Spare a thought for the poor Iranians

There is economic cataclysm going on in Iran. What guns and rhetoric have failed to do might be achieved by grubby old economics - the downfall of the nut cases who have been ruling Iran for sometime.

The Iranian rial has plunged into free fall. It declined by 25% in one week in October against the US dollar. Since the beginning of 2011 it has fallen by 70+%. It was some 10,000 rial to the US $ in 2011. Its now around 30,000 rials to the US $. The rial is now virtually worthless. Inflation by official estimates is some 25%, in reality more like 70%. There is economic chaos.

Why is this important ? You only have to look towards  the street protests that have sprung up in Iran to see how this is affecting everybody in Iran - the rich, the poor, and yes, even the mullahs. But, wait a minute. Iran is oil rich, right ? It should be rolling around in wealth. And yet, the country  is in deep crisis and the population is suffering.  Why ?

If ever there was an example of how a rotten government can destroy its people, it is Iran.  By all rights Iran should be a rich country. It is an ancient and rich culture and full of extremely bright people. And above all, it is swimming in oil. But unfortunately it has a government that must surely compete with North Korea and Zimbabwe for the title of the worst government in the world. It exports terrorism, it dips its fingers into every trouble spot in the region - it finances the Hezbollah in Lebanon, it backs the Syrian regime, it supports the Hamas in Gaza........ It is trying its best to build a nuclear bomb.

Consequently it has pissed off the world. Crippling economic sanctions have been the result. Nobody bar Russia and China, and to some extent India, is trading with it. It has been kicked out of SWIFT - the international banking settlement system. Therefore everybody, including Russia and China have to deal with it via the back door.  If anybody trades with Iran he has to virtually receive suitcases of cash in return. That's not easy to do on scale. So even exporting oil has become difficult.

End result is that the rial is plunging like a stone. So everything becomes incredibly more expensive. Food prices are doubling. Luxuries, which might even be necessities in other parts of the world, are becoming unthinkable. The common Iranian, like most others in the world, cares two hoots about religious purity and dogma. He wants to fill his stomach. And then wants to buy a mobile phone. After that he wants to post on Facebook. Simple.  If you deny that from him for too long and make him slide backwards, his patience will break and he will burn the beards of those who are stopping him. 

So for Israel and the hawks in America, here is a pleasant thought. You don't have to nuke Iran to stop them from acquiring nuclear weapons. The rial is doing the job for you brilliantly. With a bit of journalistic license I say, the bill is mightier than the bomb !

Please Sir, I want some more

Onions in India. Cabbage & pork in South Korea. Chilli Peppers in Indonesia. Frighteningly, wheat globally. Riots have already started in Algeria , and is sure to spread. Food price inflation is hitting the world again. Millions of children will echo Oliver Twist's begging in those immortal words which are the title of this post. Are we going to see a repeat of 2008 ?

This blogger is no expert on food economics. But the issue of food prices is close to his heart and he has posted on the awfulness of food price inflation here before. All inflation is bad, but food price inflation is especially awful. For it ceases to be an economic problem of supply and demand and becomes an issue of survival for half the world's population. It sparks a humanitarian crisis. And it will inevitably lead to unrest and riots. The world cannot afford inflation in the price of food. Certainly not the high double digit inflation that it is seeing.

The issue is a complex one. World food supply and demand is in a precarious balance. In the short run, any disruptions in supply, usually due to natural calamities leads, to a massive spike in prices. This year the wheat crop has failed in Russia and Australia. But the issue of enhancing supply is a longer term one. The gains due to scientific revolutions in crop breeding, use of fertilisers, and the like has started to taper off. No new breakthrough is coming.

The use of large cultivable land to grow bio fuels, especially in the United States is another contributor to pressures in supply. Cultivable land is finite. Any use for other than food growing, will result in lower food supplies.

On the demand side, there has been an inexorable rise, which is actually a good thing. A chief cause has been the economic development of China and India. Higher levels of nutritional requirements are a happy result of economic development and has led to continuous increase in demand. The same will happen in Sub Saharan Africa.

A third cause for inflation is the price of oil. Oil prices affect not only in food transportation, but also in price of fertilisers. Oil is a key input cost in the growing of food. And we know where oil price is - last at $93 a barrel.

A fourth cause is awful government policies. Because agriculture is an emotive subject, every government under the sun has an unbelievable maze of subsidies, freebies, giveaways that completely distort the economics of food production and consumption. And the immediate reaction to even a perceived shortage is a banning of exports - Russian ban on wheat exports are a direct cause of the rise in wheat prices. India and Pakistan are playing silly games with banning onion exports.

I am afraid food prices are going to be high for the foreseeable future. This is an inevitable equilibrium point, I believe. With high prices, will hopefully come more investment, more capacity creation, technological breakthroughs, etc etc . In other products this will happen quicker. Agriculture, because it is heavily distorted by government action, will see this much much slower. But even after this, the price levels will remain higher. This has profound implications for the world's poor - even today, hunger is not because of lack of food. Its because of lack of affordability.

Like every opinionated commentator, this blogger has his points of view on what ought to be done. It is the intention that this subject will feature repeatedly over the coming weeks. Meanwhile I invite you to ponder over the problem and share your ideas. I believe this is one of the most pressing problem facing the world today.

The awfulness of food price inflation

Inflation, of any sort, is bad. Some stability in prices, is necessary for orderly economic activity and for growth. Countries which have experienced hyper inflation recall it with absolute horror. But the most awful form of inflation is when there is huge inflation in food prices. In non food products, one can curtail demand if prices rise. But what do you do with food ? After all, you have to eat.

