The summer of economic discontent

There is no such declared war waging that we can call an economic war with full confidence, supported by convincing evidence. Yet, we all feel it and no matter what lines one traces on its charade, one ends up with a vexing image. 

On one day two weeks ago, a black Monday (déjà vu), stock prices in the three major Chinese stock markets dropped drastically by 7 per cent. The shock resonated in the rest of the world markets.

The Chinese authorities held their breath, lowered interest rates and injected $20 billion-equivalent of yuans in their wavering markets.

The huge losses incurred on Monday began to show shy signs of recovery on Tuesday, Wednesday (August 25), and kept rising until the end of dealing hours on Friday.

That upswing trend was not meant to last. The following Monday, prices of stocks, major commodities (oil) and gold went down again. The trend continued until, September 4, with no sign that it will ease off.

Two countries emerged from the nosedive taken by the prices paradoxically stronger. 

One is China, which demonstrated, at great loss, at least in book value, that it can afflict the world economy if its own health relapses.

The other is Saudi Arabia. 

By refusing to cut down its oil production in order to maintain its market share, the price of oil kept going down.

The biggest losers as a result of the decline in oil prices are Venezuela, Nigeria, Russia, Iraq and Libya. The last two are already loosing by not producing.

Venezuela and Nigeria are borrowing and running huge budget deficits.

Russia is watching with apprehension its foreign reserves declining and its currency depreciating.

Naturally, the GCC countries stand to lose. The richest four GCC economies cannot, at varying degrees, sustain for long these losses, which are eating out their stash of foreign reserves.

Yet, one must remember that Kuwait, the UAE and Qatar keep relatively small amounts of reserves with the central monetary authorities. By contrast, Saudi Arabia has over $500 billion with its monetary authority.

The first three, especially the UAE, keep most of their reserves in wealth assets run by sovereign funds.

As such, a Saudi loss would be much less than the loss of the other three. The question, however, is how long can this economic war be sustained internationally.

The meeting that took place on Friday between King Salman and Obama at the White House dealt with oil prices without declared results.

Obama’s prior visit to Alaska had underscored the need to control this production. 

Keeping oil prices down not only contradicts that, but forces the US Treasury to pay large subsidies to shale oil producers.

Oil prices are now low, but most of the world economies are in recession or slowed down.

Spiting China, Iran, Venezuela and Russia can only go to a certain limit. If the current economic war continues, we are in for a sharp decline of the world economy.

The writer, a former Royal Court chief and deputy prime minister, is a member of the Senate. He contributed this article to The Jordan Times.