Last summer massive fires in Russia coupled with crop damage in Pakistan due to flooding created the conditions that lead to the downfall of the Tunisian and Egyptians regime, a brewing civil war in Libya, and unrest among minority Shia on the west side of the Persian Gulf in Bahrain and Saudi Arabia.
The full effect of yesterday’s massive tsunami will not be understood for months, but it’s already clear that the Japanese have a massive rebuilding job ahead of them.
Our second, fourth, and eight largest sovereign debt holders are all under stress due to natural disasters. Japan and Russia’s troubles are direct, while the troubles in Persian Gulf states are a follow on from rising wheat prices.
All of this adds up to a world in which our ability to finance debt may be dramatically curtailed.
Japan, our second largest sovereign debt holder, just took a massive hit with the tsunami of March 11th. There are no estimates yet but comparison to other disasters seems appropriate.
Japan, our second largest sovereign debt holder, just took a massive hit with the tsunami of March 11th. There are no estimates yet but comparison to other disasters seems appropriate. Katrina’s $125B in damage came from storm surge roughly the same size as the tsunami in a much, much smaller area. There is a possibility that the damage in Japan may eclipse the $882B in treasury bills they hold. Domestic repair work will obviously take precedence over saving.
The combined oil exporting Persian Gulf states are our fourth largest debt holder. Saudi Arabia is the largest and they face a restive Shia minoirity in their northeast. Bahrain, home port for America’s Fifth Fleet, is a Sunni monarchy with a Shia majority. The recent distribution of $2,700 per family in Bahrain does not seem to have quelled unrest. Saudi Arabia took another path, dispatching 10,000 troops to their troubled provinces and publicly suggesting they’ll “help” Bahrain if they can’t get things under control there.
Russia is our eighth largest sovereign debt holder. They avoided internal discord by embargoing their wheat harvest; they are internally self sufficient in both food and energy. If the drought of 2010 is the new normal due to climate change the food stress that triggered the fall of governments in North Africa may also be the new normal, and that internal stability could be endangered.
That same internal self sufficiency eludes both Japan and the Persian Gulf states. Japan imports 97% of their fossil fuel requirements. Saudi Arabia is abandoning their domestic wheat production program, having badly overdrawn their aquifers.
One of the revelations of Wikileaks is that Saudi Arabia’s oil reserves are overstated by 40%. Their largest oil field, Ghwar, appears to be in terminal decline. What we see in North Africa now will spread, the only questions are how far and how fast.
We have long enjoyed a unique position, with our currency being the means by which global trade debts are settled. Our sovereign debt had been peerless for the last century, but now there are disturbing signs.
This piece on iStockAnalyst regarding a February 2010 treasury bill auction is fairly accessible and the particulars are grim. A record setting purchase by small buyers, a record percentage of the offering ending up in the hands of the Federal Reserve, and a record failure of those foreign purchasers indicate that small investors are scared and retreating to the perceived safety of our sovereign debt.Large scale investors are expressing their fears about our overall debt quality.
Things simply can not continue as they are. We can’t be sure whether energy or climate will trigger a debt crisis but it will be one of the two. The points we need to consider area:
1. We need to envision what might happen if our ability to borrow is dramatically curtailed. The troubled auction referenced above involved large scale foreign buyers purchasing just 70% of the norm. Frugality is needed and the old, the sick, and education for our young are neither the right place nor large enough areas to cut in order to obtain the needed savings. Our massive military expenditures are the largest, most obvious target.
2. The Bush era tax cuts yielded not the promised growth but instead a massive bubble with all of the attendant corruption that easy money brings. The majority of Americans finally understand that Reagan’s theory of trickle down economics is code for the wealthy robbing the middle class. They will demand action on this, a movement we now see starting i
3. Our tax coded must not only produce revenue, it also needs to foster the changes we need to face a future of declining oil production and increasing climate volatility. Fossil fuel subsidies should be stricken at once. An advanced renewable tariff for electricity would provide stability for wind and solar equipment manufacturers. A national strategic rail electrification program could cut oil usage nearly 40% and our economy would grow 25% due to the stimulus that would coem from rebuilding of our long haul and interurban rail.