Egypt on the brink of revolution? Inflation the culprit.

Demonstrators have poured onto the streets of Cairo and brought the city to a stand still.  Reports suggest that hundreds of protesters have clashed with police over mounting concerns of corruption.  Several fascinating things have happened over the past few days.

First, two days ago a giant gold shipment was intercepted at the Egyptian airport.  This raised speculation that the ruling class is preparing for an exit strategy a-la Tunisian president Ben Ali. 

Secondly, there have been online calls of solidarity for an Egyptian revolt organized on Facebook/Twitter. 

The protests coincided with a national holiday honoring the country's much-feared police. In another parallel with the Tunisia protests, the calls for rallies went out on Facebook and Twitter, with 90,000 saying they would attend

As of today, we have learned that the Egyptian government has taken steps to snuff out organization by restricting online communication.  According to Zero Hedge, Twitter has been blocked.

Most headlines are reporting the story as Egyptians angry with Mubarak, but as discussed previously here, the riots spreading through all of North Africa and hitting China and Bangladesh are no coincidences.  I bring to your attention the following story:

In 2010, non-core inflation, such as food and energy, increased, especially bread and cereals, Magda Kandil, executive director and director of research of the Egyptian Centre for Economic Studies, told Daily News Egypt.

Since mid-summer of last year, she explained, inflation for bread and cereals has increased some 20 percent, noting that as these staples are found in a wide range of products, their price fluctuations often directly impact those for other goods, such as vegetables.

Let me tell you, when staples, materials that people need to survive spike in price for no real unexplainable reason then people will protest.  There are many abuses that humanity can and does accept, we have seen hundreds of examples of people living under the worst conditions one can imagine.  However when survival is put into question then even the most totalitarian governments run into serious problems.  In fact, this is probably the most misunderstood aspect of Totalitarian regimes.  Most assume that the police state is the most unbeatable and powerful force in the world, but historical examples suggest otherwise.  Ordinary people can challenge and even bring down the most powerful Governments if the right catalyst exists.  Whether it is German wives standing up to Goebbels on Rosenstrasse or the collapse of the Soviet Union the will of the people is hard to deny.

Now in Egypt there is no obvious explanation behind the 20% spike in staples, although most observers and reporters often seem to find one.  The answer in this case is exactly the same reason behind Tunisia's inflation, too much money being printed.  A major difference between Tunisia, Bangladesh, China and Egypt is that Egyptian Pound is a floating currency and not pegged to the US Dollar.  This of course does not stop the Egyptian Central Bank from ballooning it's monetary base.

There are two indications that the Egyptian Pound has weakened substantially. 

First, the M2 has once again spiked, a somewhat broad measure of the amount of money in Egypt, from Reuters.
Secondly, the US dollar has remained virtually unchanged from 2008 to today.  The US Dollar Index shows a low of roughly 71 in 2008 and today stands at just under 80.     Yet the exchange rate between the Egyptian Pound and Dollar is at it's highest in 6 years, clocking in at 5.81 Pounds to 1 US Dollar.  As the exchange rate goes up the value of the Egyptian Currency goes down.  This mean that regular working class Egyptians experience price increases in everything thus making ordinary life extremely difficult as expendable income vanishes. 

CAIRO (Reuters) - Egypt's M2 money supply rose 11.9 percent in the year to end-September, the central bank said on Sunday.
Money supply rose to 948.4 billion Egyptian pounds at the end of September from 847.8 billion Egyptian pounds a year earlier.

For example, take a look at the price of the CRB index, which is a collection of commodities that include staples like corn, wheat, etc.

Now, you can sure as hell blame Bernanke for this monstrosity as the liquidity he is injecting is finding itself chasing risky assets in the commodity sector, but consider that in order for Egyptians to buy these very same commodities they must first convert their Egyptian pounds into US Dollars and with the exchange rate rising they have to pay more and more for commodities, which are themselves becoming more and more expensive.  A most dreadful combination for anybody in the business of buying and creating food as profits vanish and price increases must transfer to the consumer.

This is the reason that so many Egyptians are now risking their lives on the streets of Cairo.