The Real Reason Why America Might Default on Its Debt

Yesterday, the Republicans in the House of Representatives engineered a vote against supporting the U.S. role in the NATO operation to assist the rebels in Libya. The same Republican Party that avidly supported George W. Bush's arrogant military idiocy in Iraq just gave aid and comfort to Muammar Gaddafi, a monstrous dictator, sponsor of terrorism, and protector of the Lockerbie bomber. America's NATO allies with military personnel over the skies of Libya must be mystified by the spectacle of America's war-making, union-breaking Republican Party all of a sudden trying to put flowers into rifle barrels. Good thing President Obama is insisting on a troop drawdown in Afghanistan because the Republicans just gave our NATO allies with troops in Afghanistan a convenient pretext for pulling out ahead of us. If we won't support NATO in Libya, why would NATO support us in Afghanistan?

The real reason for the Republican kidney punch is, of course, the extreme partisanship of today's politics. Whatever the Obama administration does, the Republicans oppose. Whatever the Obama administration doesn't, the Republicans advocate. Substance no longer matters. Style no longer matters--the last politicians with any style were Reagan and Kennedy. The only thing that matters is opposing the opponent. The Republicans claim to be seeking adherence to the War Powers Act of 1973. But President Clinton engaged in a much more active air bombardment during the Kosovo War without authorization under the War Powers Act.

A much, much larger issue than Libya is raising the debt ceiling. A default by the United States would be 22.5 on the Richter Scale compared to the 9.0 of a Greek default. But talks between Democrats and Republicans aimed at resolving the debt ceiling problem have broken down. Today, the President is reaching out to Senate leaders in an effort to restart the dialogue. But the right wing hot heads in the House will surely do their utmost to prolong the confrontation. After all, compromise would involve doing something other than oppose, and today's right wing Republicans are a one-trick dog that only growls and drools.

Don't be too quick to sell off your Euro-denominated investments. Even though the Euro bloc is courting longer term financial disaster by kicking the can down the road, its member nations are acting with a modicum of maturity in trying to find short term respite from the Greek sovereign debt crisis. They acknowledge that they're approaching an abyss and are actively trying to avoid belly flopping into it. The Republicans in the House want to use the debt ceiling problem as a vehicle to solve the federal deficit problem, all without any tax increase. This is like trying to send astronauts wearing only gym shorts and t-shirts to Mars on tricycles. The cost of this unyielding right wing onrush into tomfoolery would be the mother of all financial crises. But, given yesterday's House vote on Libya, that just might happen.

Losers and Winners on the Ides of March

They weren't kidding about the Ides of March.

LOSERS. This is a day for losers.

Japan. With the 9.0 earthquake (about as big as they come) and the 30-foot tsunami that followed, Japan got walloped. Now, the rising risk of reactor fuel meltdown has the Japanese nation turning to its nuclear industry and asking, "Et tu?"

Industrialized World. Japan is deeply integrated into the world economy, as an exporter and importer. The ramifications of the soon-to-come earthquake-driven recession there affect crucial industries around the globe, including electronics, automotive, insurance (obviously), petroleum, and banking. With China slowing its economy to rein in inflation, Europe turning to austerity as it struggles with its currency crisis, and America getting by on the methadone of Federal Reserve easy, easy money, there's not a whole lot of horsepower in the international economy to pick up the slack left by Japan. The stock markets are starting to figure this out.

Nuclear Power Industry. While some Japanese nuclear power plant workers may, in effect, be committing hara kiri trying to contain meltdown risk, nuclear power projects worldwide are being curtailed and cut. When you play around with stuff that has real potential for destruction, no amount of engineering can guarantee safety. That's true of nuclear energy, and it's also true of financial derivatives.

Libyan Rebels. With the world's attention diverted to East Asia, the Libyan rebels' chances for resupply and a no-fly zone from other nations are fading rapidly. The U.S. buys little or no Libyan oil, and has no vital national interest there. Britain and France were quick to advocate a no-fly zone, but they know that only the U.S. Navy has the resources and power to actually impose one. That means America would have to bear the burdens and take the casualties. The U.S. government is clearly stalling for time--its demand for UN authorization is a transparent pretext for delay. Maybe the Obama administration knows something it can't really share with the rest of us, yet. Things in the Persian Gulf may be worse than the news services have reported. Saudi Arabian troops have rolled (in unmarked vehicles) into Bahrain, in order to help the Bahraini government stay in control. Things in the Persian Gulf could be deteriorating, and the U.S. military may have to keep its powder dry in order to retain the option to play a role there, where the U.S. has a large vested interest.

Barack Obama. The President hesitated to join up with the Libyan rebels, and they now think he has a secret pact with Gaddafi. Obama has called on Gaddafi to cede power and leave Libya, so Gaddafi knows that Obama isn't on his side. No matter who wins in Libya, America and Obama lose. The Japanese nuclear crisis has blown up Obama's nuclear power policies, and a recession in Japan could put pressure on the administration to apply more fiscal stimulus (i.e., engage in more deficit spending, which isn't exactly politically trendy these days). The perhaps not well publicized unrest in Bahrain and Saudi Arabia, along with a deteriorating situation in Yemen, put the Obama administration in the position of wanting to side with oppressive monarchs in order to protect U.S. interests. Even if these monarchs survive, America's already compromised image in the Arab world will suffer.

