How the Fed triggered the Arab Spring uprisings in two easy graphs

One curious aspect of recent events in the Middle East and North Africa is how unwilling most commentators have been to join the dots between the Federal Reserve’s second phase of quantitative easing and these revolutions. I’m less queasy. Of course, all revolutions have many causes, and I don’t mean to belittle the achievements of brave non-violent protesters, desperate self-immolators, or saloon-car rifle-wielders. But, as a trigger and driver of these events, the Fed seems very clearly to have achieved more in the Arab world in six months than the Pentagon achieved in decades.


See Graph 1 above.


The first graph illustrates the correlation between the prices of food and the Fed’s purchase of US Treasuries (i.e. its quantitative easing programmes). (A widely-discussed graph illustrating correlation between QE and broader commodities indices can be seen here.) We see how the food price index broadly stabilised through late 2009 and early 2010, then rose again from mid-2010 as quantitative easing was re-started (QE2) following Ben Bernanke’s Jackson Hole speech of August 27 – with prices rising of about 40% over an eight month period. Similar correlations can be observed between Fed purchases and wider commodities indices, but let’s focus on food for now.

Now of course commodities markets can be notoriously difficult to predict, these graphs aren’t decisive proofs by themselves and the Fed (to widespread scepticism) has denied that QE2 is a driver. The exact contribution of QE2 to these rises will be debated in PhD theses for decades to come. But the reality is that a rise in commodity prices is precisely what theory predicts would be a consequence of QE2, and the data give the same picture – we aren’t investigating a contentious mystery in the data; we are seeing precisely what we ought to have expected. There are lots of mechanisms. My favourite is the idea that further Fed easing solidified expectations in economies pegged to the dollar that monetary policies would have to remain ultra-loose, driving inflationary booms in those economies, reflected in rising commodity prices (this would be compatible with the Fed’s own story).

There is a long-established relationship between food prices and the likelihood of revolution, as we see in Exhibit 2 (courtesy of Paul Mason’s blog).

When food prices rises faster, revolutions become more likely. And in a number of Arab states, food prices are already higher (and more exposed to international commodity price rises) than other states, as Mason explores.

The case is clear and simple, but nonetheless powerful for that. QE2 drove up food prices, as we ought to have expected. Rapid food prices rises led to revolutions, as we ought to have expected. Cut away the other factors and complexities that are always there in revolutions, and the implication is clear.
Telegraph

"Let them eat cake"