Scarier than revolutions: a tempest in a shopping cart

While the attention of the media is largely devoted to looming storm clouds over the Middle East, it may well be that the next tempest to shake the world may in fact be expected in your teapot. Not to mention your shopping cart. And your gas tank.

In fact, while the uprisings in the Middle East may well be harbingers of historic change in the region, they are also a direct result of another set of factors that could conceivable eclipse them as the big story of the year for 2011: rising global commodity prices. In Tunisia, Egypt, Yemen, and Jordan among the most notable complaints of protestors has been the skyrocketing food prices.

As noted here, that fact is part of a vicious circle that is worrying markets. Bad global grain crops last year produce unrest in the Middle East this year. That in turn pushes up energy prices due to concerns about disruptions in energy flows. That in turn pushes up food prices further as something like 30 or 40 percent of the cost of most food products is related to energy costs associated with processing, packaging, and transportation.

But that’s not the whole story. Look at the headlines coming out of China this week about a spreading and significant drought that is likely to further negatively impact food supplies and push up prices. Look at the other headlines about Chinese and Brazilian concerns about inflation. Or the headlines from today (and many recent days) about how inflation worries are depressing stock prices.

In fact, among the very few people who are not that worried about inflation is U.S. Fed Chairman Ben Bernanke who, testified Wednesday, said that while it may be a problem for the emerging world, "inflation is expected to persist (in the United States) below the level Federal Reserve policymakers" feel they have to worry about it. Of course, just because he doesn’t worry about inflation here in the United States, doesn’t mean Americans aren’t going to feel the pinch if food and fuel prices go up. In a rough economic environment like this one for many Americans that squeeze will be particularly acute … and included in that group are the politicians who will hear the howls of their constituents if prices get above the level average people feel is fair to them. Furthermore, if inflation in places like China, Brazil, or elsewhere in the emerging world causes them to tighten their monetary policies or it negatively impacts  real growth, there could be meaningful negative knock-on consequences for the United States.

At the hearings attended by Bernanke, Republican Budget Committee Chairman Paul Ryan of Wisconsin was not quite as sanguine about the issue as was the Fed chief. He said, "My concern is that the costs of the Fed’s current monetary policy — the money creation and massive balance sheet expansion — will come to outweigh the perceived short-term benefits. We are already witnessing a sharp rise in a variety of key global commodity and basic material prices, and we know that some producers and manufacturers here in the United States are starting to feel cost pressures as a result."

Bernanke shrugged off the problem with an argument that it was limited to the emerging world where there was a lot of growth and consequent overheating. This is why, of course, it is dangerous to let economists do economic analysis — because they tend to miss the political and security consequences of events. That said, sometimes they miss the economic ones too. Bernanke also suggested that rising oil prices are due to increasing emerging markets demand, aren’t coming from the United States and there’s nothing monetary policy can do about it. Well, International Energy Agency reports aside, one of the reasons oil prices have spiked in recent years due to the fact that investors use oil as a hedge against the dollar and price the commodity in dollars and therefore there are at least two reasons why a weak dollar policy like that pursued by this Fed (their long slow cruise on the QE2 … that’s "quantitative easing two" for you landlubbers) ends up pushing up oil prices.

I have plenty of respect for Bernanke. But when the Chinese Central Bank, the European Central Bank, the Brazilian Central Bank, and several Fed governors all are concerned, I think it’s time to take his "what me worry" view with a grain of salt. We’ve seen it in prior instances when what came next was a considerable financial calamity.

According to the U.N., last week world food prices peaked for the seventh consecutive month, led by prices in wheat, milk, sugar and, yes, even tea. Some are predicting tea market shortfalls of 50-60 million kilos for 2011. (This is thanks in part to droughts elsewhere in the world including, to pick one example, Kenya. The connection between prices and strange global weather patterns are so great that one would think that they might even grab the attention of those skeptical about climate change … but of course, to discount science it helps if you also discount causality and logic so perhaps this will be another loud warning on that front that will be ignored.) For a provocative take on this turn … with a grain of high priced salt … to one of London’s favorite tabloids, The Evening Standard, for today’s piece entitled, "The Men Who Ate the World."

As the piece notes, chocolate prices are also skyrocketing which particularly pains me. At the same time, it offers the only silver lining to this worrisome trend. While spiking food prices may be politically and economically destabilizing, they could have the secondary effect of counteracting the world’s also worrisome obesity epidemic which was cited by Josh Keating in his piece at FP on the most recent study showing that more and more people are starting to look more and more like the planet itself.