Dr. Ronald I. McKinnon: The Arab Spring & Loose Money at Federal Reserve

Don’t expect a synoptic approach from arcane specialists.

Arnold Toynbee’s massive 12 volumes on the “Study of History” spells out the social and psychological relation between pusillanimity and the pathetic drive to fine a niche from which to survive.  This is significant, for I suspect that Dr. McKinnon, who resides as Chair at Stanford has given an incalculable reserve of insight regarding the opening of the Arab Spring and the impact of hot capital inflows in subsistence cultures.

Since the whole world is hooked up to the Reserve status that is a weakened US Dollar, we should anticipate that weak nation states (actually Civilizations) on the periphery of slow/stagnant growth to demonstrate a high rate of agitation at the rate of US depreciation.  Why?

Because most stagnant nation states are held together by staple products.  Any rise/jump in the prices or supply of such products produces anarchy.

Welcome to the Arab Spring!

This was pointed out by Dr. Ronald McKinnon recently, although don’t expect the specialist gnomes throughout the beltway to understand nor appreciate how dangerous the linkage is between monetary and foreign policy.  Dr. David Petraeus and Robert Gates surmised such a synoptic approach before leaving office.  But those who work in isolation can’t know nor anticipate the social, political impact of their dangerously myopic Keynesian policy on those outside first world nations.

So much for Globalization!

Domestic monetary policies effect the value of our currency.  In a fiat, exchange rate, floating system, governments manipulate the external value of their currencies through either purchasing foreign reserves or domestic policy.

To understand just how dangerous the impact of discretionary federal reserve policy is on    third world nations and staple products just remember that in 2002 the Fed cut its rate to 1%, this sent a massive flood of hot money to numerous other nations in the hope of chasing equity/commodity returns.  When poor emerging markets got this hot cheap money something happened.  An asset bubble in housing began in China and Brazil.   Secondly, the US Dollar depreciated 30% every year from 2002 until 2008.

Why 2008?

The banking crisis forced US Banks to sell off their foreign reserves to get back into dollars.

The Federal Reserve myopic vision saw a liquidity crisis.  True, but that’s a very limited view.  Upon fixing this ‘liquidity’ crisis the Fed cut interest rates to 0%, created inflation and watched as others AGAIN fled the US to invest more HOT money into emerging economies.  With an ever rising money supply commodities rose in poor nations.

Ditto with the Eurozone crisis in mid 2011.

The Arab Spring is a political event.  It is the Reformation that Islam desperately needs.  But it should be read as the impact of monetary policy, especially the wide differential that exists in external currencies (values) between first world nations and those who are dependent on staple products.  If we study the value of monetarism, especially its social impact on the rise of the money supply and inflation, we’ll see the birth of the Arab Spring.

Politically and culturally we should admit the ethical failure that underwrites Keynesian thought in the American political class.  We have yet to face the social and fiscal consequences of competitive devaluation.  The left thinks it can dodge this bullet!  We should know the historical precedents leading to the Second World War, namely monetary and fiscal crisis’ that animate political realities.  We’re practicing monetary nationalism, we shouldn’t be surprised to see its impact along the periphery of stagnant civilizations, for this huge global easing; the social impact of easy money, rising inflation, price instability, is nothing less than the failure of the American political class to come to terms with the limits of liberalism.

Japan has refused to join our pivot to Asia, it won’t accept our trans-pacific trade agreements with numerous other nation states in a bid to build a coalition against China. The dominant political class in America refuses to pass fiscal pro-growth reform.  We don’t address our failed entitlements, we have a failed pension system throughout the Union & President governing in opposition!

Enough said.  But this political, cultural, monetary crisis has become what Whittaker Chambers anticipated of the West:  a total crisis!