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 Analyticspredicted 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.
*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.