The economy of Lebanon is collapsing

Here is the opening:

Most parts of Lebanon are receiving no more than two or three hours of electricity a day. An incoming flight at Beirut’s airport had to abort a landing this month because the lights on the runway went out. The traffic signals in the capital have stopped working, adding to the congestion on Beirut’s already chaotic streets.

These are among the latest symptoms of an economic implosion that is accelerating at an alarming pace in Lebanon as its government, its banks and its citizens run out of foreign currency simultaneously.

And:

The Lebanese pound has lost over 60 percent of its value in just the past month, and 80 percent of its value since October. Prices are soaring and goods disappearing.

Bread, a staple of the Lebanese diet, is in short supply because the government can’t fund imports of wheat. Essential medicines are disappearing from pharmacies. Hospitals are laying off staff because the government isn’t paying its portion, and canceling surgeries because they don’t have electricity or the fuel to operate generators.

And:

Newly impoverished people are taking to Facebook to offer to trade household items for milk. Crime is on the rise. In one widely circulated video, a man wearing a coronavirus mask and wielding a pistol holds up a drugstore and demands that the pharmacist hand over diapers.

“Lebanon is no longer on the brink of collapse. The economy of Lebanon has collapsed,” said Fawaz Gerges, professor of international relations at the London School of Economics. “The Lebanese model established since the end of the civil war in 1990 has failed. It was a house of glass, and it has shattered beyond any hope of return.”

And:

Lebanon’s Western allies long ago made it clear that they won’t help out until the government undertakes efforts to reform the corrupt and bloated public sector. An $11 billion package of loans and investments has been on offer since 2018 — on the condition that the government undertake some limited changes. It hasn’t.

And if you had any doubts:

Staggering amounts are now missing from the banking system — perhaps as much as $100 billion, according to government figures.

Three-quarters of the deposits in the entire banking system were denominated in U.S. dollars, and many ordinary Lebanese may have lost most or all of their savings, said Jad Chaaban, an economist at the American University of Beirut.

Here is the full article by Liz Sly.

Comments

Story makes at most half sense.

No bread on account gummint can't fund imports of wheat?

People wanna trade or steal stuff, so there must be stuff.

Sounds like a huge gummint deficit, financed by loans from central bank, plus price controls.

Been there; done that. Nothing new.

Central bank subsidizes the failing flagship companies, taxes the middle class for the effort, then economists lie about us telling us the seigniorage tax is free money, then we broke and in serious trouble. When seigniorage taxes run out, may as well steal deposits. Sounds like most central banks.

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Missing from the excerpt: any mention of Iran.

Rich,

Wrong. It is there implicitly in that the Gulf Arab nations, long financiers of Lebanon, have cut back because of influence there of Iran-backed Hezbollah. That is the only link to Iran.

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Maybe the Syrians can take over the country again.

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2019 deficit: 11.2% of GDP
Total government debt: 140% of GDP
Inflation: 17% per year

Who could have possibly seen this coming except for literally everyone ?

The high -- now hyper -- inflation rate is new. It was around 1-2% last year. They even had a quite long and disturbing period of deflation around 2015.

The government defaulted. No default, no inflation.
We have not defaulted, yet, and we are now in a semi permanent deflation.

Let's see... if most of the US debt is 10 years or less then the interest rate on that averages under 3%. Wow, the thought of the government inflating that away is truly terrifying in a US context. I mean, not as terrifying as a virus that kills 0.7% of people that contract it, but I could still see people losing sleep over it.

Nixon did it, so did Roosevelt, and many other regimes in the USA, one way or the other.

How much inflation did we suffer on the Nixon Shock? It peaked at 15% but by 1984 we had repriced it all and were in a long term disinflation.

The goal is quite modest, do it half as good as Nixon and keep the peak inflation down to 7%. It seems to me that, among mathematicians anyway, the theory has advanced fa enough to do a more stable default on say, a third of the debt over 10 years. I mean, we are supposed to be a bit smarter about it as time goes on, but maybe not, maybe we are regressing.

Right now we are in a nightmare, government only functions if there are enough Zombie sectors willing to pay the seigniorage tax. Do we really want a central bank which taxes via the right to coin?

