Riot Alert: Look Out Argentina, South Africa, Turkey, and India by Ciaran Ryan

The Johannesburg-based economic research house ETM Analytics (www.etmstrategy.com), which has a strong Austrian bias, puts out a monthly “riot alert” based on the speed with which countries are debasing their currencies. It has been scarily accurate in predicting where trouble is most likely to erupt.

The research shows that those countries printing money the fastest are also those experiencing the most social unrest. ETM measures inflation in terms of the Continuous Commodities Index (CCI)*, which reflects inflationary trends almost immediately on the basis that monetary expansion debases the currency and increases the prices of commodity imports such as fuel and food.

For all the press acreage given to the political causes of violence in countries like Syria and Egypt, it is difficult to side-step the obvious common denominator: inflation. A 10% rise in food prices can transform a hungry man into an angry man.

As the accompanying graph shows, Syria is the world’s most rapacious money printer. It is also currently one of the most dangerous places in the world. No surprise there.

Next up is Argentina, under the leadership of the erratic but populist Christina Fernandez de Kirchner. Since 2010, Kirchner made numerous attempts to reduce central bank independence, increase the government’s balance sheet and devalue the peso. Kirchner also introduced price controls, increased taxes and nationalised key companies. All this, says ETM Analytics, has “set the economy up for another bout of hyperinflation. At the same time, there has been widespread social unrest noted in Argentina in recent months.”

It is also worth noting that Kirchner is engaging Britain’s Prime Minister David Cameron in a glare fight over the Falkland Islands.

Egypt’s democratic flowering is wilting on the stem as unrest spreads from Cairo to Port Said and beyond over the killing of 30 protestors in January. The country’s foreign reserves are down by two-thirds since 2010 and wheat stocks are similarly dwindling (the government subsidizes bread). The Egyptian pound has lost nearly a quarter of its value against the US dollar since 2010, raising the cost of imports, and throwing the Muslim Brotherhood-led government at the mercy of the IMF.

South Africa’s race to the economic abyss continues unabated, propelled in no small part by enthusiastic money printing. Once the world’s preeminent gold producer, it now ranks fifth behind China, Australia, United States and Russia. Mining investment is fleeing for more comely shores. A few weeks ago South African-born mining house Randgold Resources said it will no longer invest in South Africa because the government is more interested in harvesting tax revenues than encouraging investment. Instead, Randgold will pour its money into “safer” countries afflicted by low-grade wars, such as Mali, Congo and Ivory Coast. This is akin to McDonalds announcing it would leave the U.S. for good to set up shop in North Korea.

South African mining and construction workers are in open revolt against the Congress of South African Trade Unions (Cosatu) which forms part of the ruling ANC alliance. Workers seem to have cottoned on to the fact that their leaders long ago abandoned them. In August last year, police shot 44 striking mine workers who had broken away from the official National Union of Mineworkers. Last week, several more were injured with rubber bullets at a mine owned by Anglo Platinum, which has announced it will scale back its South African operations.

Farm workers in South Africa’s Western Cape Province went on a rampage last month, demanding higher wages. Government stepped in and raised the minimum wage to R105 (US$12) a day. A few days later, the inevitable happened: employers announced they would lay off thousands of farm workers. No surprise there.

Another country on the danger list is India, with a youth unemployment rate nearly 50% above the national average. The rate of labour force participation in India has also been on the decline among youth, suggesting students are staying in school longer. Outstanding student loans have more than doubled in the last four years, and graduates find themselves entering a weak job market.

Youth unemployment and inflation are a toxic combination, as Egypt and Tunisia discovered in 2011. Now, perhaps, it is India’s turn.

“India’s GDP growth has slowed from levels of 8-9% in 2011 and is now projected to be around 5% in 2014. Bank economists continue to revise India’s GDP growth forecasts lower. Slowing GDP growth suggests lower jobs growth in coming quarters,” says Chris Becker of ETM Analytics.

India’s wholesale price index (WPI) inflation rate declined to a November 2009 low of 6.6% year-on-year in January, but this does not reflect the rate of inflation experienced by the poor, which shot up more than 40% in the last three years. Given the prevailing environment of slowing economic growth, high youth unemployment, and strong basic commodity price inflation, ETM believes India is a key country to watch for unrest in the coming months, especially “if the Reserve Bank of India decides to loosen monetary policy further to stimulate growth.”

Turkey, too, is on the danger list. For the first time in five years, Turkey has been classified as “extreme risk” in Maplecroft’s Terrorism Risk Index, reflecting increasing terrorist attacks by the separatist Kurdistan Workers’ Party (PKK). However, the PKK, which has the backing of Syria and Iran in response to Turkey’s financial and logistical support of the Free Syria Army, has for the moment concentrated its attacks to the south and east of the country; the effects on the country’s economy have been limited.

Tunisia, another currency abuser, this week bade farewell to Prime Minister Hamadi Jebali, just two weeks after the assassination of opposition leader Chokri Belaid, and just two years after the overthrow of the previous government, which gave birth to the Arab Spring.

“Socio-political grounds are commonly cited as the main reason for instability in the hotspots of the world. However, often the trigger for instability is something as simple as a bout of price inflation; rising food and energy prices quickly arouse socio-economic grievances amongst the masses, which can easily turn from popular protest into conflict,” says ETM.

The relationship between inflation and social upheaval has been well documented by economists such as Friedrich Hayek.

At the height of its hyper-inflationary frenzy in 1923, Germany’s prices rose at the rate of 322% a month. This ended when Germany abandoned fiat money printing in favour of a gold-backed currency. This provided the wherewithal for Hitler’s massive remilitarisation, culminating in World War Two. During the French Revolution, inflation was 143% a month. This, too, ended when Napoleon re-introduced gold backing, but that did not stop his disastrous military foray to Russia.

At its height, Zimbabwe’s inflation rate hit a mind-numbing 6.5 sextillion percent in November 2008, according to the Cato Journal. Social unrest was kept in check by starvation-induced apathy and military repression. The country’s inflation rate has since moderated to around 3% after abandoning the Zimbabwean dollar in favour of more stable currencies such as the U.S. dollar.

Becker believes the currency wars currently in play suggest a race to the bottom by the world’s greatest abusers of the printing press. The U.S. dollar and British pound are losing ground to the Euro, but Japan is trying desperately to debase its own currency and so steal a competitive advantage.

This, then, is the apex of economic brilliance in the world today: the idea that a weak currency, which is an inevitable product of money printing, is a good thing since it makes exports more competitive.

If you believe that, then look again at the above graph and see if you cannot come up with a better idea.

The research measures inflation on a country-by-country basis using the Continuous Commodity Index (CCI), which is a more immediate measure of inflation than more conventional measures such as the Consumer Price Index (CPI). The CCI is a basket of some 19 commodities, including food, fuel, industrial commodities and precious metals. It reflects inflationary trends almost immediately on the basis that monetary expansion debases the currency, resulting in higher costs of commodity imports such as fuel and food. CPI, on the other hand, covers a much wider basket of goods such as housing costs, clothing and technology, costs which form an insignificant part of the spending of low income households.

Reprinted with permission from Economic Policy Journal.

Ciaran Ryan [send him mail] is a writer and mining entrepreneur operating from South Africa and Ghana. Visit his website.