–If there’s one lesson to have learned over the weekend it is this: inflation can lead to revolution. That may be putting it simply. But the task of today’s Markets and Money is to show that the love of bad money is the root of all politically-destabilising price increases in the developing world.
–That doesn’t exactly roll of the tongue. But it may explain why Tunisian President Zine al-Abidine Ben Ali is watching the events on the streets of Tunis from a hotel in Saudi Arabia. The Tunisian President fled the country after his efforts to placate protestors failed.
–There are certainly other political factors at play. But rising food prices are a factor. Businessweek reports, “On Thursday night he [Ben Ali] went on television to promise not to run for re-election in 2014 and slashed prices on key foods such as sugar, bread and milk. A day later he declared the state of emergency, dissolving the government and promising new legislative elections within six months.”
–None of that worked. And now he’s gone. But rising food prices are not. And for that Tunisians can thank, at least in part, Ben Bernanke’s policy of Quantitative Easing. The Bernanke Fed has in effect exported commodity inflation in its relentless drive to weaken the dollar (and force China to revalue its currency).
–As we mentioned to Australian Wealth Gameplan readers last week, to the extent that there’s a global food crisis, it’s really a global crisis in paper money driving up the price of real things. That doesn’t mean it isn’t a real crisis. It’s just important to understand that the origin of these political and social events is fundamentally unsound money.
–Of course there IS a non-monetary factor too. Flooding, drought, and lower-than-expected crop yields have put the global food supply chain under pressure. In a world of just-in-time-inventory management and $100 oil, the supply chain is proving more fragile than hungry people might like.
–It becomes a political event in those parts of the world where food represents a large portion of discretionary income. World Bank President Robert Zoellick told the Financial Times, “With food accounting for a large and volatile share of tight family budgets in the poorest countries, rising prices are re-emerging as a threat to global growth and social stability.”
–Does a weak dollar really lead to higher food prices? Well, yes. The dollar is falling in value relative to tangible goods. But you have to keep in mind that rising commodity prices are also driven by countries with appreciating currencies using their newfound purchasing power to purchase scarce natural resources. Buy ‘em while you can, before they go up in price again.
–If the weak U.S. dollar keeps undermining political stability in the developing world because of rising food and oil prices, then the developing world will have another reason to hate America. To be fair, maybe the Bernanke Fed is trying to protect American jobs by driving Chinese labour costs higher.
–But that’s probably not how the rest of the world will see U.S. currency policy. They’ll probably see it as a tool for producing involuntary regime change in countries where food and fuel prices are out of control. The Arab world can probably keep oil prices low in OPEC member countries. But do you reckon they’re a bit nervous about what’s happening in Tunisia?
–One country that’s not nervous is China. It’s gaining more confidence, in fact. Yes, China is worried about inflation too. On Friday, the People’s Bank of China announced it would raise reserve ration requirements at banks by 50 basis points, effective January 20th. China is trying to prevent excess liquidity from driving prices out of control (house prices, food prices, stock prices).
–In fact, China’s President Hu Jintao understands perfectly that too many dollars are bad for everyone. China included. In written answers to questions posed by the Wall Street Journal and Washington Post, Hu wrote, “The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level.”
–It’s too late for that. But Hu knows that too. He added that, “The current international currency system is the product of the past.” That has a faint resonance with the famous quotation from John Maynard Keynes that the gold standard was, “a barbarous relic.”
–The problem with the gold standard is it imposed fiscal discipline on the 20th century Warfare/Welfare State. It had to go. The problem with the current global fiat dollar standard is it unleashes political and social mayhem. It has to go to.
–But what will replace it? China hopes to internationalise its currency so it will become a new global reserve currency. But it was hoping to do so by about 2015, when the IMF is scheduled to re-weight the currencies that make up its special drawing rights (SDRs). In with the Yuan, down with the dollar!
–By our reckoning, 2015 is about four years from now. And that’s a long time to tolerate/endure higher oil, energy, and food prices. These well-laid plans may not be good enough. In the meantime, investors can speculate on higher commodity prices. But if high prices lead to increased political instability, even that will be a risky bet.