I spoke today at a lunch about the effects of the market on the Middle East. What, the organisers wanted to know, did the Arab Spring mean for the markets?
It’s an obvious question but I think it is slightly the wrong way around. It isn’t the Arab Spring that is causing much in the markets. Instead, the markets have caused the Arab Spring.
You can make a good case for the financial crisis having created a wave of fractures throughout the supply chain and cutting global capacity across the board. The general opinion is that there is a global output gap of around 8% (with current resources, we could be producing that much more).
But, if you take into account the capacity lost either permanently, or at least for the medium term, that may not be the case. Think of all the marginal commodity producers that went bust in the immediate aftermath of the credit crunch – if no one can borrow money to get their mines open or exploration off the ground again, do they represent spare capacity or lost capacity?
Halkin Services’ Peter Warburton thinks the latter – which is why, even in 2009 when the rest of the world was fussing about deflation, he was pointing to cost-push price inflation – inflation caused, not by an organic rise in demand, but by a troubled supply chain. When quantitative easing (QE) piled in on top of that, he, for one, wasn’t much surprised to see commodity prices rise across the board. As he pointed out in 2010, “an aggressive stimulus package to aggregate demand which seeks to restore the status quo ante will encounter inflationary tendencies at lower levels of activity than before.” Quite.
The transmission mechanism from QE to rising wheat and onion prices will be debated for years – I expect to still be seeing PhD theses on it when I am 80. But look at the charts and you do have to admit that, while the causation is uncertain, the correlation is pretty clear.
But there is another chart, created by Baring Asset Management, doing the rounds that shows just such an interesting correlation – that between fast rising food prices and revolt. You can see this here. You can argue that it isn’t perfect, in that the price of bread is heavily subsidised in much of the Middle East. But it does show clearly that pricey food and riots tend to come hand-in-hand.
Happiness studies – for what they are worth – show us over and over again that most people value certainty and stability over almost everything else. That makes them risk averse – they only riot properly when their standards of living fall. The general perception is that the Arab Spring is about a desire for a liberal democracy just like those in the West. It may be. But without rising food and energy prices, that desire may well not have been expressed.
I suspect we’ll be seeing PhD papers analysing this for the next 40 odd years too. In the meantime, if we want to know what is going to happen next in the Middle East and North Africa, we could do worse than keep an eye on the weather and on Ben Bernanke, given that they appear to be the main factors influencing food prices.
The same goes for several Central Asian countries: Bangladesh, Nigeria and Sri Lanka, all of which come uncomfortably high up on Nomura’s Food Vulnerability Index. Alternatively, Chrystia Freeland’s Uprising Index, which incorporates the Nomura Index alongside various other elements, is worth a look.