Turmoil in the Middle East: a double threat to depositors
March 10, 2011
There is much to root for in the wave of popular uprisings against dictatorial rule sweeping the Middle East. In the short-term though, there is also much for bank depositors to be concerned about.
The ripple effects of disruptions in the Middle East could hurt depositors in savings accounts, money market accounts, and CDs, in not one but two ways.
Oil and inflation
Of course, whenever tensions flare up in the Middle East, the world holds its breath because of the threat to the global oil supply. In the long run, whoever ends up running a country with petroleum resources, it is in their self interest to keep the oil flowing. In the short run, though, the more violent the struggle for power gets, the more likely there are to be disruptions in that flow of oil. These disruptions can range from short-term shutdowns to long-term damage to oil producing infrastructure.
The fight in Libya has reached the point where short-term shutdowns are a given, and long-term damage is a possibility. It is clear that Moammar Gadhafi isn't going to go quietly, and if he is forced to give up power, the damage Saddam Hussein's regime did to Iraq's oil infrastructure on the way out comes to mind.
In response, oil prices have shot up to their highest levels in more than two years. With inflation already gathering steam, this is bad news for depositors--most CD, savings, and money market rates are already losing ground to inflation, and a spike in oil prices is likely to put them further in the hole.
Pessimism knocks the wind out of interest rates
Besides worrying about the oil supply, markets generally don't like uncertainty. The Middle East situation threw a chill of bearishness over the financial markets yesterday. Bond yields had been rising nicely this year, but took a beating yesterday and have been slipping backward generally over the past two weeks. This could further delay the day when CD rates, savings account rates, and money market rates start to gain strength.
Inflation and lower interest rates--the worst of both worlds for depositors.
