Tuesday, February 1, 2011

Inflation impact to world economies

Article compliments of: http://freedomofoceania.blogspot.com
January 14, 2011

I've been thinking heavily about the prospects for US dollar hyperinflation or stagflation and the resulting impact it would have on the world.  Many would say that QE by the fed has contributed to the rise in agricultural commodity prices (food and fuel inflation), while others claim it is merely a supply and demand issue in the face of rising world population.  The author feels it is fair to say that both statements are correct.  With that in mind, I have developed a rough thought experiment for a linear and geometric increase of commodity prices and potential geopolitical impact.

First the population growth rate:  List of countries by population growth rate

As a base of our thought experiment we need to understand the regions and areas of the world with the largest population growth rate.  There is a clear trend of population growth in North and central Africa, Afghanistan and South America. 

With that in mind we should look at what level food and fuel prices make up average or per capita income.  In the United States, food makes up approximately 4% of income spent.  In contrast, African nations such as Nigeria spend on average 31.43% of income on food.  In a stagflating environment where fuel and food prices are rising (liquid fuels are a major base component of food costs), the countries whose populations spend a greater share of income on food are affected to a much greater level.  In the thought experiment, the overall negative effect on an average Nigerian is orders of magnitude greater than in western countries.

By extrapolating a 50% compounding rate of food inflation, we find over half of our list, after a 200% increase of food prices, is in the danger/ riot zone as a percentage of income spent on food.  The troubling thing is that many of the countries negatively impacted by food prices are oil exporting nations directly tied back to the western countries prosperity.  This below chart is by no means a prediction, or forecast.  Forecasting is for fools greater than this author.  It does however demonstrate the fragility of many nations in the world.  Note that in the year before the french revolution, the price of bread rose 50% and there is substantial empirical evidence linking excessive food inflation to political turmoil.

The US Government, because of our excessive debt level, will try to debase the currency.  Bernanke probably feels that based on figures below and elsewhere that he has a fair amount of breathing space to devalue the USD by 75% or more over a period of a few years.  Unfortunately, I think Bernanke feels that he can keep a controlled decent.  I feel it's very likely it could resemble a piano being shoved off the roof of a building. Either way, the USA is definitely not a bad place to be.  One of the larger dangers we have in the US, UK, Canada, EU is our optimized, and consequently, fragile economies to the supply of goods and energy.   I hope, my dear reader, understands that based on the thought experiment below, we are in for some tumultuous and unreliable times for supplies of goods and energy.  Become un-fragile my friends. 

CountryYear 0Year 1Year 2Year 3Year 4Year 5Year 6
South Africa14.22%21.33%32.00%47.99%71.99%107.98%161.97%
Saudi Arabia14.32%21.48%32.22%48.33%72.50%108.74%163.11%

Here's another good map of food prices as percent of income from the Economist (Where people spend most on food and fuel):  http://www.economist.com/daily/chartgallery/PrinterFriendly.cfm?story_id=11693372