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Published: Saturday, 12/20/2008

The ripples of recession

AS THE economy worsens, the attention of Americans is drawn inward. So this is a good time to remember that if it hadn't been for the Great Depression, Adolf Hitler never would have become ruler of Germany.

In the German parliamentary elections of 1928, the Nazis won less than three percent of the vote, and just 12 of the 608 seats in the Reichstag.

After the U.S. stock market crashed in 1929, our government called in the loans it had made to Germany, throwing Germany into depression. Unemployment there rose from 1.5 million (10 percent) in 1928 to 5.5 million (30.1 percent) in 1932.

Hard economic times radicalized the German electorate. The Nazis won 230 seats in the Reichstag in the election of July, 1932, nearly 100 seats more than the second-largest party.

Though the U.S. economy has suffered serious harm, our competitive position in the world actually has improved, because most other nations are suffering more than we are, wrote Ricardo Hausmann, director of Harvard's Center for International Development, in Britain's Financial Times on Monday.

"The financial meltdown has translated into a sudden stop in capital flows to emerging and developing countries, which threatens to destabilize their growth, their financial systems, and their government accounts," Mr. Hausmann said.

Those who are suffering most are those who can afford it least. "Financial crises, like epidemics, kill the unhealthy first," noted the cynic who writes for the Asia Times under the pen name "Spengler."

The collapse of oil prices is having a devastating impact on our enemies in Iran and Venezuela, and our sometimes enemies in Russia.

The Iranian economy was a mess even when oil prices were high. The mullahs maintain a tenuous hold on power through massive subsidies for food and refined fuel, subsidies they can no longer afford to pay now that oil revenues are a third of what they were in the summer.

Hugo Chavez's situation is even more dire. Deutsche Bank estimated in October that Venezuela needed an oil price of $95 a barrel to keep its budget in balance.

Venezuela had food shortages and raging inflation before oil prices collapsed. If Mr. Chavez has to cut subsidies - as he must - he could be toppled in a matter of months.

Hard economic times may improve Russia's international behavior, Mr. Hausmann thinks.

"Remember the dangerous scenario this past summer with Russian intervening in Georgia and threatening Europe with the energy card?" he asked. "Now, Russian policy makers perform daily prayers just to be able to open the stock market for regular business."

But except for Venezuela - where nothing but good can come from Mr. Chavez' misery - we should temper our schadenfreude (pleasure in the misfortune of others) with caution. Because desperate circumstances cause desperate men to do desperate things.

It wasn't just megalomania that caused Saddam Hussein to invade Kuwait in 1990. His war with Iran had emptied Iraq's treasury, and he saw no way out of the fiscal hole he was in except by seizing Kuwait's oil fields. Hitler invaded Russia because he thought he was in an economic squeeze.

Might the mullahs in Iran be tempted to try to solve their otherwise insoluble economic problems by seizing the oil fields in southern Iraq and Kuwait? Spengler thinks so. "The system is rotten, and must either break down, or break out, that is, through military adventures," he said last summer.

But the biggest danger point, Spengler thinks, may be Pakistan, a nuclear power on the verge of becoming a failed state, with 20 million men of military age, most of them dirt poor, many educated only in radical Islamist madrassas.

"The West at present is unable to cope with a failed state like Somalia, with less than a tenth as many military age men as Pakistan, but which nonetheless constitutes a threat to world shipping," Spengler said. "How can the West cope with the inability of [Pakistan's] duly constituted government to suppress Islamist elements in its army and intelligence services?"



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