Yesterday at the National Press Club, Fed Chairman Ben Bernanke delivered a lengthy sermon justifying his grand strategy for the US economic recovery.  In his discourse, the Chairman made it abundantly clear that, in his view, it was unfair to label Fed monetary policy as the cause of global increases in commodities prices, an issue some market pundits have speculated as of late.

Attacks on the Fed have been quite peculiar–some have even gone so far as to suggest US monetary policy played a role in the government collapse of Egypt.   Three decades of oppression would seem a more likely explanation.  But Bernanke’s statement was also peculiar:

It’s entirely unfair to attribute excess demand issues in emerging markets to US monetary policy.

“Entirely unfair?”  One would expect the Chairman to say to his critics that it is ‘entirely inaccurate’ or ‘misleading’.  But it does not seem entirely unfair to, at a minimum, examine a linkage between record high commodity prices and the Fed’s controversial, and highly unconventional, monetary policy.  This early in the game, it simply cannot be ruled out as a contributing factor.  Then again, that is the very problem- it’s too early in the game.

To provide a sensible explanation for his critics, Bernanke puts in plain words how the role of supply and demand accounts for price increases:

On the inflation front, we have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply.

During the question and answer period, Bernanke was keener on separating the Fed’s liability:

There’s a lot going on there …When you talk about food prices… you talk about supply and demand …The fed monetary policy is aimed at the US economy….We are using policy to address stability in the United States.

Let us use the crisis in Egypt as a way of applying his methodology.  While under political turmoil, Egypt is also the world’s largest importer of wheat.   Yesterday wheat prices surged on the Minneapolis Grain Exchange to levels past $10 a bushel, as demand in Egypt is likely to increase partly based on the following speculation: political disorder will interrupt routine commercial activity, thus more wheat will be needed to supply Egyptian natives.

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The Egyptian government may have blocked Egyptians’ access to the Internet, but it couldn’t block the Internet itself. Thanks to the likes of John Scott-Railton, voices of countless Egyptian protesters continue to wend through the web.

Once the government imposed muzzling began, the 27-year-old UCLA graduate student reached out to friends in Egypt by telephone, gathered updates, and posted them to his Twitter account @Jan25voices, named after the day the protests began.

Nearly 700 tweets later, Scott-Railton (who up until last week was a Twitter newbie) soon found himself in the midst of the Middle East revolt. In one week he has attracted 6,700 followers and counting and his audio clips of Egyptian voices have been played more than 3.5 million times.

Reason.tv caught up with Scott-Railton at his UCLA office.
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Lt. General Sami Enan is the chief of staff of the Egyptian Armed Forces.

Reuters is reporting that the “Egypt general could be new leader-Islamist “:

Enan could be an acceptable successor to Hosni Mubarak because he is perceived as incorruptible, a member of the banned Muslim Brotherhood said on Tuesday.

Egyptian Muslim cleric Kamel Al Helbawi, a main figure in the opposition movement with strong ties to the Muslim Brotherhood,  is quoted:

“He can be the future man of Egypt… I think he will be acceptable …”

The prominent Kuwaiti news service Gulf News just released a story under this stunning headline:

“Armed forces chief seen as Mubarak successor”

And now this breaking news from French news service Le Quotidien:

“The intellectual community of Egypt calls on Amr Moussa, secretary general of the Arab League, and Sami Enan, Chief of the Egyptian armed forces, to act as leaders of the opposition. We do not want El-Baradei. He spent too much time abroad, and knows nothing of the daily reality of the Egyptian people. He does not represent us,” declares on Facebook a professor of economics lecturer at the University Amércaine Cairo (AUC.)

Le Quotidien quoted directly from the Muslim Brotherhood website.

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Barack Obama and the U.S. government have called for a “peaceful transition” in Egypt, in response to massive protests, riots and escalating anarchy. But I wonder if President Obama is taking notes? I wonder if he realizes just how close America is to facing a similar crisis that could result in riots, revolt in the streets, and economic paralysis. I wonder if President Obama would act much different than President Mubarak in Egypt. So far, small signs hint that Obama might turn out to be just as intolerant to dissent as Mubarak.

Think it couldn’t happen here? Think again. Let’s review the economic crisis that America faces at this very moment. Just in the days since Obama’s State of the Union speech there have been numerous signs that the U.S. faces an economic Armageddon. Dark storm clouds are fast approaching:

• The U.S. budget deficit is far more than even economic experts imagined.
• Unemployment is up yet again — far more than the experts projected.
• Social Security shortfalls are bigger and have happened sooner than any expert predicted — a decade sooner.
• Fourth Quarter GDP was lower than projected — and even the figure released was merely the result of the Fed printing fake money 24 hours a day, to create false consumer confidence, to prop up a U.S. economy that is falling off a cliff.
• The foreclosure crisis is deepening beyond what any expert imagined. As a result, real estate prices are falling even further, thereby threatening not only consumer spending, but the very survival of major banks.
• Inflation is skyrocketing on the two things that matter most — food and energy prices. One more disaster — perhaps the fall of Egypt, leading to an oil crisis — could lead to a hyperinflation that could turn America into a combination of Zimbabwe and the Weimar Republic.
• We already face economic Armageddon on a state and local level. U.S. cities, counties and states are teetering on the verge of bankruptcy. Their grave financial condition is the result of massive unsustainable spending and debt, caused in large part by irresponsible public employee salaries, pensions and health benefits. The worst part of this crisis is that the stimulus money is gone and the federal government is bankrupt, unable to bail itself out, let alone the cities, counties and states.
• There are early signs of revolt and anarchy here in America — with a record number of policemen shot and killed during a two-week period in January.
• The Middle East threatens to turn into a powder keg that could lead not to democracy, but to radical Islamic control of many Arab countries. This grave new threat to America, American interests, and the survival of our ally Israel, would lead to more military spending and a potential oil crisis that could engulf and overwhelm the U.S. economy. In our current vulnerable economic state this tragedy could set off a worldwide economic panic.
• Japan’s credit rating was downgraded on what most economists agree is a disastrous slide toward oblivion. Japan’s debt is so huge it can never be repaid. As one famous economist describes the crisis they are facing: “Japan is a bug in search of a windshield.” Japan’s impending implosion could also trigger a worldwide economic panic.
• Spain just announced unemployment of over 20%. Not only does this news threaten the survival of the EU, it also drives a stake through Obama’s strategy for saving the U.S. economy by creating green jobs. Spain proves there is no market for green jobs. The whole idea is a mirage created by leftist progressive politicians desperately grasping for straws.

