In Alan Greenspan’s autobiography, Age of Turbulence, he describes being humbled by then-President Ronald Reagan. Greenspan answered the president in a manner Mr. Reagan deemed overly presumptuous. Mr. Reagan then invited Mr. Greenspan to show him the portion of The US Constitution that required Mr. Reagan to appoint a Chair-Person over The Federal Reserve.
Unlike Ezra Klein at The WaPo, Alan Greenspan did not think this was a trick question. As an intelligent, well-educated man, Mr. Greenspan understands documents older than 100 years of age, and realized Ronald Reagan was advising him to remain properly deferential to the national chain of command. After this disagreement, Mr. Greenspan and President Reagan were able to prosper in synonymy, as did America. However, Alan Greenspan did remain independent of the political order enough to properly execute his duties as a Federal Reserve Chairman.
A major reason that I do not particularly like Mr. Greenspan’s replacement Mr. Bernanke is that Mr. Bernanke seems to have taken that deference to the national chain of command too far. The Fed under Mr. Greenspan no longer seems to be independent of Washington’s political machinations, and of Washington, DC’s two warring tribes; The Dems and The GOP. This upsets several semi-stable equilibriums, and leads to unintended consequences that may well include the overthrow of several tenuous 3rd world governments.
Spengler of The Asia Times Online describes how commodity prices impact lives in Egypt far more significantly than in the United States.
Egypt is the world’s largest wheat importer , beholden to foreign providers for nearly half its total food consumption. Half of Egyptians live on less than $2 a day. Food comprises almost half the country’s consumer price index, and much more than half of spending for the poorer half of the country. This will get worse, not better.
This suggests Egyptian vulnerability to inflation in food costs that could pose an existential threat to an entire nation’s way of life. Spengler goes further and suggests that this vulnerability is not only a threat, mind you, but rather as Agent Smith put it in The Matrix; “This is the sound of inevitability, Mr. Anderson. This is the sound of your doom.” In essence, Spengler saw Egypt’s entire economic model as one that was holed below the waterline and destined to crash. I admire the man’s writing, but respectfully disagree.
Spengler posits his argument on the concept of elasticity of demand. When most things get expensive, we, as rational consumers, defend ourselves by buying less thereof. If you’ve ever explained to your indignant kid that nobody in their right mind would spend $250 for a Tickle Me Elmo Doll, you’ve just disappointed your adorable offspring in response to your elasticity to demand for Tickle Me Elmo Dolls. That works well, and helps us all spend our swag more intelligently – until we just flat-out gotta’ have it!
All of God’s children have got to have food. The elasticity of demand, assuming you don’t need to drop a few pounds now that Christmas has passed, gets pretty close to zero. Expensive food is not something many people can just forego. This is an unavoidable hardship.
It’s at this point where I begin to respectfully diverge from Spengler’s argument. He argues that Chinese wealth is the source of Islamic poverty. He claims that China has steadily improved its diet, and thereby put systemic pressure on the price of commodities that puts the staples of life out of the reach of the Egyptian Poor. Thus, when the winter weather is terrible, and the harvests go awry, the prices spike higher, because the Chinese can pay them. In essence, Egypt got poor in response to China’s wealth and the vagaries of the global climate impacting the price of wheat.
What Spengler argues could be true on a temporary basis. However, Asia has been getting rich for a long time. People in China, Japan and Korea didn’t suddenly discover nice dishes like Bulgogi just this last year. Asia countries have been successfully expanding their economies and standards of living at an astonishing clip since the mid 1960’s. Egypt, to the extent that they fight Southeast Asia to import enough wheat to feed their families has been steadily adjusting to growth in aggregate demand for agricultural commodities since Toyota started selling lots of cars in North America. There had to be an additional shock that Egyptians haven’t trained themselves to typically deal with as just a cost of doing business.
That something else may well be the unintended consequences of our current Federal Reserve getting out of its’s proper assigned lane, and trying too hard to focus all of its energies on the imploded American Labor Market. Jared Dillian, in his 2 Feb edition of “The Daily Dirtnap” makes an explicit accusation with respect to Fed independence.
If there is one word that you want to take away from the most recent Fed directive, it is the word “insufficient.” “The economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions.”
The Fed (supposedly) cares about inflation and unemployment. I am telling you that they care about unemployment more. A lot more. There is something unholy going on between the Fed and this administration, I am telling you that, I am starting to suspect that the Fed is not so independent as we think. No sir. I have no reason to think that, aside from the fact that central banks throughout time will care more about inflation than unemployment, even the ones with dual directives. Here, we have a Federal Reserve (as evidenced by the directive) that cares about unemployment to the exclusion of all else.
Dillian goes on to posit that this single-minded infatuation to target employment and disregard inflation has led to the loose monetary policies that would make The Whore of Babylon appear Victorian and Primrose. This has devalued dollar denominated assets and put the interest rates on traditional, easy paths to wealth preservation, such as savings accounts and money markets through the floor. Investors are forced out of these traditional routes to safety, and made to find alternate, low-risk stores of value.
Precious metals and commodities have enjoyed a windfall. Combine this new upward pressure with all the “warmal cooling” the farmers of the world have had to scrape off their tractors lately, and you get a major price spike in wheat, corn and other agricultural commodities. This problem is further exacerbated by America’s retarded, bi-partisan (bi-tarded?) policy of converting hundreds of tons of our corn into ethanol for flex-fuel vehicles. Corn would make a really handy substitute good right about now. All of these trends converge into a hellish confluence of suckage factors for anyone reliant upon cheap and abundant agricultural commodities to feed a poor and excitable population.
So therefore, the price of wheat has hit $9/Bushel in recent trading. Egyptians have not received anything close to the pay raise required to “eat” that increase in food prices. With an unemployment rate well north of the 9% they officially claim, Egyptian labor markets will probably never tighten enough to allow hard work to lead to The Big Raise any time soon.
No matter how good you are at your job in a dead labor market like Egypt’s, you are not one of God’s unique and beautiful snowflakes. Instead, you are lucky they willingly pay you what they do. The average Egyptian cannot be blamed or condemned for feeling that there is no way out. This leads to that crushing and debilitating belief that the game is rigged and that free-will and enterprise are for all intents and purposes dead.
All Muhammad Al-Baradai and the Muslim Brotherhood need now is some catchy slogan. Something that promises the moon and yet still never gets specific enough for them to be called on it. With “Hope and Change™” already taken, they could go for something more apropos to what the Egyptian People feel as they suffer from the cruel vicissitudes of a poorly functioning marketplace. “Land, Peace and BREAD!” may well do the trick.