact at the strategic or any other level with the Brotherhood. Now the president of Egypt is from the Muslim Brotherhood, even if he said that he quit after he was elected. The new parliament and some of the new cabinet members – and even some of the future military leaders – could be Muslim Brotherhood or at least sensitive to the Brotherhood’s ideas and goals. Improving relations with the Brotherhood should be seen as a practical calculation, not as an acceptance of their principals. Egypt is an important country. We need to keep our relations going. President Mohamed Morsi is an example of the changes that are occurring in Egypt.
Building relations with the Salafists is another story altogether. I would be very careful with this. Their views of the US are dangerous, radical and extremist. Building relations with them should be geared more toward keeping potential enemies close to understand them better. I see very little hope in any real improvement in our relations with the Salafists.
The liberals, “secularists”, Nasserists and many others think we dropped them. Many also blame us for bringing the Muslim Brotherhood to power. Why, they ask, did we not help them more during the most difficult times? This is a tough question that our diplomats and others need to work on to develop future relations with these groups. They are splintered and weak compared to the much better organized Brotherhood, Salafis and others. However, they will be involved with Egyptian politics for some time and should not be discounted as potential future leaders.
The Egyptian revolution and the political churn from it are far from over.
The US has had very good relations with the Egyptian military. Friendships and long term understandings have been developed. The strongest relations we have with Egypt are still with the military even after the changes that lead to the retiring of many senior officers. The military needs to be handled in a more nuanced manner now given the power of the Brotherhood overall. However, the tensions and chess game between the Muslim Brotherhood and the military are not over. Those who think that President Mohamed Morsi checkmated the military with the recent retirements are clearly and plainly wrong. There will be a lot more to this story.
The most important relation that the US needs to develop in Egypt is with ordinary Egyptian people. Our diplomats, business people, professors and others need to reach out more to the regular folks. We need to understand them better and they could understand us a lot better. The farmers in the countryside, the tea people in Cairo and Alexandria, and the TukTuk drivers from all over are Egypt’s backbone.
Regular Egyptians could become very important arbiters for the future of Egypt, especially if a potential “Revolution of the Hungry and Poor” breaks out. If the economy is not fixed quickly, there is a good chance for this. There is another important reason to reach out more to the regular folks: they are mostly decent, good people. The US could help them and help itself at the same time by building more small clinics in the poor areas, building school houses, helping with infrastructure repairs, giving scholarships to poor Egyptians to US schools and colleges, developing cultural exchanges and more. We cannot distance ourselves from average Egyptians anymore.
Egypt is likely going to take on new roles for regional and global issues. Egypt’s relations with Israel are likely to change. This will depend on how the politics of the revolution and bread work out. Egypt’s relations with Hamas, Hezbollah, Iran, Sudan, and many other places and groups that the US considers problematic could also change. We need to understand these changes as they happen and respond in more nuanced and strategic ways than how I think we will.
Egypt will also likely reach out more to China, India, Russia, Brazil, the Gulf Cooperation Council and others to diversify its support. It will likely rely much less on the US than at any time since Anwar Sadat if the Muslim Brotherhood acquires even greater power. President Morsi’s visits to China, Saudi Arabia and more are not just to get frequent flier points and to meet and greet. Morsi’s trips are mostly about diversifying Egypt’s international relations and its sources of economic and political support. The Chinese seem quite happy to oblige and I expect that the Chinese military’s relations with the Egyptian military will also change.
We need to be very careful as changes in the international relations of Egypt develop.
Egypt is an important country in overall US-Islamic and US-Arab relations. We need to move with great care and consideration of not just the first, but also the second, third and fourth order effects of any new moves Egypt makes – and what moves we might make in response. The building of Sunni-Shia tensions may also work into this situation.
Egypt is a relatively poor country with big ambitions. Maybe it is time for the US to rethink its posture towards Egypt as well. Many Egyptians in leadership and others I have met during the 20 years I have been associated with the country have told me about the condescension they have sometimes felt from visiting Americans. The perception becomes the reality no matter what may actually be occurring. Building relations is complex. Rebuilding them during a time of great political and revolutionary flux is even more complex and fraught with risks. We need to send the best, brightest and most intelligent people to represent us.
