Tuesday, February 26, 2008

NY Times: Rising Inflation Creates Unease in the Middle East

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Thanks for a reader for pointing me to this article... my research team of 1 human and 10 hamsters can't catch it all (rodents really are quite lazy), and I've been sagging on my NY Times reading. Ironically, the first paragraph has a striking similarity to a certain 1st world country that rhymes with... Cramerica. But as investors most of us are too busy clapping and cheering Fed cuts, because they always seem to make the market happy, for a few hours/days/weeks anyhow - without taking a step back and thinking of what is really being created on Main Street.

For any Realmoney.com readers Tony Crescenzi has been stating M2 (a measure of money supply) has exploded upward in the past 2-3 weeks ... apparently the Fed is realizing the first 30 steps of its 31 step credit binge recovery plan have not worked. Hmm, this has coincided most perfectly in timing with the most recent explosion upward in commodities. Related? Nah... of course not. This is the pickle for the Fed - it can create magic money out of thin air; it just cannot control where that money goes. Ironically it is either being horded on bank balance sheets, or used to speculate (run up) commodities that are already off the chart. Not exactly what they meant to do... oh well. It's only inflation... out, nothing for the working class to worry about, now the high flying elite who create financial innovations and are paid huge sums for these works of brilliance. (Mona Lisa's of capital destruction!)
  • Even as it enriches Arab rulers, the recent oil-price boom is helping to fuel an extraordinary rise in the cost of food and other basic goods that is squeezing this region’s middle class and setting off strikes, demonstrations and occasional riots from Morocco to the Persian Gulf. (replace the words 'Arab rulers' with 'upper 0.5% country club financial elite' and the blurb works perfectly for our country too)
  • Here in Jordan, the cost of maintaining fuel subsidies amid the surge in prices forced the government to remove almost all the subsidies this month, sending the price of some fuels up 76 percent overnight. In a devastating domino effect, the cost of basic foods like eggs, potatoes and cucumbers doubled or more. (this is essentially what the Chinese government has been doing as well; subsidizing costs as they spiral out of control - thankfully Americans send them their money every day so they can afford to continue this - who said we don't rub their back?)
  • In Saudi Arabia, where inflation had been virtually zero for a decade, it recently reached an official level of 6.5 percent, though unofficial estimates put it much higher. Public protests and boycotts have followed, and 19 prominent clerics posted an unusual statement on the Internet in December warning of a crisis that would cause “theft, cheating, armed robbery and resentment between rich and poor.” (sounds vaguely familiar)
  • Now we have to choose: we either eat or stay warm. We can’t do both,” said Abdul Rahman Abdul Raheem, who works at a clothing shop in a mall in Amman and once dreamed of sending his children to private school. “We’re not really middle class anymore; we’re at the poverty level.” (this is already happening in lower tranches of American society - the only difference is it is now moving upstream in the socio-economic food chain so people on local TV news actually might pay attention now)
  • Some governments have tried to soften the impact of high prices by increasing wages or subsidies on foods. Jordan, for instance, has raised the wages of public-sector employees earning less than 300 dinars ($423) a month by 50 dinars ($70). For those earning more than 300 dinars, the raise was 45 dinars, or $64. But that compensates for only a fraction of the price increases, and most people who work in the private sector get no such relief.
  • The fact that the inflation is coinciding with new oil wealth has fed perceptions of corruption and economic injustice, some analysts say. “About two-thirds of Jordanians now believe there is widespread corruption in the public and private sector,” said Mohammed al-Masri, the public opinion director at the Center for Strategic Studies at the University of Jordan. “The middle class is less and less able to afford what they used to, and more and more suspicious.”
  • In a few places the price increases have led to violence. In Yemen, prices for bread and other foods have nearly doubled in the past four months, setting off a string of demonstrations and riots in which at least a dozen people were killed. In Morocco, 34 people were sentenced to prison on Wednesday for participating in riots over food prices, the Moroccan state news service reported. Even tightly controlled Jordan has had nonviolent demonstrations and strikes.
  • In Bahrain and the United Arab Emirates, inflation is in the double digits, and foreign workers, who constitute a vast majority of the work force, have gone on strike in recent months because of the declining purchasing power of the money they send home. The workers are paid in currencies that are pegged to the dollar, and the value of their salaries — translated into Indian rupees and other currencies — has dropped significantly. (thanks Ben!)
  • In the oil-producing gulf countries, governments that are flush with oil money can soften the blow by spending more. The United Arab Emirates increased the salaries of public sector employees by 70 percent this month; Oman raised them 43 percent. Saudi Arabia also raised wages and increased subsidies on some foods. Bahrain set up a $100 million fund to be distributed this year to people most affected by rising prices. But all this government spending has the unfortunate side effect of worsening inflation, economists say. (sound familiar folks? anyone? the only difference between them and a certain first world country is that country borrows its money to create more inflation..errr... create stimulus... where these countries actually use cash)
  • Even so, the inflation of the past few months has taken a toll on all but the rich. (ahem)
  • A new class of entrepreneurs, most of them with links to the government, has built gaudy mansions and helped transform Damascus, the Syrian capital, with glamorous new restaurants and cafes. That has helped fuel a perception of corruption and unfairness, analysts say.
  • Many people believe that most of the government’s economic policies are adopted to suit the interests of the newly emerging Syrian aristocracy, while disregarding the interests of the poor and lower middle class,” said Marwan al-Kabalan, a political science professor at Damascus University.
  • The same attitudes are visible in Jordan. Even before the subsidies on fuel were removed this month, inflation had badly eroded the average family’s earning power over the past five years, said Mr. Tawil, the former economic minister. Although the official inflation rate for 2007 was 5.4 percent, government studies have shown that middle-income families are spending far more on food and consuming less

