1/29 Weekly Commentary

The Food Dominoes
The U.N.’s Food Price Index surged to 214.8 in December, exceeding the previous record in 2008 when rising costs and fears of shortages sparked riots from Haiti to Egypt. More than 100 people have died this month in protests in Tunisia against food inflation, unemployment and alleged corruption, according to the U.N., and at least three were killed in Algeria.
Since U.N. index was published food prices have continued to increase.  Tunisian riots emboldened the Muslim Brotherhood to spark the Egyptian riots, since Egyptians face the same impoverishment from food and energy price increases despite the food and energy subsidy programs.  The food program sells basic commodities at much lower than market prices but the subsidy prices has been rising with the market.  The result: the poor are being hit disproportionately in the third world and the developing economies as well.  Take it to the streets!
The linkage to Fed policy is direct.  QE and QE2 and FOMC policy, by creating a mountain of reserves, have kept short-term yields at zero and depressed the dollar.  This free money has been exported either directly by speculators or indirectly by sanctioning similar policies at other central banks.  Central banks and their governments have been taking action to sterilize the Fed policy by creating their own fiat expansions.  The Fed has directly exported inflation to all other nations because of the status of the dollar as the reserve currency.  Unbelievably, this is Ben's intent!  He believes that by forcing Asian countries to accept revaluation of their currencies that magically factories will be built in America.  News to Ben: those factories are gone, never to return, until American society is rebuilt on the other side of this debt crisis.
Obama now wants to cut Egypt's foreign aid unless they allow the rioters free reign.  Yet, food subsidy takes 4% of Egypt's total budget and they have in effect reduced the food subsidy by not increasing it in line with market prices.  Energy subsidy takes 15% of the total budget, so their budget is inadequate to the task of keeping pace with the flood of cheap dollars.  The food subsidy was decreased in the 2010 budget but the decrease was removed in the 2011 budget after the outbreak of the Tunisia riots.  However, these funds have not yet arrived in the streets. The Egyptian budget deficit will be 8.3% of GDP and is unsustainable over the long term.  Yet, our rates are still at zero and the Fed is creating new fiat reserves on a daily basis under QE2.
International prices for basic foods priced in local currencies:

This madness is ending with QE2.  Target June, with the markets peaking in April.
Postscript:
I believe that if Mubarak falls that the new government will immediately or in short order be controlled by the Muslim Brotherhood with a massive 46% of Egyptians below the poverty line (by Egyptian standards) and is higher than during Sadat's government. The M.B. assassinated Sadat but did not get their government in the last time it turned over.  This is not an environment for a sustained democracy.  So the market's fears are real.