Riots caused by high prices are the result of US Fed policies
Milan (AsiaNews) – AsiaNews recently published a number of articles on rising food prices, especially in China[1] and India[2], Asia’s two largest economies, raising alarm bells about potential turmoil. Countries like Laos, Oman and Jordan have already experienced riots over the cost of food staples. Higher fuel prices have sparked popular unrest elsewhere. News about such incidents have not come from Asia alone; in fact, every continent has been affected. For example, roadblocks have been set up in Chile, a country shaped as a long strip wedged along South America, where transportation costs and fuel prices are very important. Similar incidents have been reported in Bolivia where the cost of petrol jumped 86 per cent on 26 December.
In North Africa, the rising cost for semolina wheat, the basic ingredient in the region’s main food staple, couscous, has led to riots in the streets of Algeria and caused disgruntlement in Morocco. In Tunisia, whose president fled (with 1.5 tonnes of gold), the government resigned. What started out as widespread dissatisfaction appears to be turning into a popular revolution. Something like it is feared in Egypt[3] where customs officials have recently stopped 59 shipments of gold before they left the country, a sign that some people have lost confidence in those in power and are willing to risk confiscation and smuggling charges.
Europe too has not been spared. Urban violence has hit the streets of some European cities when the debt crisis burst in Greece, Portugal, Spain and Ireland. British students took to the streets to protest as well. More recently, three people died in clashes in Albania. More generally, the situation in Eastern Europe, in Estonia and Moldavia for example, is very serious because of major rises in fuel and food prices.
Despite apparently contradictory data, things are not much better in Western nations. The US Department of Agriculture recently released a report forecasting the lowest inflation since 1992 for food items and other basic and consumer goods[4]. The same appears to be true for European nations.
However, regular shopper might not agree[5]. The prices of food and agricultural products are not some vague theoretical issue. In Western countries, inflation has gone “smart” with producers and big chain stores, wherever possible, holding prices steady but putting their products on a diet in terms of quantity and quality (with more greens or sauce in tuna or other canned foods, for example).
North Korea has again reacted to the lack of food its own way. Given the endemic famine it has caused, the regime stressed the urgency and gravity of food shortages by using its artillery. This time however, it did not simply fire blank shots or into the sea, but shelled human settlements, killing civilians.
Taken individually, all these events or happenings appear as local contingencies. However, they are not. According to the Food and Agriculture Organisation (FAO), food prices, especially grains, rose between 40 and 60 per cent last year. Higher prices for basic items in this or that country are due to worldwide factors. Production shortfalls or bad weather are not to blame, whether it is drought-stricken wheat production in Russia and Kazakhstan or flooding in Canada, northern Europe and Australia (floods in Pakistan had a devastating impact on humans but very little on agricultural output). The same is true for frost in the case of Argentina’s maize, soy and wheat production, or the loss of the potato crop in Russia or other such events.
Famine has not caused popular unrest—certainly not in ways known to humanity for thousands of years. Grain production[6] dropped by 2 per cent drop last year, too little to explain the actual rise in prices. In fact, price rises and the decline in world production are out of synch. Indeed, vast food reserves built up over the past few years thanks to record surpluses could have been easily used to make up for any contingent drop in production. Interestingly, FAO data show exceptional price increases in the past six-seven years, in some case of the order of almost 400 per cent compared to 2002-2004, and this despite higher production levels.
