The International Energy Agency, western countries' watchdog, was quoted yesterday that "only a protracted and severe global recession would justify a sustained dip in oil prices below" $60 a barrel. Guess what? Ask and you shall receive. A global recession is here. My recent trip to Budapest and Istanbul revealed the paradox and the problem. The large traffic jams to cross the Bosporus illustrated why the global demand for oil has been pushed beyond $100 a barrel. But where did all of these people with incomes of less than $10,000, a quarter of the US, get the money to buy cars? Simple. They borrowed it.

 Income growth, increasing bank credit, and remittances from abroad have driven consumption booms around the developing world. According to Alan Greenspan there have been real estate booms in 40 countries. A Russian bank has issued over 80,000 credit cards a day. But this lending in emerging markets is as vulnerable to a down turn as it was in the US. How many languages can you say subprime?

As global credit markets contract, the cracks are starting to show. Kazak banks owe $40 billion. Russian banks owe $140 billion. Default rates are soaring. Trading in Hungarian government bonds stopped twice in the last two weeks. China’s stock market is off 36%. Its real estate market is crashing. Developers and real estate agencies are closing their doors. The shoe industry in Guangdong is down 40% since 2002 and 17% of textile factories lose money.

 The global boom of the past five years that has caused the rise of gas prices was fueled by cheap credit and it is now running on empty. As the global expansion turns into a global contraction, the demand for oil and other commodities will lessen along with the high price, but at a large cost.

 William Gamble

 Author: Freedom: America’s Competitive Advantage in the Global Market