The Middle East is not immune to the problems around the world and to some degree it’s probably more vulnerable as these countries have not faced a crisis in a while. Thus they are likely to have more excess fat around the edges. We are finding from headlines that Kuwait is having a bank crisis. Meanwhile Dubai, the city of construction cranes, will likely to soon be called the city with half finished projects as hundreds of billions in construction projects are canceled due to a slowdown in the economy.
So why do we care what is taking place in the Middle (of nowhere) East? Two reasons:
- Oil. Our “friends” in the Middle East cannot afford to cut their oil production to support high oil prices. They have billions of dollars of debt coming due that they have to refinance. Though the logical thing to do to maximize the value of their reserves in the long-run (long run is the key word) is to cut oil production, they cannot afford to do that as they need oil revenues (any revenues) NOW!
- Countries of the Middle East will not big buyers of US Government debt, as they’ll need money at home. Another natural buyer of US Treasuries is going away.