by Ciaran Ryan
Recently
by Ciaran Ryan: Riot
Alert: Look Out Argentina, South Africa, Turkey, and India
Riots
have broken out across Brazil and Turkey. India, Argentina and South
Africa are next on the list. Believe it or not, these things can
be predicted by looking at inflation stats and monetary debasement
rates, writes Ciaran Ryan.
Nationwide
riots have broken out in Brazil and Turkey in the last few weeks,
but don’t imagine they will stop there. Six months ago Johannesburg-based
research house ETM Analytics
predicted this would happen because these two countries are among
the worst monetary abusers in the world.
ETM
puts out a regular “Riot Alert” based on the rate at which
countries are expanding their monetary bases the fastest. Heading
the list is Syria, currently the most dangerous place in the world
with 93,000 killed since March 2011.
Inflation
is measured on a country-by-country basis in terms of the Continuous
Commodity Index (CCI)* which analyses price changes
in 19 different commodities. The CCI reflects inflationary changes
almost immediately because monetary expansion debases the currency
almost immediately, resulting in higher prices for imported goods
such as fuel and food.
The
research appears to show a direct link between inflation and social
unrest. This link has been met with some scepticism, particularly
here in South Africa, by the centurions of the status quo. After
all, we all know that Syria is locked in a deadly geo-political
game that, on the face of it, has nothing to do with the rate at
which it is printing money.
The
same must be true of Turkey and Brazil. In Turkey, it all started
with a protest in Istanbul against plans to develop a green space
and a skirmish about the outlawed act of public displays of affection,
but quickly spread to 85 cities and towns. The protests are no longer
about preserving parks, but about an out-of-control government and
its theft — through inflation — of the wealth of millions of Turks.
In
August last year, dozens of striking miners were gunned down by
police at a platinum mine in South Africa. This is no isolated incident.
Wildcat strikes are breaking out across the country, contributing
to a flight of capital that has seen the Rand lose nearly a third
of its value against the US dollar in the last year. In the past
two months, xenophobic violence has again erupted in South Africa
for the first time since 2008, a time when price inflation was last
accelerating sharply. The xenophobic violence targeting foreign
nationals became so serious in the Gauteng province (where Johannesburg
is located) in the past two months that the Somali government asked
the ANC government to protect its people. In the last few days foreign
nationals were forced to flee the Cape Town township of Wallacedene
in fear of their lives. Conservative estimates are that 200 Somali-owned
shops have been looted and many set alight. Displaced Somalis and
other foreign nationals are sleeping outside the local police station
in a bid for safety.
This
has everything to do with the fact that the South African Reserve
Bank and commercial banking system has been flooding the system
with newly minted fiat money for the last three years, pushing the
Rand-US dollar exchange rate to its the lowest level in years.
The
situation in Brazil is rapidly spiralling out of control, as more
than two million people in 80 cities across the country have taken
to the streets. First they were complaining about increases in bus
fares, but when the government back-peddled on this issue, protesters
continued to pour onto the streets to vent their anger over corruption,
poor public services and the cost of hosting the 2014 World Cup.
The list of complaints keeps getting longer. Even after three major
cities decided to lower these bus fares back to the original level,
the unrest continues to spiral, indicating that there is a deeper
unrest in the country. A less explored aspect of this unrest is
the fact that Brazil is one of the worst monetary abusers in the
world, with a 35% increase in CCI inflation since May 2010.
There
is a lesson here, well documented by Austrian economists: inflation
leads to growing levels of income inequality and malinvestments
that impoverish the broader public, setting the stage for mass social
violence and, in severe cases, to revolution (witness Tunisia and
Egypt).
Trying
to understand what is going on here through the Keynesian or Marxist
lens will only lead you up a blind alley. This is no class struggle.
The protesters have disowned the political class in its entirety.
The faux constructs of left and right have no bearing on what is
happening on the streets of Istanbul or Rio de Janeiro. The political
class is in trouble.
What
is happening, according to Chris Becker of ETM Analytics, is that
monetary and price inflation has reached the tipping point for social
unrest. “Understanding the minutiae of political and social
dynamics in these countries are highly complex, but the likelihood
of any country reaching mass social unrest inflection points is
that much lower when prices and living costs are stable or falling.
“To
have a strengthening currency, one needs a prudent central bank
maintaining positive real interest rates and not printing new base
money to hand to the banks, which they can then lend to credit-worthy
people, while those people who don’t have access to credit markets,
or are not savvy enough to invest in the inflationary sectors, are
becoming poorer. We must understand that this is an unjust process,
as those accessing credit are in effect stealing purchasing power
from those who don’t. A huge redistribution is taking place, and
it’s usually governments who are the biggest borrowers benefitting
most from this process, while the public are getting poorer and
they are feeling it in their pockets. Although people can’t identify
the exact reason of why they are getting poorer, they know their
living standards are falling, and take to the streets in mass across
the country to display this distaste and blame anything that’s topical
at the time.”
