As the celebrations continue in Egypt after President/dictator Hosni Mubarak fled the nation, we need to examine the real lessons behind the revolution. The mainstream media portrays this strictly as fight for freedom. The press isn’t reporting on the real reason for the uprising: economics. Egypt has been under Mubarak’s rule since he claimed power under martial law after President Sadat was assassinated. If this was an uprising motivated solely by freedom, the Egyptian people would have demanded years ago that Mubarak remove the martial law and hold elections. It was economic reasons that prompted this call for freedom.
Egypt has a typical state controlled economy. Close to 30% of the employed citizens work for the government. This is usually a sure sign of a defunct economic system. Beyond this, the unemployment rate hovers between 20% and 30%. This level of unemployment is not due to the skill or education level of the Egyptian people. They are a highly educated workforce. These dynamics have been in place for several years though. So these facts alone haven’t prompted the revolt. The coup de grace was inflationary pressures. If you are unemployed or under-employed and prices for staples rise dramatically, it really hurts. Again, the press is making this out to be a revolution based solely on a need for freedom. Make no mistake if inflation was subdued, Egypt would not have revolted. Certainly, freedom is something the Egyptians have probably desired for a long time. It just never prompted a revolt until the economic situation became dire.
What lessons can Americans draw from this? One, the inflation issue is going to have large repercussions, and it is due to the Federal Reserve, and other central banks. The price of commodities has skyrocketed between 50% and 75% in the past year. Commodity prices ordinarily respond to demand/supply dynamics. If demand increases and supply remains constant, prices will rise. Certainly, the world’s demand for commodities has increased with the addition of China, India, and other emerging countries. However, demand hasn’t increased 50% over the past year. The commodities market, along with other assets such as stocks, are subject to speculation. Over the long term, demand/supply dynamics will control the price of commodities, but speculation can retard the price over the short term. This is precisely what the Fed’s money printing and low interest rate policy is creating.
As the Fed funnels money into the economy, these dollars are going to find a place to sit. It isn’t going to be traditional interest bearing vehicles since these instruments pay so little. The money is heading into the stock and commodity markets. It is pushing up prices above the natural demand/supply levels. The low interest rate environment created by the Fed is also forcing investors into these riskier assets to find a higher yield or return. So the average retiree is leaving money markets and CDs in search of a livable dividend. The big lesson here is we need to end the Federal Reserve. Since its inception in 1913, the US dollar has lost 95% of its value relative to goods and services. You would not experience this deterioration of purchasing power if we had a currency backed by gold and/or silver. If we continue to let the Fed run the show, we will really start to feel the inflation.
Egypt is a canary in the coal mine. Even before Murbarak fell, Tunisia and Yemen faced uprisings. Lebanon had protests as well. This will spread to other countries, and it will cause disruptions to the economy either through lower worldwide GDP growth or oil production. Further, we could find that these power vacuums are filled by less friendly regimes to the US.
Fed Chairman Ben Bernanke argued that the inflation hasn’t affected America as measured by the government’s Consumer Price Index (CPI), and that foreign countries have the tools to mitigate inflation through central banking policies. This is naive. Let’s ignore the fact that the true inflation most Americans experience is substantially higher than the stated CPI rate (the calculation of CPI is a post for another day). Eventually, the inflation experienced by other countries will come home to roost here in the US. If China, India, or any other country experiences substantive inflation, the wages of their citizens will eventually rise. As these employees build our electronics, clothing, and other items, the companies will have to increase their prices to pay for the higher employee costs, and, of course, the loftier commodity prices. We will experience the foreigners inflation eventually.
The second lesson deals with our government budget. We have been providing Egypt with approximately $1.7 Billion in aid every year for Mubarak’s reign. Mubarak’s regime received over $60 Billion of yours and my tax dollars. He now has bank accounts containing billions of dollars. Obviously, our gifted tax dollars didn’t go to the Egyptian people. Egypt isn’t the only country raking in our hard earned dollars, which probably only enrich the controlling parties. Here is a chart of our foreign aid by country. Iraq and Afghanistan receive large gifts from us each year, but you will probably be astounded at how many countries are on our dole. Even Russia receives $1.2 Billion per year from the US. Isn’t this the country that was our mortal enemy a couple decades ago? Isn’t this the country building massive wealth with its oil fields? Their debt to GDP burden is substantially lower than ours, yet we give them billions every year.
We need to stop all aid to countries…all countries. One, we can’t afford to help out as we are broke. Two, the money is stolen by the ruling elite. It never gets to the intended parties. Even the humanitarian aid we provide many countries finds its way into the wrong hands, just as it did in Egypt.
While we celebrate the voice of the people being heard in Egypt, let’s not ignore the lessons from Mubarak’s downfall.