"The man who prefers his country before any other duty shows the same spirit as the man who surrenders every right to the state. They both deny that right is superior to authority."
Lord Acton

Friday, January 14, 2011

Inflation impact to world economies

I've been thinking heavily about the prospects for US dollar hyperinflation or stagflation and the resulting impact it would have on the world.  Many would say that QE by the fed has contributed to the rise in agricultural commodity prices (food and fuel inflation), while others claim it is merely a supply and demand issue in the face of rising world population.  The author feels it is fair to say that both statements are correct.  With that in mind, I have developed a rough thought experiment for a linear and geometric increase of commodity prices and potential geopolitical impact. 

First the population growth rate:  List of countries by population growth rate

As a base of our thought experiment we need to understand the regions and areas of the world with the largest population growth rate.  There is a clear trend of population growth in North and central Africa, Afghanistan and South America. 

With that in mind we should look at what level food and fuel prices make up average or per capita income.  In the United States, food makes up approximately 4% of income spent.  In contrast, African nations such as Nigeria spend on average 31.43% of income on food.  In a stagflating environment where fuel and food prices are rising (liquid fuels are a major base component of food costs), the countries whose populations spend a greater share of income on food are affected to a much greater level.  In the thought experiment, the overall negative effect on an average Nigerian is orders of magnitude greater than in western countries.

By extrapolating a 50% compounding rate of food inflation, we find over half of our list, after a 200% increase of food prices, is in the danger/ riot zone as a percentage of income spent on food.  The troubling thing is that many of the countries negatively impacted by food prices are oil exporting nations directly tied back to the western countries prosperity.  This below chart is by no means a prediction, or forecast.  Forecasting is for fools greater than this author.  It does however demonstrate the fragility of many nations in the world.  Note that in the year before the french revolution, the price of bread rose 50% and there is substantial empirical evidence linking excessive food inflation to political turmoil.

The US Government, because of our excessive debt level, will try to debase the currency.  Bernanke probably feels that based on figures below and elsewhere that he has a fair amount of breathing space to devalue the USD by 75% or more over a period of a few years.  Unfortunately, I think Bernanke feels that he can keep a controlled decent.  I feel it's very likely it could resemble a piano being shoved off the roof of a building. Either way, the USA is definitely not a bad place to be.  One of the larger dangers we have in the US, UK, Canada, EU is our optimized, and consequently, fragile economies to the supply of goods and energy.   I hope, my dear reader, understands that based on the thought experiment below, we are in for some tumultuous and unreliable times for supplies of goods and energy.  Become un-fragile my friends. 

Country Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
US 4.66% 6.99% 10.49% 15.73% 23.59% 35.39% 53.08%
UK 5.25% 7.88% 11.81% 17.72% 35.44% 53.16% 79.73%
Germany 5.93% 8.90% 13.34% 20.01% 40.03% 60.04% 90.06%
Canada 6.40% 9.60% 14.40% 21.60% 32.40% 48.60% 72.90%
Australia 6.58% 9.87% 14.81% 22.21% 33.31% 49.97% 74.95%
Finland 6.92% 10.38% 15.57% 23.36% 35.03% 52.55% 78.82%
France 7.05% 10.58% 15.86% 23.79% 35.69% 53.54% 80.30%
Japan 9.69% 14.54% 21.80% 32.70% 49.06% 73.58% 110.38%
China 12.76% 19.14% 28.71% 43.07% 64.60% 96.90% 145.34%
Argentina 14.16% 21.24% 31.86% 47.79% 71.69% 107.53% 161.29%
South Africa 14.22% 21.33% 32.00% 47.99% 71.99% 107.98% 161.97%
Saudi Arabia 14.32% 21.48% 32.22% 48.33% 72.50% 108.74% 163.11%
Thailand 16.37% 24.56% 36.83% 55.25% 82.87% 124.31% 186.46%
Mexico 17.03% 25.55% 38.32% 57.48% 86.21% 129.32% 193.98%
Chile 18.23% 27.35% 41.02% 61.53% 92.29% 138.43% 207.65%
Brazil 18.53% 27.80% 41.69% 62.54% 93.81% 140.71% 211.07%
Russia 19.73% 29.60% 44.39% 66.59% 99.88% 149.82% 224.74%
India 25.27% 37.91% 56.86% 85.29% 127.93% 191.89% 287.84%
Indonesia 31.15% 46.73% 70.09% 105.13% 157.70% 236.55% 354.82%
Nigeria 31.43% 47.15% 70.72% 106.08% 159.11% 238.67% 358.01%
Jordan 40.90% 61.35% 92.03% 138.04% 207.06% 310.58% 465.88%
Morocco 63% 94.50% 141.75% 212.63% 318.94% 478.41% 717.61% 

Here's another good map of food prices as percent of income from the Economist (Where people spend most on food and fuel):  http://www.economist.com/daily/chartgallery/PrinterFriendly.cfm?story_id=11693372


  1. Excellent posts - I saw your blog linked from Zerohedge and will be reading.

  2. I followed you hear from zerohedge and I must say I'm glad I did. Your article is very insightful and quite the eye opener. I will be posting a link to your article on my blog thewarningsigns.blogspot.com so I can help spread the information. If you have any problem with me doing so please let me know. Thanks for the great article and God Bless.

  3. Thank you for the kind words of encouragement. I'll do my best to put together insightful posts worth reading. Thanks!