Becker
adds that there are three levels to this analysis. The permissive
cause of social unrest includes the unjust and fraudulent institutional
arrangement of the monetary system, i.e. central banks backstopping
a fractional reserve banking system that can essentially create
money out of thin air. The active cause of social unrest is the
monetary inflation this system creates, which impoverishes and harms
the majority of the public who are forced to use that currency and
have no escape from it. Then, finally, the catalyst to the unrest
can in reality be anything that resonates with many people across
the country, such as an increase in bus fares.
“Most
analysts are focussing on the catalysts of the social unrest, which
is why none of them predicted it ahead of the fact, and have only
now come out with a flurry of analysis and research to explain what’s
going on here. By focussing on the major injustices that are taking
place in the world, particularly related to the monetary system,
we are able to identify which countries are at particularly high
risk of mass social unrest events ahead of the fact,” says
Becker.
So,
who else is on the danger list?
Take
a look at the accompanying graph and see for yourself.
The
wall of shame: the world’s worst monetary abusers
Egypt
and Argentina are at extreme risk of spreading unrest. “In
Egypt, poverty and food insecurity have reached staggering levels
in the last few years, an issue that could lead to further social
unrest and political instability in the Arab world’s most populous
country,” according to the Wall Street Journal.
About
15% of Egypt’s population moved below the poverty line between 2009
and 2011, according to a recent joint report by the United Nations
World Food Program. The report also found that an estimated 13.7
million people, or 17% of the country’s 82 million population, suffered
from food insecurity there, compared to 14% in 2009.
Argentina
under President Cristina Fernandez de Kirchner is resorting of ever
more repressive measures to rein in (official) inflation of 25%
and curb the growing black market for US dollars. According to Associated
Press, Argentines “have lost faith in the peso and in her leadership
as inflation soars, Central Bank reserves drop and the economy slows,
hamstrung by currency controls that make doing legal business more
difficult.”
The
black market peso trades at close to 10 to the US dollar, about
half the official rate. That’s how much Argentines are prepared
to pay to get their money out of the country. Now the government
wants to clamp down on this market by offering an amnesty for those
who hold “illegal” dollars. It will expropriate these
dollars in exchange for tax-free government bonds paying 4% a year
until 2017 — in a country with inflation running at more than six
times this amount. Meanwhile, Fernandez has lost more than half
the support she had when re-elected in October 2011, assisted by
her bumbling incompetence and disclosures that a close friend is
being investigated for money laundering.
Argentina
and India are two countries to watch for social unrest in the coming
months, says Becker. And, of course, South Africa.
India
is already seething with discontent, but the trend threatens to
assume alarming proportions in corporate India, according to that
country’s Business Standard. “Incidents of labour unrest have
been on the rise in recent years across companies, pointing to growing
discontent among workers over wages and other issues.” Affected
companies includes Colgate-Palmolive, Hero, Maruti, Suzuki, Hyundai,
Videocon, Onida and Nokia, according to India’s Business Standard.
US
Federal Reserve governor Ben Bernanke signalled a potential slowdown
in quantitative easing, prompting an immediate deflation in US stock
prices and a rally in the US dollar. Other countries are likely
to follow his lead.
But
the damage is already done. The CCI measure of inflation will give
you an indication of where to look. The consumer price index (CPI)
measure is practically irrelevant. In South Africa, for example,
the CPI measures some 70,000 items each month. It is safe to assume
none of us buy 70,000 items a month. There is a lagged effect between
CPI and newly created money injected into the economy. The first
receivers of the newly printed money are government, bankers, wealthy
and credit-worthy businesses and individuals. By the time it ends
up in the hands of the bottom-feeders — mainly the labourers and
pensioners — the money has already lost value due to inflation.
This
is known as the Cantillon effect, which describes the uneven effect
of inflation on different prices and segments of the population.
It is never a straight line. Inflation is reflected not just in
food prices. Investors will use newly created money to drive up
stock prices, as has happened in recent months. After last week’s
sell-off, the first crack has started to appear. The newly printed
money will run off in search of yet another bubble, until that one
bursts.
While
this is going on, expect to see more unrest on the streets.
*The
Continuous Commodity Index (CCI) comprises some 19 commodities,
including food, fuel, industrial commodities and precious metals. CCI
reflects inflationary trends almost immediately on the basis that
monetary expansion debases the currency, resulting in higher costs
of commodity imports such as fuel and food. CPI, on the other hand,
covers a much wider basket of goods such as housing costs, clothing
and technology, costs which form an insignificant part of the spending
of low income households.
LRC
previously
covered the link between inflation and social unrest.
June
22, 2013
Ciaran Ryan
[send him mail] is a
business writer and mining entrepreneur based in Ghana and South
Africa. He blogs occasionally at www.writersroom.co.za.
©
2013 Ciaran Ryan
This article originally appeared on: Lew Rockwell