Financial, not technical or weather factors are behind higher prices. Inflation is the by-product of huge liquidity injected into the markets by central banks, in particular the US Federal Reserve, as AsiaNews has pointed over the years. For a long time, the price of raw materials has for the most part not reflected the interaction of supply and demand for real goods. By far, the main factor in shaping the price of almost all raw materials is trading by financial operators who can quickly shift huge amounts of money from government bonds to securities, stocks and so-called goods. For those with the right connections, profits are huge and risks relatively low. Since they have access to almost unlimited resources, they can get what they want. Market values are systematically distorted in large measure, but not exclusively, by the ‘Plunge Protection Team’, a colloquial term used by newspapers for a little known body with an exclusive membership that has a major impact on markets. Set up in 1988, its official name is the President's Working Group on Financial Markets. It includes the secretary of the Treasury, the chairman of the Federal Reserve, the chairman of the Securities and Exchange Commission (SEC), and the chairman of the Commodity Futures Trading Commission. In addition, the Federal Open Market Committee (FOMC) of the Federal Reserve Bank of New York, which oversees the nation's open market operations, is now routinely involved as well. A small number of institutional groups rotate around the aforementioned bodies as well. They include big business banks, like Goldman Sachs and JP Morgan, and hedge funds. Movement of personnel between these institutional groups and big private groups are commonplace; thus, no one should be surprised if a handful of managers in charge of speculative funds can earn huge annual pays, a billion dollars just in fees in some cases.
The pleasant side of all this is not so much the power such a small group of people can exert (financial derivatives alone are worth 15 times all the goods and services produced in the world a year), but rather the certainty these insiders have that they will not likely have to pay for their mistakes. Here is a case in point.
In a previous article,[7] we noted that as of 3 November 2010 mortgage-backed securities (MBS) constituted 44.91 per cent of the budget (so to speak) of the Federal Reserve (the de facto but not de jure central bank of the United States since the US constitution forbids such an institution). However, from a legal point of view, these securities are worthless. Consequently, a strong possibility exists that the Fed (a private organisation created on 23 December 1913 by a law signed by Woodrow Wilson) could become insolvent and go bust because of such securities.
However, this possibility has disappeared a few days ago. Reuters[8] reported in fact that the Fed, without making too much noise, changed its accounting rules. As of 6 January, bonds held by the Fed, including MBSs, can no longer be counted as losses against its own capital but become a liability for the US Treasury. The Federal Reserve is thus no longer facing even the theoretical possibility of bankruptcy. When people realise that bonds bought from commercial banks to prevent their collapse are worthless, the US Treasury will be the one liable for the losses. This way, in complete disregard of democracy and unbeknownst to almost everyone, the risk of insolvency has shifted to US taxpayers, of all ages, both living and those not yet born. Of course, no one is likely to demand that the fat commissions earned by banks and financial companies and their bosses be reimbursed.
“If only businesses and households had the same privilege [of changing accounting guidelines],” said Pedro Nicolaci da Costa in the Reuters piece. Echoing his wish, at AsiaNews we say: If only households in China and India, who spend 40 per cent of their meagre wages on food, had the same privilege.
What all this means is that the gap between elites and the rest of the world is growing ever wider, fuelling popular unrest around the globe. Yet, the former do not appear too worried for they have been preparing for such an eventuality for quite some time. As for political leaders who are unwilling to adapt to what powerful financial elites want, they are likely to be eliminated.
[1] See, for example, Wei Jingsheng, “Inflation in China will cause the collapse of the regime,” AsiaNews, 30 December 2010, and “Inflation fears as Chinese economy grows,” AsiaNews, 20 January 2011.
[2] See, for example, Nirmala Carvalho, “Rising petrol prices hurt the poor as the ranks of the rich grow,” AsiaNews, 17 January 2011, and ibid., “Pricey onions threaten India’s growth and government,” AsiaNews, 20 January 2011.
[4] In its monthly report last August, the US Department of Agriculture forecast US food prices to rise at their lowest rate since 1992. See “Food price inflation lowest since 1992: USDA,” Reuters, 25 August 2010.
[5] See Joshua Brown, “Food price inflation isn't theoretical anymore,” Christian Science Monitor, 8 November 2010.
[6] See “Food Outlook Global Market Analysis,” FAO Trade and Markets Division, November 2010.
[7] See Maurizio d'Orlando, “Currency wars and the Fed’s demise,” AsiaNews, 18 November 2010.
[8] See Pedro Nicolaci da Costa, “Accounting tweak could save Fed from losses,” Reuters, 21 January 2011.
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