In the last few months, food prices in India have gone through the roof. If you are living in India, you are experiencing it first hand. If you are abroad, you would have surely heard about it. The official food price inflation figure is 20%. In many key food items, the inflation has been much higher than that.

The first hint came in pulses, a vegetarian Indian’s main source of protein. A kilo of arhar dhal (pulses) has apparently touched the unbelievable level of Rs 100/kg. Then came vegetables. Onions at Rs 35/kg, potatoes at Rs 40/kg, and so on. Sugar is now at Rs 50/kg. Name a food item – prices are at levels never before seen.

Indian stoicism is legendary. Families simply tighten their belts more. Those who cannot afford it, just forego “luxuries” such as vegetables. Thankfully wheat prices haven’t gone up by too much, but rice prices have soared. Where does the poor man go ?

Economic growth is all very good, but some fundamentals have to be ensured in any country. Foremost amongst them is that food is affordable. The surest way to social unrest is through inflation in price of food. In the past, governments have been voted in or out of office, most famously on the price of onions.

Why is this happening in India now. Combination of circumstances unfortunately. This year the weather has not been kind to agriculture – both floods and drought have been significant factors in different parts of the country. Rising fuel prices is another cause. Supply demand mismatch, always the bane of agriculture, has been acute this year. A series of misguided policies have not exactly been helpful.

But I fear, food price rise is a structural thing and not easily reversible. While such a sharp increase will be reversed, I think the long term trend of significant price rises is, perhaps, inevitable. As populations grow, and agriculture declines as a profession of choice, the pressure on food availability will increase. The oil price rise will inexorably result in higher food prices as I have argued before in this blog.

What can be done ? I don’t know. I know very little of agricultural policy and economics. What I do know is that dhal at Rs 100/kg is neither sustainable nor acceptable.

Obil Boil

Oil on the boil again, screams the headlines in India’s Economic Times. Or as our wonderful little friend Chotu might say, Obil Boil. I am certain that his words were prescient and not just a child’s lisp of mama’s olive oil.

Crude oil prices have touched $80 a barrel. The US dollar has continued to weaken and since oil prices are globally stated in US dollars, they are bound to rise further. I argued that the world must get ready for expensive energy for the foreseeable future here, but governments have lost a golden opportunity, when oil prices were low consequent to the recession, to prepare their citizens for the coming times when oil prices will be in 3 digits.

This has profound implications for the whole world. Firstly inflation will inexorably rise. The risk of inflation in the near term is the highest, with two huge factors contributing to it – the price of oil and the stimulus money that governments have spent. When oil prices rose last time to the peak of $147 , we had riots as it has a direct impact on the cost of food. The impact on poorer countries was disproportionate. Secondly the world will see a massive transfer of wealth from everywhere to OPEC – primarily the Middle East. Such a transfer of wealth is without parallel in history, with profound geopolitical fallouts.Churchill’s famous words may have to be rephrased to “never in the field of human history have so many paid so much to so few”.

Even now, it isn’t too late for governments to act. They must slowly abolish all subsidies on petroleum and then keep increasing the price of petroleum products in small doses so that people are slowly taken to the high oil price world, instead of a cataclysmic jump. They must not reduce prices when crude oil weakens occasionally – instead they should build up a fund to cushion against periods of extreme rise.

One of the possible fallouts of a sustained high oil price world might be that the world will start to go more local than go more global. Products may start to be produced nearer where they are consumed. Jetsetting around the world may start to become rarer. Brits having strawberries in December may become a thing of the past. Perhaps in the world of the future, a Chotu saying Obil Boil, may become common place and not raise an aaawww anymore. Now, that is not a nice thought.

Get used to oil price in three digits

The price of crude oil has climbed steadily to $70 a barrel. Its of course, way off, from the peak of $147 it touched in July ’08. But its been climbing steadily over the last couple of months. Two major events await us in the near future.

The first is inflation. Its already a big risk because of the massive amounts of money governments, the world over, have been pumping in to ward off the recession. When oil prices shoot again, everything is going to be affected. Inflation will hit the poor most – the price of food will rise. Many governments will be tempted to subsidise the price of oil and public finances will become a further mess than they are, in most countries. Inflation is going to be a killer ; unfortunately there’s not much that we can do.

Governments should have been acting through last year. When the price of crude oil fell to just above $30, they should have been creating a fund to cushion the inevitable rise that was to come. Nobody did this. Governments who control the price of oil in their countries should have been steadily increasing consumer prices in small doses. But that’s not a politically convenient thing to do; so nothing was done. “Cheap Oil” is an oxymoron. We’re in for a killer increase.

The second major event is the greatest transfer of wealth in human history. All of us, the world over, will transfer a huge portion of our income to fatten a small population in the Middle East & Russia. Sure, this is a free trade and not coercion; the price is after all determined in a free market. But oil is not just any other product, Like it or not, in the way we live, oil has become a necessity, like water and air. When the price of something as basic as that shoots up, it has a major impact on the world. In the long run we can adjust, but in the short run the pain will be high. This has profound social and geopolitical consequences. All of us will lose and a small percentage of the world’s population will gain immensely. History has shown us that when a few enjoy at the expense of many, a revolution starts.

This sounds like a doom and gloom post. Unfortunately, that’s how I see the near term future. We better get used to oil price in three digits. Oil, I’m afraid, is going to become a four letter word.