- The Washington Times - Wednesday, October 29, 2008

When the U.S. economy catches cold, the rest of the world gets pneumonia. That’s because much of the wealth of the rest of the world depends on selling stuff to us, and/or on investing in our economy.

The cold we’ve caught from the subprime mortgage crisis is pretty serious. As of Oct. 22, our stock market was down 40 percent for the year.

But, as the erudite cynic who writes for the Asia Times under the pen name “Spengler” notes, it’s a lot worse almost everywhere else. Brazil’s stock market is down 59 percent; China’s 62 percent, Russia‘s 72 percent. The Nikkei, the Japanese stock exchange, closed Monday at its lowest level in 26 years.

The purpose of the $700 billion bailout bill was not to prop up the stock market, but to thaw credit markets. The health of these are measured typically by the LIBOR, the London Interbank Offered Rate, the rate of interest at which banks loan money to each other. The LIBOR for three month loans fell last week to 3.535 percent, down from a peak of 4.819 percent on Oct. 10, but higher than the 2.816 percent it stood at before the stock market meltdown.

Americans have to pay more interest to borrow money now than we did before the crisis began, because lenders want more protection against possible defaults. But the price of default protection is much higher for what used to be called “emerging” economies, and what might more appropriately now be called “at risk” economies. With LIBOR at 3.5 percent, Turkey has to pay about 11 percent to borrow dollars; Russia 15 percent, Pakistan 30 percent, Spengler noted.

The schadenfreude (pleasure at the misfortune of others) our enemies in Russia, Iran and Venezuela experienced when our stock market melted down has been replaced with fear as the price of oil has sunk with it. Totalitarian regimes tend to mismanage their economies. Iran and Venezuela have nothing going for them except for the sale of oil, and they need high prices for it to keep their troubled economies afloat.

According to Mohsin Khan, director of Middle East and Central Asia at the International Monetary Fund, Iran’s “break-even price is $90 a barrel.” Deutsche Bank estimated Venezuela needs an oil price of $95 a barrel to keep its budget in balance. Oil prices fell to near $60 a barrel Monday, with further declines considered likely. If they stay at this level for some months, the potential for civil unrest in Iran and Venezuela is high.

Desperate times can cause desperate men to do desperate things. The global economic crisis swiftly may become a national security crisis of a magnitude we haven’t seen since World War II.

Spengler thinks the financial crisis will push already troubled - and nuclear-armed - Pakistan further toward radical Islam. Turkey, heretofore the most peaceful, democratic and pro-Western of Islamic countries, also will drift towards the dark side.

By far the most dangerous wild card is Iran. The ethnic Persians from whom the rulers come are a minority in country where most of the other minorities would rather affiliate with some other country - the Azeris with Azerbaijan, the Kurds with Iraqi Kurdistan, the Ahwaz Arabs with the Iraqi Arabs on the other side of the Shatt al-Arab. And the mullahs are unpopular with most of the ethnic Persians.

While those connected to the regime have siphoned off some $35 billion in oil revenues, most Iranians live at a subsistence level. They are able to make ends meet only because of massive subsidies for food and fuel - subsidies that will be trimmed or ended altogether if oil prices remain low. Unemployment and inflation exceeded 30 percent before oil prices plummeted. The mullahs may conclude the only way to keep from being overthrown is to seize the oil resources of their neighbors in Iraq, Kuwait and Saudi Arabia (whose oilfields are in the predominantly Shia area along the coast).

If the mullahs regard the new U.S. president as weak and inexperienced, they may regard the rewards from such a reckless gamble to be worth the risk.

Jack Kelly, a syndicated columnist, is a former Marine and Green Beret and a former deputy assistant secretary of the Air Force in the Reagan administration. He is national security writer for the Pittsburgh (Pa.) Post-Gazette.

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