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Takeways?

#1 If you took away the names of the cities and countries, and just read the text and the problems, you could be talking about the US. It is amazing really - we sit so high and mighty as if we have cornered the market on a rising tide lifts all boat with "free market capitalism", but the outcome appears to be no different then in corrupt dictatorships. Humans are humans. Greed is greed. The world over. Whether it's socialist Russia, dictatorship Middle East, or democratic US of A, more and more world wealth is concentrated in fewer and fewer hands. Only those damn Norweigens, Swedes, and Danish seem to have pulled away, but what do these people (happiest on earth) know?

#2 I offer as a solution to these governments a bright idea. Create for an example, a system, where almost anyone with a heartbeat can own a home. They can get a mortgage, put nothing down, and then convince their lenders to let them draw home equity against their homes, or heck go to 120% Loan to Value. Sounds good? I know... I know.. it's flipping brilliant. It should get you guys through for 5 years or so. All you need is a world full of stupid investors willing to buy the loans. My recommendation is to package them into groups of 1000, and tell said stupid investors that when you package 1000 bad loans together, it turns into a AAA loan. What? No one would buy that line of reasoning. No really - just get a ratings agency to slap a AAA rating (how? Well you pay them off, for every rating you pay them - so they have incentive to give you AAA ratings). See how it all works? I know... it sounds almost outrageous in it's stupidity but what if I told you, it worked beautifully in the greatest country in the world? Yes... if we can do it, you can do it. And when it all breaks down, you will use your central bank to print dollars to bail out the system and you can use the excuse that "so and so bank is too big to fail." Yes we have the entire blueprint ready for you. Now get to work so your "middle class" can borrow themselves into a grave to buy the basics of life such as... food. While the ruling elite laughs at the absuridity of it all during their weekend's at Martha's Vineyward. That's how it works here... you sound like you are well on your way there to American capitalism.

Welcome to the club!

(please note the above scenario does not take into account the fact the Muslim faith, frowns on debt - clearly this would be a problem passing my proposals of financial innovation - however the snake oil salesmen of Wall Street could potentially create a new financial innovation called tbed.... you see debt is the opposite of tbed.... so they could somehow sell this with their brilliance as not being debt... but beind tbed; therefore religiously ok. These folks can sell anything, I am sure they can find a work around)

p.s. to your ruling elite - we have some beautiful $24-$32 million townhouses in Manhattan for you, once you've milked your people for all they are worth. Yes, most Americans cannot afford it, so you are welcome at it. I know... it's brilliant. You can pay me later for my solutions once you see how great they work.... but note, I only accept Euros not that trashy US dollar.


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