Sense on Cents

I believe we remain in the relative early stages of significant structural and fundamental changes in our global economy. As political leaders – both domestically and globally – work to address a variety of issues, I see the following two themes continuing to play out:

1. In an attempt to support our economy, Washington has done and seemingly will continue to do everything possible to pull demand forward, delay the recognition of financial losses, and simultaneously redistribute losses which emanated from our banking system. We could debate the merits and impacts of a variety of the programs implemented. Some have worked well. Others have been unmitigated disasters. The fact is, though, we have been faced with an array of unintended consequences in the process. The traditional rule book for investing and economics is not very helpful in our world circa 2011.

2. Over the last few years, I see a reversal from what I believe is the historical norm in terms of flows of economic development. Allow me to clarify. I now see developments, both past and present, in the financial markets leading to historically perverse economic policies. On a global basis, these perversions have generated political unrest and ultimately social and civil changes, including riots. I am not an economic or political historian, but I do not view the political upheaval in our nation this past November or others in a vacuum. Similarly, while there are certainly a variety of forces at work impacting the social unrest playing out on the streets of Cairo (and previously Athens, London, Dublin, and elsewhere), we should not dismiss the unintended consequences and global impact of economic policies emanating in Washington.  Let’s navigate further.

There is certainly no doubt that Fed chair Ben Bernanke is doing everything in his power to generate a degree of inflation here in the United States in an attempt to stimulate our economy. Bernanke’s excessively easy monetary policy exhibited via close to $2 trillion of quantitative easing has sparked a spike in prices in a variety of commodity markets, primarily food and energy. While our personal incomes have barely budged and the values of our homes continue to decline, our cost of living continues to move higher. Americans feel this. But how does somebody trying to get by on a few dollars a day feel it? Who might that be? Let’s travel to Cairo, Egypt.

I am not stating that Ben Bernanke is the main reason why Egypt is experiencing massive rioting currently. There are certainly many reasons for that. However, was the spike in food prices the spark that lit the tinderbox or further fuels the flames? We would be naive to discount these unintended consequences of Bernanke’s easy money policy. Larry Kudlow asked the same question the other day in writing, Food Riots: Is Bernanke Partially to Blame?:

As we know, massive popular unrest has broken out against autocratic governments in North Africa and the Arab world. Egypt is the biggest story. But to varying degrees, the people have taken to the streets in Algeria, Jordan, Libya, Morocco, and Yemen.

But in addition to the apparent revolt against repressive governments, all the experts say the other main cause of unrest is record food prices. For example, former Bush advisor Dan Senor notes that Egypt is the world’s largest wheat importer. Because of skyrocketing prices, Egyptian inflation is now over 10 percent.

So I have to ask this tough question: Is Ben Bernanke’s ultra-easy QE2 money pump-priming partially to blame?

Commodities are priced in dollars, and the Fed has been overproducing dollars for more than two years. Consequently, emerging markets throughout the world — and the food sector in particular — are suffering from rising inflation.

The CRB food index is up an incredible 36 percent over the past year, including 8 percent year-to-date. Raw materials are up 23 percent over the past year. Inflation breakouts have occurred in China, various Asian Tigers, India, Brazil, and other Latin countries. Even Britain and Germany are registering higher inflation readings.

But food riots in the North Africa/Middle East area are bumping smack into long-time resentment over autocratic government.

If food is in fact the trigger for what may be a revolution in Egypt, then U.S. monetary policy has to shoulder at least some of the blame.

Ultimately, as Senor argues, a region-wide revolt against the autocrats may be healthy if it leads to greater democratization and liberalization. But the protests may spread to Saudi Arabia and Iran, with huge implications for global energy markets. And that’s where the hoped-for transition to political liberalization — with a potential backlash from radical Muslim groups — makes the story even more unpredictable.

Interesting views put forth by Mr. Kudlow. People with differing political views can debate these points ad nauseum. However, real ‘sense on cents’ requires that at this point in our nation’s history we take a broader and longer term perspective on the impact of our political and economic policies. I do believe we should embrace the linkage of the financial-economic-political-social/civil theme as one which will continue to play out for the foreseeable future. Risks beneath the surface will continue to bubble up as pressure points are stressed.

Navigate accordingly. Thoughts, color, constructive criticism always encouraged and appreciated.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own and not those of Greenwich Investment Management. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

This entry was posted on Monday, January 31st, 2011 at 6:59 AM and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.