Inflation was broken by tight money policies, specifically high interest rates.

Try raising rates today. The government debt is 26 trillion, with a good chink of that in short-term debt instruments. For every point of interest raised, when the debt is converted will cost the U.S. an additional $260 billion in debt servicing costs. Raising interest enough to break 15% inflation would bankrupt the government.

That ship has sailed, The government is flying us into an economic coffin corner while using up all the tools that could get us out of it.

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Without actual eyes and ears on the ground, chart readers wouldn't have seen it coming. The government debt and inflation spikes happened recently. Numbers look smooth until they don't.

https://tradingeconomics.com/lebanon/inflation-cpi
https://tradingeconomics.com/lebanon/government-spending

When’s the last time Lebanon’s debt to GDP was under 100%?

When’s the last time GDP deficit was under
the GDP growth rate, and no, remittances don’t count as growth ?

It was a house of cards for years.

Budget deficit *

Tldr the deficit was financed via capital flows, this was always going to end in tears

Yup and not just remittances. They depended on a lot of outside money including France, Saudi Arabia, and Iran but all those countries aren't as financially strong as before. The boycotts coming from the GCC countries against the Hezbollah led government adds more pain on the margins. The massive collapse in oil prices hurts the entire Middle East including Lebanon.

War with Israel takes money away from productive use and the Syrian civil war next door created a refugee population that is now 20% of Lebanon. That's a lot of extra mouths to feed and forces them to rely on foreign capital and outside trade. Domestic production hasn't caught up yet.

A shitshow for sure but Lebanon is a country with an amazingly resilient population given all these burdens. I'm optimistic like Taleb on Lebanon. They are building anti-fragility.

https://medium.com/@nntaleb/lebanon-from-ponzi-to-antifragility-c9867eb71998

They've been building it for 40 years now. I'm sure the good times are just around the corner.

Good luck with that.

+1, this is what the anti-fragility they've built looks like. To some degree anti-fragility is about redundancy and self-reliance. It doesn't look like they've been successful.

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I had been paying little attention to Lebanon's economy; I'd assumed that since the end of its civil war and the various aftershocks that it'd been doing okay but not great.

But the symptoms described in the post make it sound like the economy's had economic mismanagement of near-Zimbabwean or Venezuelan proportions inflicted on it.

The events that you describe could badly hurt any economy so they might be the true source of Lebanon's latest economic ills.

Or is it the case that Lebanon's economy truly is epically mis-managed, and those events have merely provided the tipping point that exposed the rotten core of Lebanon's economy?

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But living costs have been forced way way down by forcing business labor costs way way down.

But profits of successful businesses are really really high.

Aren't those the keys to high GDP growth?

“But profits of successful businesses are really really high.“

Tautology alert.

Yeah, but... When something mundane -- like poultry production -- ends up being the source of exceptional profits it's an indicator of corruption or at least a distorted economy. (These two things generally go together.)

You would not have trouble pointing out a single example of a non-distorted economy, would you?

Fun fact: in Vanuatu, passport sales to Chinese make up 30% of government revenue.

NZ poultry is distorted. US poultry is a Klein bottle.

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What is the root cause of this concerning state of affairs? The White Man's War on Black People in America? Slavery? Brutal Oppression of people of Color? Covid-19? Trump's failure to solve the COVID-19 hoax problem? Narcissistic American's refusal to mask up? The Jeffrey Epstein cover-up? Failure to embrace and celebrate everyone's gender identity? European colonialism? Who is to blame? Americans or White Folks in general? Christianity? White Police? Come on, tell me who to blame!

Mostly Hezbollah.

Mostly Syria.

30% Syria, 15% Hezbollah, 55% an official factional spoils system for a government where the whole economy in effect goes through the government. With each faction pointing at the others and screaming "Factionalist!!". The more Western capitalist of the elite who would have liked to move to a more rational economy point at the Syria/Iranian influence emboldening the Islamic 'mass', but their proposals never gave up their fingers in the pie while asking others to do so.

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They’re 135th worldwide in COVID cases per capita so they should obviously be used as a model of success. Mission accomplished. Obviously.

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It is stated their economy is collapsing because of no foreign dollars flooding the country but we all appreciate another case of conservative victimhood. Not everything is about you so don't be so fragile :)

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Wilmer, I like your comment.