Republicans. International events are taking front page news coverage away from Republicans and their domestically-focused agenda. They can't easily criticize President Obama's foreign policy, which is strikingly similar to George W. Bush's. They may have to settle for appearances on Dancing With the Stars.



WINNERS. Even in ugly situations, there are winners. That's why you find the most cynical of stock market speculators swarming into select parts of the market when a crisis hits.

Natural Gas and Shale Oil. The NIMBY style controversies over fracking may seem manageable in light of massive radiation releases from Japanese nuclear power plants. Natural gas and shale oil might have to be repriced to cover the costs of reimbursing people damaged by fracking. But the stuff is found in plenitude in these United States, and will surely be a growing source of energy in the future.

Coal. It's not beloved by environmentalists and mining it leaves ugly scars on the land. But America has massive coal reserves and will surely turn more and more to them in the future. Long term, alternative/renewable energy sources may begin to play a major role in America, but for the short and medium term, coal will be definitely be a part of our lives.

Oil Producers. Oil producers, like Venezuela, Russia, Nigeria and Canada, see their fortunes rise. Too bad not all of them are friendly to America.

Iran. Iran gets a win-win here: increased revenues from rising oil prices and more opportunity from the Arab uprising to stir up Shiite co-religionists on the Arabian peninsula.

China and Taiwan. As Japan's economy struggles, Chinese and Taiwanese companies will get a chance to get into high value-added product lines the Japanese have dominated. Semiconductors and high tech automotive components are obvious targets. Look for Chinese automobile companies to try to move up their deadlines for introducing their products to America.

Let's Count Our Blessings

The world is full of trouble, it would seem.

Libya is a free fire zone, with a gonzo maniac leading one side. This could end badly.

Oman is the latest Arab nation to succumb to unrest. The insurgency spreads.

Wisconsin is deadlocked over labor union rights in what has become the political confrontation of the year. Unfortunately, the management side of the dispute is run by a governor who didn't notice that a blogger from Buffalo isn't one of his biggest political contributors. So he probably won't be smart enough to see a good compromise that's right in front of him. He's now threatening numerous layoffs of state employees. The demonstrations in Madison echo the antiwar protests of the Vietnam era. Governor Walker echoes the American officer in Vietnam who reportedly said, "it became necessary to destroy the town to save it."

China is slowing its economy in an effort to control accelerating inflation and the potential for political unrest. This would take away one of the few sources of growth in the world economy.

But things really aren't that bad. Let's count our blessings.

Charlie Sheen tells us he has Adonis DNA. We should be grateful a living deity would share his divine talents on the small screen, at least until those unbelievers at CBS canceled his show.

Bernie Madoff tells New York Magazine that he's a good person. And to think we held such negative views of him. Although broke and in prison, Bernie still has a wealth of shamelessness DNA.

Speaking of shamelessness DNA, Mahmoud Ahmadinejad, President of Iran, recently criticized Arab leaders for their oppressive response to political protests. Even in a house of mirrors, this guy would manage not to see himself.

The Easy Stock Market

The Dow Jones Industrial Average has dropped almost 300 points in the last two days, and oil prices have popped up to $100 a barrel. Gas will reach $3.40 to $3.50 a gallon in a week or two. This, all because unrest in the Arab world has upended the government of Libya, a major oil producer. Libya's erstwhile leader, Muammar Khaddafi, is holed up with several thousand loyal troops. Much of Libya is now in rebel hands, and some military units have abandoned Khaddafi. His survival looks increasingly unlikely. But if his forces are well-provisioned, the fighting could continue for who knows how long.

Libya has no governmental structure (no constitution, no formal process for succession of leadership). If Khaddafi falls, a hundred claimants to leadership could step forward. That would take a while to sort out.

Oil production in Libya is grinding to a halt, and may stay halted for a long time. Other OPEC nations might be able to increase their production enough to fill the gap. But much of the new production would be sulfur-heavy, expensive to refine crude, not the light, sweet, low-polluting crude that Libya produces. And that assumes OPEC would be willing to increase production instead of cash in on the higher prices.

Gas prices have already drifted up 15% in the past six months. At some point, rising oil and gasoline prices, declining real estate values, continued high unemployment, stagnating (or in the case of many public employees, falling) incomes, and cutbacks in state and federal government spending will combine to chill the economic recovery. Whether we fall into recession again, or just idle in neutral, things won't be good.

It's no surprise the Dow fell so abruptly. Today's stock market is bipolar, either delirious with joy or down in the dumps. The market's recent meteoric rise created the conditions for an abrupt pullback. Whether it's easy come or easy go, we have an easy stock market.

Policy wonks on both the left and right will renew calls for energy independence. The programs they recommend will differ. None will be simple or cheap. However achieved, independence will be expensive.

The economic distress caused by volatile oil prices, the 5,000 plus American dead and hundreds of billions of American dollars spent fighting the Iraq and Afghanistan wars, and the need for expensive continued U.S. presence in an increasingly unstable region haunted by seemingly unstoppable nuclear proliferation make the cost of inaction extremely high. That doesn't mean there will be action. America's divided government is struggling to accomplish anything. Thus far in 2011, it's mostly followed past policies of expanding the federal deficit by cutting taxes and increasing spending. A gargantuan problem such as energy independence may be impossible for the pushmi-pullyu in Washington to handle. Save your nickels. Cash money will command a premium as uncertainty grows.