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Sunday, August 10, 2008

Georgia and the World Economy

It has taken a mere four days for outside Russian forces to chase Georgian forces from breakaway regions of their own country and put those territories firmly under the thumb of Moscow. The motivations of Russia in pulling off this power play don't seem to be much of a mystery (strengthening influence and control over territories hosting pipelines crucial to Russia's energy sector). The failure of American media to explain the danger of Russia's intervention and the reasons for America's inability to adequately respond to it aren't much of a mystery either. Our economy's health is so precarious that no government or market players want to risk spooking the public any further by connecting the dots.

* a lame-duck US President is spending his last August vacation attending the Olympics and visiting our bankers (I mean friends) the Chinese
* an incompetent US Congress has adjourned for their August vacation to campaign and blame their inaction on the "other guys"
* public and private debt in America continues to skyrocket due to an unfunded $120 billion per year war, high energy prices and a slowing economy
* as banks attempt to stop additional mortgage lending losses by cutting HELOC funds, consumers simply shifted their borrowing to high-interest credit cards, to the tune of $14.3 billion in June 2008, nearly DOUBLE the $8.1 billion added in May (#2)
* much of America's "boots on the ground" capability has been ground to dust and rust by the five year deployment in Iraq
* The US banking system has nearly collapsed several times WITHOUT any true external shock
* Europe's economy is as precariously positioned as the US economy due to bad US mortgages that were securitized and resold worldwide
* Europe's energy markets are highly dependent on Russian oil and eastern European pipelines like those in Georgia
* Russia has already demonstrated its willingness to play hardball with energy and pipelines to support its interests by disabling a pipeline in Belarus in 2007

The situation facing the markets as of August 10, 2008 is vastly different than the one exactly one year earlier. On Friday August 10, 2007 the US credit markets literally froze up with no discernable external input and required a MASSIVE intervention from the Federal Reserve to temporarily right the ship -- an intervention LARGER in size than that required after the attacks of September 11, 2001. (#1) Today, exactly one year later, world markets have had some very concrete problems to consider for an entire weekend before international markets open for Monday:

* a likely direct spike in crude prices due to supply concerns from the situation in Georgia
* secondary spikes in crude prices as speculators react to the direct spike
* confirmation that an overextended US military cannot act to protect energy interests so crucial to our short-term health in an already teetering economy
* possible confirmation that America's crippling dependency on Russian / Chinese purchases of Treasuries to keep our economy floating is weakening our already damaged moral authority in the world

The recent drop in oil prices from $145 to $115 has produced elation for consumers and some economists who hope falling energy prices will help revive a stalling economy. For investors in commodities, it's probably produced a few gray hairs and heart attacks while tempting them into larger positions in energy hoping for the next updraft. I suspect the truth is that wildly fluctuating energy prices won't be good for anyone and that they are really a canary in the coal mine signaling the presence of much larger problems.

* a one or two-year reduction in energy prices will discourage long-term investments in alternative energy / conservation technologies, worsening eventual problems 10-20-30 years out
* any sudden spike in energy will encourage speculators who have already lost billions in mortgages to "catch up" by betting big on oil, which will cripple world economies in the short term if prices stay up or further bankrupt many institutions if the speculators can't drive the market
* billions in speculative bets sloshing around Wall Street will further destabilize the core of our financial system, already at its most vulnerable since 1929

With all these problems converging, it seems rather puzzling to see Bush on vacation (as much as any President is "on vacation"), sitting in a basketball arena (paid for in no small part by American interest payments on Treasuries held by China) taking in some hoop action. After all, Vladmir Putin saw fit to head home early to take care of the Russian end of the crisis in Georgia.

Then again, there seems to be a precedent. I wonder if "Putin determined to recapture Georgian pipelines and spook world economy" appears anywhere in the August 6, 2008 Presidential Daily Briefing?


#1) http://watchingtheherd.blogspot.com/2007/08/financial-markets-running-on-empty.html

#2) http://www.bloomberg.com/apps/news?pid=20601087&sid=ap7UVL.N6UAM