I recently had a small accident with my bike, a few scratches and bruises. A friend suggested jokingly that I needed a lawyer. I told him, “I will give you the most un-American of responses: it was my own fault.”

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Lebanese have a reputation for being incredibly successful business people ... outside of Lebanon.

Why the decline at home? Did their colleges and institutions of learning replace entrepreneurship with Grievance Studies?

Because smart people don't try to do business in areas where corruption is rampant. They go to places where they can do business. The people who stay behind are those who think they'll get ahead being corrupt.

Best comment so far.

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War, occupation, and extremism

Read an overview of Lebanese history since 1980. It's hard to pass your exams when there are bombs going off. It's not just history. My young Lebanese friends go pale and quiet when I ask them about growing up there. Only the hardcore return to live there again. Life is much better in the United States.

Islam, in one word. Islamist supremacy, in two words. Partisan, divisive Muslims, in three. Such was the nation from civil war forward. Today, reports are too unclear to say it’s so simple.

Oh. And libertarians have been warned: Lebanon is what anarchy looks like.

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Austria will pay too, with blood

Lanza can't save the libertarians the christians are pissed

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Crony capitalism seems to be the rule in middle East and Arab countries ( except Israel ), rather than getting ahead by performance and competition.
Lebanon looks like the worst case of this right now.

Wasn't that the trigger for the Arab Spring, the persistent economic privileges afforded to well connected elites at the expense of the large majority without political connections?

Is Israel being bankrolled by the US taxpayer is not crony capitalism to you? I'd imagine any country would do well with US money rather than guns, arms, and war!

I think it may be cronyism on the American side. It's a political decision ( same as aid to Egypt/Jordan) but yes it's influenced by the defense and Israeli/Jewish lobbies) as it directly benefits them

There is cronyism (and corruption) in Israel but it's a matter of degree I don't believe it rises to the level seen in Arab countries.

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U.S. aid to Israel is about 1% of Israel's GDP. We could stop today and nothing would change.

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"except Israel": keep the jokes flowing, Cat.

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I mean they took in Carlos Ghosn the epitomy of above the law cronyism.

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Atlas shrugged, book III.

Soon to be released in a theater near you.

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I can't believe anyone is offering them $11 billion. In the same way I can't believe the West gives a special UN agency for the Palestinians over a billion a year so that they can blow our airplanes up.

I would hope a more reasoned offer would run something like "Not one cent until half a dozen people are hanged for a few suicide attacks - especially on the Marines"

Maybe for Trump's second term?

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Why would you not have a fixed exchange rate/dollarisation if your economy is so dependent on imports?

Fixed exchange rates are usually a terrible idea but in this case it seems better than the alternative.

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What's happening in Lebanon has to be viewed in the context of the broader sectarian conflict between Shiite and Sunni Muslims and our own conflict with Iran. Lebanon's Muslim population is almost evenly divided between Shia and Sunni, but with help from Iran the Shia side, represented politically by Hezbollah, has effectively run Lebanon for years. Now, with the Trump administration all but declaring war with Iran and having imposed crippling economic sanctions against Iran that have dried up Iran's assistance to Hezbollah in Lebanon, and with Saudi Arabia and the other other oil rich Sunni countries following Trump's lead, Lebanon will likely become the flashpoint, converting what has been a proxy war between Saudi Arabia and Iran into a regional war. This is what Pompeo has been pursuing, and it will be the October surprise some have predicted.

Those who believe Donald Trump is the most dangerous man in America are wrong. The most dangerous man in America is Mike Pompeo. Pompeo combines a high level of intelligence (he graduated first in his class at West Point) with raw political ambition and the natural instincts of an authoritarian (including petty theft!). Trump may not engage in self-reflection or have any empathy but Trump is an ignoramus. Pompeo, on the other hand, possesses the same inability for self-reflection or empathy and is willing to go to any lengths, including war, in pursuit of his personal ambitions. While America has focused on Trump's incompetence, Pompeo has been building the foundation for war in the middle east.

