Feb 28, 2011 04:36 PM

Hot Money, Fast Riots

Popular revolts have toppled governments that have ruled for decades in Tunisia and Egypt. The revolts are spreading to other Arab countries and even to Iran. The chances are that the region will undergo a complete political transformation in a year or so. The affected region has over 400 million in population. Its global significance cannot be underestimated. It may be the biggest global change in two decades.

Social revolutions have complex social backgrounds. It usually involves multiple pressure points that fester for many years. The tipping point involves some trigger. In this case the rapid inflation, especially food inflation, in the second half of 2010 was the trigger.

The developed economies suffer from high indebtedness. Their central banks seem to adopt very loose monetary policy to reduce the debt burden. This force is likely to continue for years to come. Inflation in the world will likely remain high.

A large share of the global population, including low income groups in the developed economies, have not benefited from globalization but are suffering from inflation. Their reaction will put global stability in jeopardy. The major central banks may change their attitude toward loose money only when the riots happen in their own countries.

Food and Energy Price Surge

In both Tunis and Cairo, it was loose money that triggered the riots. The FAO food price index rose by 41 percent in 2010. I am sure that many clever analysts would argue that there is no relationship between the Fed's loose money and food prices. The food and energy prices began to surge right after the Fed began to talk about QE2. It is too much of a coincidence to explain away.

Inflation is redistributive, usually unfairly. First, low income people tend not to have debt, because they are usually not qualified to borrow from banks. When inflation surges, as it is happening now, their bank deposits erode in real value. Where do their losses go? The people who have debt and real assets like property speculators gain the same amount. Inflation essentially robs the poor and gives to the rich.

Second, low income people tend to have insecure jobs and cannot bargain wages up along with inflation, especially when inflation surges like now. The reduced purchasing power for their wages pushes them into an unsustainable situation. They simply cannot make ends meet.

Forty percent of Egypt's population lives on less than US$ 2 per day. The unemployment rate is nearly 10 percent. When food and oil prices rise by over one third, one can imagine why people were pushed into revolt.

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