It’s All Connected – January 30, 2011

It’s all connected.  The eruption in Egypt is a consequence of many intertwining factors, some of which we have discussed recently.

Why are the protesters endangering Mubarak’s government now, particularly?  One reason, certainly, is the success of the popular revolt in Tunisia.  But that only begs the question – why Tunisia now, particularly?

I see two main strands.  The first is deprivation – both countries (and many more down the domino chain) are characterized by cronyism and corruption, where a handful of the well-connected make out like bandits and the vast majority barely scrape by.  But I think the main catalyst this winter is that that vast majority is finding scraping by a lot harder than it used to be, mostly because of huge increases in the price of food.  All over the developing world, food prices have been surging at rates ranging from 20% to 500% in the last year.  And when the price of food doubles, the difficulty of scraping by increases exponentially.

Why have food prices surged so much just now?  One reason is the rapid growth of populations in Third World countries, with a natural increase in the demand for food.  Complicate that by the fact that in many of these countries, accelerating economic growth is raising the standard of living of millions, and with it the demand for quantity and variety of foods.

Another reason was the widespread fires suffered by Russia’s wheat fields last summer, which reduced crop production by as much as twenty-five percent. In response, Moscow issued a ban on Russian wheat exports; with Russia being the third largest wheat producer in the world, that action naturally put upward pressure on prices.

Still other lines of causation can be traced to old-fashioned bad public policy decisions.  The Obama government still insists on pushing ethanol as one of the ways it seeks to push America toward a carbon-free energy future.  That has had the result of diverting millions of tons of grain away from food supply and into energy – more upward pressure.

Finally, the price action in grain markets has the familiar look of a financial bubble – and bubbles, whether in dot-com stocks, real estate, or grains, are principally the result of too-loose monetary policy.  The Fed may look at our local inflation rate and low capacity utilization and conclude there is little risk in keeping the pedal to the metal on  monetary policy.  But the dollars sloshing around the markets, while not being taken up by economic growth in this country, are finding their way into dollar-based markets like oil and commodities.  Unfortunately, the risk is being borne not by US consumers but by those in places like Tunisia and Egypt who are least able to absorb it.

The second main strand is political frustration.  Egypt has operated under a state of emergency literally for years – that kind of policy comes close to looking less like an emergency and more like the status quo.  Governments that maintain themselves with strong police efforts lose legitimacy and ultimately prove too brittle to withstand the pressure of their people for a voice in their governance.

American policy has for years found itself in the uncomfortable position of supporting autocratic leaders in the interest of larger purposes.  As LBJ is said to have said, “he may be a bastard, but he’s our bastard.”  But the George W. Bush administration saw the ineffectiveness of that, and in the wake of 9-11 pushed Egypt, Saudi Arabia and others in the region to open up their political systems.  In her own Cairo speech, Condoleeza Rice declared that for too long we have opted for stability instead of democracy and achieved neither.

Mubarak responded to the pressure by opening the doors to democracy a crack, and then promptly arresting the leading opposition figure, Ayman Nour. But had the pressure been maintained, the frustration and impotence of the democratic opposition would have stopped shy of rioting in the streets.  Imagine how difficult it is to see a similar sort of revolt against the regime in Iraq – there they have in very short order adopted the mentality of taking their grievances to the polling booth.

But the pressure did come off, and with President Obama’s ascendancy the tack shifted from the Freedom Agenda to a more “realpolitik” agenda of accommodation.  The administration virtually abandoned the protesters in Iran in 2009 who came within sight of bringing down the government of the mullahs; but Obama was more interested in reaching out to the government than in assisting in its overthrow.  Obama’s Cairo speech carried nice sentiments, but his actions spoke much louder in ways that pleased the autocrats.

And so, when the pot boils, and Mubarak is overthrown, the US will emerge once again as a force who helped keep the people in bondage.  If Obama is so concerned that the world appreciate the United States for its principles, he might reconsider how much the strategy of accommodation represents a betrayal of those principles, and with them the aspirations of millions in desperate lands.

Markets will hate this.  The price of oil has already jumped, and if Egypt falls into chaos, putting at risk the free flow of oil through the Suez Canal, the price will spike further.  I remember how Bush was scored in mid-2008 when oil shot up and gas prices reached levels between $3 and$4 a gallon – the result of Bush’s oil-industry-friendly policies, carped the editorialists.  Now it’s at that level again, and I don’t hear much comment about Obama’s stewardship.  Will they say anything at all if crude oil spikes over $100 again?

Quick comment on the State of the Union address:  Much has already been written on it, and I don’t need to put in my two cents, but I will toss in a penny.  It seemed to me that Obama saw the November mid-terms and the shooting rampage in Tucson as connected events with one high-level message: don’t be negative.  So he laced his remarks with some genuinely touching grace notes – such as his opening congratulation of John Boehner – and some heretofore uncharacteristic affirmation of American exceptionalism.  And so he concentrated on grand visions of the future, preferring to leave it to those humorless scolds on the Republican side to be the public buzz-kills and talk about cutting spending.  I don’t think he understands how palpably the public at large fears the insolvency that is coming our way.

After all, promising to freeze spending at current levels will do no more than lock in $1.4 trillion deficits for the foreseeable future.   And I just don’t think that’s what the voters were saying last November.

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