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To clear the air, while it's true that the Koch brothers bankrolled Pompeo early on (when Pompeo was appointed Sec. of State, Pompeo was described as the Koch brothers own secretary of state), it's unclear how much Charles Koch continues to support Pompeo, as the two have split over the Trump administration's hostility to the free trade Koch promotes. It was reported that Pompeo met with Charles Koch in the fall to discuss the possibility of Pompeo's run for the Senate from Kansas. Pompeo later announced that he wouldn't run. Of course, Charles Koch is a skeptic of global warming, and so is Pompeo; indeed, Pompeo's flirtation with the rulers in the middle east oil kingdoms fits nicely with the business interests of Koch Industries. Again, this is just to clear the air. I have no quarrel with Charles Koch and certainly no inside information about his relationship with Pompeo. But I view Pompeo as a threat to stability not only in the middle east but also in America.

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Iran has stopped funding one of the world's largest terrorist organizations which is so powerful it dominates Lebanon.

Ray blames America. And the Koch brothers.

Superb. Fridge logic at its best.

It's nice to see rayward conceding, though, that Trump's policy of containment toward Iran has been a major success.

If you consider "success" pissing people off, imposing economic hardship to the point of poverty on millions of people, encouraging rather than discouraging radical elements within a country by proving moderates' slow efforts to re-align the country are worthless and will be reneged on, providing legal cover for more rapid development of nuclear ambitions, and generally supporting the militaristic state developing in the US because you undercut efforts to have a world deal with its problems on a diplomatic front, then you are right. And a jackass.

Some wondered what the long term results of Bin Laden's efforts on 9/11. It's been 20 years of payback & destruction by the US using every conceivable means - military, economic & genocide. It will not end until a 2nd US Capital is established in the Middle East, obviously in Jerusalem, everyone genuflecting to an Emperor in Washington.

It is as obvious as gravity...….

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Talib has a rosier long-term outlook: https://medium.com/@nntaleb/lebanon-from-ponzi-to-antifragility-c9867eb71998

Taleb is always interesting but not always right. He should be proud of his country, but while mentioning the brain drain in his article he writes as though what he thinks of as "Lebanon" is actually in Lebanon. It's in the U.S., Britain, France, Mexico, Israel, and most importantly South America. I, too, am nostalgic for the diverse and highly intellectual Levant, but it seems to have shrunk to one country (mentioned above). Meanwhile, Brazil will benefit, as one frequent poster here is fond of pointing out.

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Americans are calling out other Americans for being "privileged". Meanwhile, there are tens of millions of people of people who don't have access to clean water and reliable electricity. If being privileged is to be taken seriously as a means to point out real disparities, it should be between the truly advantaged/disadvantaged, not between citizens of wealthy countries. Human priorities!

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The Lebanese make great immigrants. Too bad about their homeland.

I think they do, perhaps particularly in those parts of America where being a jerk is culturally and financially rewarded. Very true where I live. Although, the biggest a-hole in the neighborhood, a fellow of whom people have an endless supply of "I can top that" anecdotes, is Syrian. Whatever Syrian is.

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Lebanon had a relatively free economy next door to Syria and Israel. Iran is funding Hezbollah In Lebanon to destroy Israel. What could possibly go wrong?

The real question is, how can any economy in the Middle East succeed when the corrupt petroleum-states commit so many basic economic sins?

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Almost seems like Iraq after the US democratized it...how is Iraq doing after all these years btw?

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Three-quarters of the deposits in the entire banking system were denominated in U.S. dollars, and many ordinary Lebanese may have lost most or all of their savings

That means the deposits are completely uninsured, as the Central Bank of Lebanon cannot print dollars to cover the deposits. Something similar happened in my country, Argentina, in 2001. If you are Lebanese, you should put your savings in dollars in a US bank in the United States or in Euros in a bank under EU jurisdiction (or under the mattress, as inflation in dollars would be minimal compared with the collapse of the Lebanese economy)

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Lebanon is collapsing because it is corrupt.

That's really all there is to it. It's a shame. I met a number of people there with very typical bourgeois values and ambitions but they are completely powerless.

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Nothing heart-wrenching about this at all.
If you trouble Israel then the consequences will follow.
Stop messing with Israel.
Remember : If you are hostile to Israel then you will have to pay dearly.
By the way I am neither an Israeli citizen nor a jew.

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