Who’s to Blame for Egypt? Try The Fed

Inquiring minds are upon Egypt’s plight tonight after reading a great post on BigGovernment.com entitled, “Fed Policy Burns Down the Middle East, Who’s Next?” So how’d we get here?

Chairman of the Federal Reserve Ben Bernanke launched a second round of Quantitative Easing (QE2) in October, following over a year of growth in the economy at a robust rate of over 3%. Most analysts pooh-poohed QE2 as an insufficient economic stimulus to create enough inflation to reduce unemployment. I warned that QE2 was like pouring inflationary lighter fluid on the world and then lighting a match. With food inflation now running at 15% in poor countries, the Middle East is just the first area to burn, but fire is smoldering in much of the world and other fires will break out soon.

So what exactly happened? What were the mechanics of this correlation betwen the US Federal Reserve’s monetary policy and the revolutions in Egypt and Tunisia half a world away?

QE2 is a program by the U.S. Federal Reserve to inject $600 billion of U.S. dollars in the financial system by repurchasing an equivalent amount of U.S. Government bonds. Once the money is paid to the former bondholder, they deposit the cash in banks. Banks take deposit dollars and leverage them by 6 to 10 times creating $3.6 to $6 trillion in credit. Given that the Gross Domestic Product of the U.S. economy is only about $14 trillion annually, it would impossible to immediately purchase 25-40% of the entire economy. Consequently, the reality of Quantitative Easing is that the money will be invested in the stock and commodity markets. The theory is that the financial assets rise on the huge inflows of QE cash, investors will feel wealthier and go to the malls and the car dealerships to “shop till they drop”.

The problem with theory is that QE2 money quickly drove up commodity food prices around the world. This price rise is barely noticeable to Americans who only spend 10% of their personal income on food for three meals a day; but the impact of food inflation is devastating the over half the world that spends approximately 50% of personal income on food for two meals a day. The 15% QE2 induced commodity food price increase has reduced the amount of food poor people can purchase by almost 1/3.

The riots burning down Tunisia, Yemen, and Egypt, and all of the revolutionary activity attached to them, are really about gut-level economics. Do you not think we, Americans, would riot and throwing out our government if we were forced to cut back to just 1 1/3 meals a day?

Once riots begin, people in cities fear scarcity and start hoarding food and water to survive the unstable situation and it becomes dangerous for farmers to even transport food. Of course, this exacerbates food shortages driving prices even higher.


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