QE 2, Inflation, Unrest In Egypt, And Inflation Is Under Reported In America.

(I don't have time to do a well written post.) There is major unrest going on in Egypt. I don't know all of the causes and won't try to explain all of them and I won't try to predict what will come out of the unrest in that region of the world. I will focus on how gut-level economics, the recent expansion of the money supply by the Federal Reserve known as QE 2, and the resulting inflation are contributing to unrest in Egypt. The unrest in the Middle East in driven in part by the world-wide inflationary policies carried out the various governments of the world and shows what the end result of such policies are.

According to this article from Big Government dot com, the recent Quantitative Easing or digitizing/printing of money to help pay for the Nation's debt has contributed to unrest in Egypt.

Chairman of the Federal Reserve Ben Bernanke launched a second round of Quantitative Easing (QE2) in October, following over a year of growth in the economy at a robust rate of over 3%. Most analysts pooh-poohed QE2 as an insufficient economic stimulus to create enough inflation to reduce unemployment. I warned that QE2 was like pouring inflationary lighter fluid on the world and then lighting a match. With food inflation now running at 15% in poor countries, the Middle East is just the first area to burn, but fire is smoldering in much of the world and other fires will break out soon.

QE2 is a program by the U.S. Federal Reserve to inject $600 billion of U.S. dollars in the financial system by repurchasing an equivalent amount of U.S. Government bonds. Once the money is paid to the former bondholder, they deposit the cash in banks. Banks take deposit dollars and leverage them by 6 to 10 times creating $3.6 to $6 trillion in credit. Given that the Gross Domestic Product of the U.S. economy is only about $14 trillion annually, it would impossible to immediately purchase 25-40% of the entire economy. Consequently, the reality of Quantitative Easing is that the money will be invested in the stock and commodity markets. The theory is that the financial assets rise on the huge inflows of QE cash, investors will feel wealthier and go to the malls and the car dealerships to 'shop till they drop'.

The problem with theory is that QE2 money quickly drove up commodity food prices around the world. This price rise is barely noticeable to Americans who only spend 10% of their personal income on food for three meals a day; but the impact of food inflation is devastating the over half the world that spends approximately 50% of personal income on food for two meals a day. The 15% QE2 induced commodity food price increase has reduced the amount of food poor people can purchase by almost 1/3.

The riots and revolutionary activity burning down Tunisia, Yemen, and Egypt are about gut-level economics. Do you think Americans would riot and throwing out our government if we were forced to cut back to eating 1 1/3 meals a day? Once riots start people in cities hoard food to survive and becomes dangerous for farmers to transport food. This is exacerbates food shortages and drives prices even higher.

Unemployment was modestly declining and inflation was flat before the Fed’s August announcement of the new stimulus, as shown above. That trend remains in place as QE2 has not significantly reduced unemployment. The only success of QE2 in U.S. is a 20% in the stock market the last six months.

When the Credit Crisis hit in 2008, the Middle East country of Dubai was the first financially leveraged nation to suffer a debt crash. Since that time; Greece, Iceland, Ireland, Spain and others are also suffering a similar fate. QE2 leveraging of worldwide commodity food prices has sent the Middle East into flames. With the price of a barrel of oil hitting $100 dollars and food prices accelerating, those flames will spread.

So it appears that inflation that was exacerbated by the recent fed action are contributing to global unrest. Corn ethanol has also driven up the price of food.

Inflation here in America as measured by the government is about 1.5 % over the past 12 months, this number excludes the cost of energy and food. But according to "Dr. Doom"/Marc Faber it is actually around 5%.

'I guarantee you … the annual cost of living increases are more than 5 percent, and the Bureau of Labor Statistics is lying,' Faber told CNBC at the Russia Forum in Moscow.

'Mr Bernanke is a liar; inflation is much higher than what they publish. I would imagine for most households it’s between five and eight percent per annum in the United States and in Western European countries maybe a little bit lower but also around four and five percent per annum,' he said.

In addtion, Faber said high food prices, which have sparked political unrest in Egypt, would next cause turmoil in Pakistan.

'You may not have the problem in Saudi Arabia and the Emirates because there the governments can heavily subsidize food if they want to, but I’m particularly worried that what has happened in Egypt will happen in Pakistan,' he said.

Asked whether Pakistan would indeed see an Egypt-style uprising, he said: 'I think that will be the case.'

'I think Egypt is a reminder to people that politics and social events and geopolitics have a meaningful impact on asset markets,' Faber said, adding that what the world was currently witnessing was 'a wake up call where the US outperforms emerging markets for a while.'

'That doesn’t mean that the US goes up. It just may go down less than the others,' he said.

Turning to the global economic recovery, Faber said the West was bottoming out and recovering, which meant the global economy looked 'OK' for the next six months.

But 'we’re all doomed in the long run,' he said.

'We have to realize it’s an artificial recovery driven by ultra-expansionary, monetary policies and also ultra-expansionary fiscal policies.

In other words, the deficits of governments are huge and that will lead down the road to renewed problems,' he said.

This social unrest in Egypt is the result of a world-wide inflationary policy. The poorer nations are feeling the effects now, later it will be the wealthier nations.