Money kills, inflation in Northern Africa turns deadly. Update: Tunisia in revolt.

As riots spread through North Africa I find it incredibly important to use the existing knowledge we have to pinpoint and explain in the most simplistic manner of what is happening in the world.   Our historical texts have been filled with a rich assortment of observations, observations that often carry an incorrect conclusion as an explanation to certain events.  Hopefully with the Internet gaining influence we can avoid the errors of history and lay down accurate observations that can serve future generations going forward.

Still, even to this day reports and journalists will attempt to explain certain events through the simplicity of observations and certain people will still reach the wrong conclusion thus instigating and agitating for the wrong solution to our world's most vexing problem, inflation.

Tunisia

Consider the rioting happening right now in Tunisia.  Reports provide a litany of explanations including Internet freedoms, dictatorships, infrastructure problems, etc.  Yet buried deep inside lies the culprit:

Protests over unemployment and food prices have also broken out in Algeria, Jordan and even Saudi Arabia in recent weeks, all countries with a high proportion of young people, many well-educated but jobless.

Indeed, humans will get violent when something that is so essential to life, food, becomes unattainable.  Yet food prices are listed among other 'reasons' as if it were just an unfortunate symptom of the country's current problem and not at all a primary issue.  Yet humans can live under oppressive regimes, with no Internet and high unemployment for a very long time, it is when they start to starve - unexpectedly - is when things begin to change.

Algeria

Consider again the unexpected violence mounting in Algeria, with authorities practically shell shocked over what is happening in their country.  BBC reports the following:

The riots are widely seen as drawing on deep frustrations with the ruling elite and a lack of political freedom, as well as more immediate concerns about the cost of living, housing, and jobs.

The prices of flour, cooking oil and sugar have doubled in the past few months.

Once again, working class Algerians just like working class Tunisians are gripped by impending starvation as simple staple foods have become prohibitively expensive.  This has very little to do with political freedom.

Jordan

Protesters chose a more peaceful approach to voice their concern, but at least this time Reuters cuts right to the chase:

KARAK, Jordan, Jan 14 (Reuters) - Food price protests sweeping across North Africa and the Middle East reached Jordan on Friday, when hundreds of protesters chanted slogans against Prime Minister Samir al-Rifai in the southern city of Karak.

Of course the anger like in Tunisia in Algeria is leveled at the sitting governments, the reason behind the anger is identical.

Bangladesh

In a story from several days ago, Bangladesh was swept up in violence as the stock market crashed.  Reports suggest that many took the streets after savings were wiped out in a matter of days:

While the Dhaka benchmark index surged about 80 percent in calendar 2010, it has plunged 27 percent since early December.

In actuality, the Dhaka had gains that are similar to that of the 1920s US Stock Market.  The DSE surged from 2,500 to in April, 2009 to over 8,600 by December of 2010.  That is a 300% increase in under two years.

Common Ground

So what is the common ground behind all these events?  Why is Egypt, Morocco and other countries looking at similar events unfolding on their streets?  The answer is amazingly simple, money.  Whether it is flour, sugar, stocks or oil the reason behind any unexplainable and unreasonable increase in prices is money, or specifically too much money thereby pushing up the prices.  Take a look at the currency of the countries that were mentioned and how they are valued:

Tunisia: Instead a peg to the United States dollar of 0.42 dinar = 1 dollar was established which was maintained until 1964, when the dinar devalued to 0.525 dinar = 1 dollar 
Algeria: The price of the Algerian dinar is set by the Central Banque de Algerie which pegs the dinar to a basket of currency mostly involving the US Dollar.
Jordan: Since October 23, 1995, the dinar has been officially pegged to the IMF's Special Drawing Rights (SDRs). In practice, it is fixed at 1 U.S. dollar = 0.709 dinar most of the time.
Bangladesh: Upon Bangladesh's independence, the value of the Bangladeshi taka was set between 7.5 and 8.0 to US$1


Consider that inflation is now gripping China, it is worth to remember that their currency is not any different than the aforementioned.


China: Through most of its history, the value of the Renminbi was pegged to the U.S. dollar.


Exporting Inflation


Countries that issue paper currency have a fundamental problem whereby the issuance is unchecked.  Whether the Central Bank is private or public makes no difference because money can enter the system at any time without any particular reason.  This has been happening in the United States, where the money supply has ballooned tremendously.

You have all seen this chart:

As discussed before, the consequences of this money expansion has not hit the US nearly as much as one would expect, because the primary mechanism of dispersing the money (commercial banking system) has been virtually inoperable.  However the same cannot be said about countries that are currently on the US peg, nor can the same be said for commodities that are currently traded in US dollars.  This is precisely why prices of grains, soy beans, corn, oil, copper, etc have shot through the roof.   When money is created and there is no market reason for this creation, the money flows into assets creating bubbles and excess activity - as a side mention, the stock market is just another asset.  

Another key aspect worth mentioning: For every dollar created here, we enable foreign governments to do the same but at a multiplier equivalent to the peg.  So for every US Dollar that 'The Ben Bernank' creates, the Chinese create about 6 additional Renminbi.  In Bangladesh 8 Taka get created.  So forth and so on.  This not only creates local currency that is chasing speculative assets, but makes commodities less affordable.

We live in interesting times, some call it globalization,  but it can be best described as first worldwide fiat experiment and the consequences of this tragic experiment are manifesting themselves in front of our eyes.  If only this experiment was confined to a lab, then it would not be so sad, but people are dying and they are dying for no reason.   People are beginning to starve because the medium of exchange, where humans create productive goods and exchange them for other goods has been disrupted.

Yet neither the rioters, protesters and for the most part journalists understand the deceivingly simple explanation.

Central banks, governments and monopolies have taken the foundation of the economy, money, and destroyed it.  Never forget that this last unspoken vestige of central planning will cause great hardship in the coming months and years and unfortunately even though America is largely responsible for this, Americans will be the last to experience the consequences.

We are quite lucky for now to be the reserve currency, the base of the pyramid on which other currencies get created and we will therefore experience the least amount of inflation, but we shall watch as the world descends into chaos.  In a cruel twist of fate people will turn to the US Dollar as the last remaining stable currency, not realizing that the US Dollar is the very culprit behind all the hardship.

Update:  As of this writing it appears that the Tunisian government is in complete disarray.  Tunisian President Ben Ali has fled the country and it is unclear as to who controls the Parliament.  I have also included a chart of global food prices, quite remarkable when you consider that there has been virtually no economic activity increases over the past two years.