It is hard to tell where Egypt’s new path is going. What US relations with Egypt will be like in the years to come is anyone’s guess. There will be lots of internal changes in Egypt. There will be many changes across the region as the inherent instabilities and tensions work themselves out or get worse while US politics also evolve.
Fluid and complex situations require nuanced strategic thinking. This is an area where Americans can stand to improve with respect to the Middle East. It is time to develop these skills and understanding in our people or pay the much heavier prices that could be coming our way if we don’t.
]]>I am hearing the drumbeats of war again. They sound so much like the drumbeats of 2002 that I have to wonder whether the old drummers have been brought out of storage to play the same music to a new audience.
This time the drums are directed at Iran. Surely, [...]]]>
I am hearing the drumbeats of war again. They sound so much like the drumbeats of 2002 that I have to wonder whether the old drummers have been brought out of storage to play the same music to a new audience.
This time the drums are directed at Iran. Surely, the Iranian leadership has not done their people any good with their arrogant defiance and bellicosity in the face of potential massive firepower from the other side. They have also made the situation much worse with some of their comments about Israel, the United States, NATO and others. The Iranian outreach to Hugo Chavez and other unseemly dictators has not helped their cause. Nor has their cause been helped by their interferences in Bahrain, Syria, Lebanon and more. Threatening to close the Strait of Hormuz ratcheted things up. Having fast boats play chicken with warships that could take out the entire coastline of Iran has not been a smart thing to do. Being ambiguous and cagey about their nuclear program gives a lot of verbal ammunition to their enemies.
Indeed, the situation does not look good. The increasing storms in Syria, Iraq, Lebanon, northern Saudi Arabia and Southeastern Turkey could whip up even more trouble in the region.
What are the drums calling for? It seems they are calling for ostensibly tougher sanctions on Iran. However, some of them are calling for the sanctions to be placed in the dustbin of history followed by an attack on Iran.
What do these drums tell us about what might happen after the sorties have attacked Iran? Not much. That part of the percussion piece is almost absent, much like “after Saddam” was barely considered since war on Iraq was seen as a “cakewalk”, “costing $100 billon dollars at most”, and a “slam dunk”.
A strike on Iran will not stop at the strike. Iran will respond. It may even respond globally, according to statements from elements of Iran’s leadership. They could easily respond in Iraq, Syria, Lebanon, Bahrain, and beyond. They could have their sleepers go kinetic in Europe, Latin America and more. They could counterstrike on the oil fields and facilities of other Gulf countries.
Iran could help turn the Strait of Hormuz into a battlefield even if they could not shut it down physically. The price of oil could skyrocket to $250 to $350 per barrel. The world could be plunged into a deeper recession than what happened after 2008.
The world economy is fragile as it is. Ask any Greek, Spaniard, Portuguese, Irish person or Italian. Ask anyone in the US who knows about the potential fiscal cliff, and the possible follow-on recession.
The scenarios of this war could work up massive oil price spikes that could end up producing “new” oil price levels in the medium runs if major facilities and fields are significantly damaged. Then there is the potential nuclear fallout from the attack on Iran that so few want to even whisper about, or even know about.
The drums I am hearing are calling for war. Those playing them don’t seem to want to think about what is on the other side of an attack or, even worse, what a war that protracts and pulls others into it could look like.
Sunni-Shia tensions point to the chances that many could be pulled in. Other factors on the ground in Iran, other Gulf States, the Eastern Mediterranean and more point to a potential disaster than many could hardly imagine at this moment.
How many of those who pushed for war imagined that we would still be in Afghanistan today? Did they predict then, the thousands of lives that have been lost and damaged in Iraq?
War is uncertain. War is much more about fog, blood, pain and shattered lives than armchair strategic thinking. War is about people. It is about young men and women being put in harm’s way and coming back damaged, or not coming back at all.
I am not a pacifist. Sometimes wars are needed. However, I am someone who after decades of studying, living in, working in and worrying about the Middle East and North Africa, can see a potentially massive storm of epic proportions resulting if more missteps are taken.
I cannot sit quietly and idly as the storm builds.
If I don’t speak and write what I believe is the truth to power then I am a failure. I do not intend to be so.
- Paul Sullivan is an internationally recognized expert on security issues including energy security, water security and food security in the Middle East and North Africa. He is an economist by training and a multidisciplinary public intellectual by choice. He is an Adjunct Professor of Security Studies at Georgetown University.
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