Can you imagine that all of this toxic news has occurred in only the few days since Obama’s State of the Union?

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We are navigating through truly uncharted political and economic territory.  Members of the financial cognoscenti have freshly alluded to the notion of the ‘government bubble’ as the next blow to the world economic order.

Since 2008 we have seen the housing, financial, and insurance markets hit on a global level, one after the other.  At one point, they all burst because they were unsustainable.  You don’t have to be a politico to know that the sovereign debt crisis is real.  Just look around.  As European countries (Portugal, Ireland, Italy, Greece, Spain, and Belgium) reshuffle hundreds of billions of dollars to lighten rising government deficit and debt levels, Republican appropriators here at home futilely attempt to get our books in order.  Ladies and gentleman, something is afoot.

The recent crisis in Egypt has only intensified discussion on the stability of the world economic order. No one knows what’s going to happen.  In an ideal situation, a peaceful transition of power will re-stabilize what has triggered a sell-off in equity markets and posed more geo-political uncertainty in the region as energy commodities are poised for gains based on fear.  And the bad news just keeps pouring in.

According to Reuters,

Adding to Cairo’s financial woes, ratings agency Moody’s downgraded the country’s debt rating on concern the Mubarak regime may spend more to placate protesters.

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Our Capitol Hill Insider Elizabeth Letchworth is keeping us up to date with Congress’ attempts to give the President an Internet kill switch.  Tea Party Nation’s Judson Phillips is warning against it.  From the Honorable Elizabeth Letchworth of GradeGov.com:

“The Senate Leader introduced this bill as a placeholder for the 112th Congress. He wants to use it to push Judiciary, Commerce, and Homeland Security committees to write cyber security legislation. Don’t be surprised if the Senate has a vote on this soon to show that cyber security is important to Congress, especially given the Egypt situation and the closing down of the internet. As always, the devil is in the details and S. 21 is vague to say the least.”

In an effort to resolve the rules impasse that stalled the opening day house-keeping organizational resolutions in the U.S. Senate, the two Senate leaders engaged in a colloquy (formal discussion or conference) on Jan. 27, 2011. In this colloquy, the two leaders conceded the following:

Senator McConnell:

“And, in my Caucus, I have many Senators who have complained that the Majority Leader has abused his ability to “fill the amendment” tree, preventing Senators from offering and debating amendments that they believe are important, especially when a matter has not gone through committee or cloture is filed too quickly.”

Senator Reid:

“As we have discussed, in the interests of comity and more open process in the Senate, we have agreed that we should use these procedural options of filling the amendment tree and filibustering the motion to proceed infrequently.  And, we’ll do our best to ensure that other Members of our caucuses respect this colloquy, as well.”

It is with this colloquy in mind that the Senate could see more bills introduced that will have the same bland tone as was included in the text of S. 21. The text states the obvious, outlines a serious national problem, but doesn’t address any resolution to that problem.

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Chairman of the Federal Reserve Ben Bernanke launched a second round of Quantitative Easing (QE2) in October, following over a year of growth in the economy at a robust rate of over 3%. Most analysts pooh-poohed QE2 as an insufficient economic stimulus to create enough inflation to reduce unemployment. I warned that QE2 was like pouring inflationary lighter fluid on the world and then lighting a match. With food inflation now running at 15% in poor countries, the Middle East is just the first area to burn, but fire is smoldering in much of the world and other fires will break out soon.

QE2 is a program by the U.S. Federal Reserve to inject $600 billion of U.S. dollars in the financial system by repurchasing an equivalent amount of U.S. Government bonds. Once the money is paid to the former bondholder, they deposit the cash in banks. Banks take deposit dollars and leverage them by 6 to 10 times creating $3.6 to $6 trillion in credit. Given that the Gross Domestic Product of the U.S. economy is only about $14 trillion annually, it would impossible to immediately purchase 25-40% of the entire economy. Consequently, the reality of Quantitative Easing is that the money will be invested in the stock and commodity markets. The theory is that the financial assets rise on the huge inflows of QE cash, investors will feel wealthier and go to the malls and the car dealerships to “shop till they drop”.

The problem with theory is that QE2 money quickly drove up commodity food prices around the world. This price rise is barely noticeable to Americans who only spend 10% of their personal income on food for three meals a day; but the impact of food inflation is devastating the over half the world that spends approximately 50% of personal income on food for two meals a day. The 15% QE2 induced commodity food price increase has reduced the amount of food poor people can purchase by almost 1/3.

The riots and revolutionary activity burning down Tunisia, Yemen, and Egypt are about gut-level economics. Do you think Americans would riot and throwing out our government if we were forced to cut back to eating 1 1/3 meals a day? Once riots start people in cities hoard food to survive and becomes dangerous for farmers to transport food. This is exacerbates food shortages and drives prices even higher.

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