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Food Matters: Commodity Prices and the Egyptian Revolution

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As we watch history unfold, the events that swirl around us are interrelated in ways we never could have imagined a generation ago. And so it is that events in Tunisia and Egypt can be seen as interconnected stories emerging from a single tableau.

For all of the stories wired in from Cairo of the yearning for freedom in Tahrir Square, the question of Why Now? is rarely addressed. Surely the predations of the state visited upon Arab populations by autocrats and secret police from Morocco to the Gulf are not news -- at least not to the citizenry of those countries. Yet as blogs and bylines and televised reports reach us, their central narrative remains the yearning for freedom and dignity.

But Why Now?

In Tunisia, it was Mohammed Bouazizi, a food vendor in the city of Sidi Bouzid, who, after years of taunting and abuse by the police, immolated himself in rage and frustration, and ignited the storm that subsequently erupted. But it was the price of food that had changed Mohammed Bouazizi's world, for the beatings were a regular feature of his life. And so too in Egypt, it is the price of basic foodstuffs--that consume as much as half of a typical family's income -- rather than the denial of basic rights that marks a material change in peoples lives.

Over the second half of 2010, basic food commodity prices have skyrocketed, especially wheat and sugar. While many have pointed to supply and demand factors -- ranging from growing demand in China to floods in Australia that threaten future wheat supplies -- the fact is that commodity price inflation has not been limited to food.

If there is a simple answer to Why Now, it may be that the answer is less Hosni Mubarak than Ben Bernanke. In normal economic times, broad-based commodity price inflation would increase during periods of strong economic growth. But these are not normal economic times.

In the wake of the economic meltdown of 2008, it has become clear that the recovery of the world economy depends on successful return to growth in the United States. For all of the talk of decoupling Europe from the U.S., in the wake of the global collapse the U.S. Federal Reserve emerged as the de facto central bank of the E.U. And for all the talk of China rising, the collapse of U.S. consumer spending wrecked havoc on China in a matter of months, leading to widespread civil unrest and forcing the Communist regime to spend an amount equal to 20% of its foreign exchange reserves on a stimulus program to weather the storm.

By the middle of last year, Bernanke and the Fed broadened their efforts to push liquidity (read: money) into the system to forestall a recessionary "double-dip" and accelerate domestic job creation. This effort, known by the moniker Quantitative Easing, or QE2, basically entailed printing money and buying long-term Treasury bonds.

The response of the global markets to QE2 was an immediate understanding that the Fed's intention was to push down the value of the dollar to ease trade pressures and stimulate domestic growth, even as the Fed was counting on international investment to continue to fund U.S. deficit spending. In a massive game of chicken with the Chinese -- and others whose national development strategies have been nothing less than dumping cheap goods into the hands of U.S. consumers -- Bernanke was counting on international dependence on the U.S. dollar as the reserve currency to assure adequate continued flow of funds in the U.S., even as the dollar traded down in value.

To date, for all the complaining, from China to the Fox commentariat, Bernanke has thus far succeeded. International holdings of U.S. Treasuries have continued to grow in the face of a weakening dollar, the U.S. stock market has boomed and the economic recovery has been sustained. Even some vocal critics of quantitative easing have softened their views, such as Kansas City Fed President Thomas Hoenig, who recently suggested that the Fed would likely consider extending the program.

But if QE2 has been provoked little adverse reaction domestically, a more concrete impact of QE2 has been felt in Tunisia, Egypt and across the Middle East, where basic food price inflation has skyrocketed.

Despite all the talk about supply and demand factors pushing up food commodity prices, the recent price surge reflects the wave of speculative money flowing into commodities and gold, seeking protection against a declining U.S. dollar. As illustrated in this graph, since the implementation of QE2 in mid-2010, wheat and sugar prices -- those foodstuffs most closely linked to Mohammed Bouazizi's livelihood -- have gone through the roof. While rising commodity prices have minimal impact on domestic U.S. inflation, it has a dramatic impact in less developed countries.

In Iran, fear of food riots made international news in December, as the Ahmadinejad regime sought to cut subsidies for fuel and food as commodity prices rose and further strained the national budget. And in Egypt, subsidy regimes that sought to provide low cost bread, oil, and sugar have provided little protection to the wide swath of the population -- 40% of whom live on less than $2.00 per day -- as the price of food reportedly grew by 30% in the last six months of 2010, and the black market price of flour was 100 times the official subsidized price.

Food prices are not new as an instigating factor in popular uprisings, dating at least back to the American and French revolutions, and the price of bread can bring more people to the streets than the noblest of words. The ultimate indignity and humiliation heaped upon Mohammed Bouazizi was not the beatings that he grew to accept, but rather -- faced with forces beyond his control -- it was his inability to provide for his family, to fulfill that most basic responsibility.

For that humiliation, Hosni Mubarak may fall, like Tunisian President Ben Ali before him. But the story is not just about them. It also about the interconnection of the world in ways that we rarely think about, about how policies in Washington might affect traders in Zurich and, in turn, the life of Mohammed Bouazizi on a street in Sidi Bouzid. As we watch history unfold, and imagine what the next chapter might entail, the interdependence of our world should be neither ignored nor forgotten.