From QE2 to Arab Spring - a Lesson for the ECB

As the ECB may potentially be forced into a round of "Quantitative Easing" (EUQE), dangers that span beyond Europe may loom. Known as the Arab Spring, the movement is often thought to be a "spontaneous" burst of pro-democracy fervor in the Arab world. But North African and Middle Eastern states have lived under dictatorships and tyrannical rulers for generations. These rulers were able to maintain their grip on power until, well, QE2 happened. Even though US inflation was fairly muted (although there is some debate about that), the US successfully exported dollar inflation into the rest of the world. Unlike in the US where food is around 14% of a typical family expenses, in many poor countries it constitutes a major portion of their earnings. Pushed to the limit with rapidly rising food prices, the Middle East and North Africa exploded.

Here is a quote from a research paper from the World Bank published earlier this year:

Global food prices remain high, partly due to increasing fuel prices, and the World Bank’s Food Price Index is around its 2008 peak. Since June 2010, an additional 44 million people fell below the $1.25 poverty line as a result of higher food prices. Simulations show that a further 10% increase in the Food Price Index could lead to 10 million people falling into poverty, and a 30% increase could increase poverty by 34 million people. Low-income and lower-middle-income countries are experiencing on average 5% points higher food price inflation compared to better-off countries. A special focus on the Middle East and North Africa region in this issue shows double-digit food price inflation in Iran, Egypt and Syria, with more moderate levels in other parts of the region...

Even China started showing signs of unrest due to rising food prices. The chart below shows the CRB commodity index' rapid rise as QE2 took effect, sparking major unrest in country after country.

So before the ECB (or the Fed) embarks on another round of QE, claiming that "core" inflation remains tame, they should consider the "unintended consequences" such as increased global suffering and unrest. The biggest impact of Arab Spring on the global economy was the revolution in Libya that caused global oil prices to spike.  Next time around it may be countries such as Pakistan and Iran, with much greater risks to global stability.

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