Why is there ongoing civil unrest and rioting in Sri Lanka?
Could it be that the answer is inflation?
Already, the Prime Minister has resigned, and fled to seek shelter in a naval base, while the President has talked of ceding powers to parliament.
What this will do, though, to bring down the price of kerosene and other basic staples isn’t clear.
And that lack of clarity is sounding alarm bells all over the world.
Because like it or not, Sri Lanka isn’t just an outlier.
It’s actually the shape of things to come.
As Ukraine’s harvest continues to be disrupted by the Russian invasion, as US sanctions continue to create artificial bottlenecks in energy markets, and as a decade-long campaign of money-printing culminates in President Biden’s most recent massive spending bill, the horrible but inevitable consequences are now upon us, and inflation is coming everywhere.
In the US, the latest number came in above expectations, at 8.3%. Europe is witnessing similar levels, China’s inflation is on the move, and in Nigeria almost all domestic flights were recently cancelled in a co-ordinated protest against the price of aviation fuel.
Naturally, the US Federal Reserve, realising the errors of the recent past, is scrambling to correct itself. Quantitative easing is about to become quantitative tightening, as Jerome Powell and his team attempt to turn on a - now devalued - dime.
That’s all very well for the USA, where domestic consumers are most worried about gas prices, and incumbent politicians are becoming increasingly nervous about the mid-terms. Tightening and the interest rate rises that are going with it will probably lead to greater unemployment, but that’s a problem for another day.
More important is that voters, who are often already concerned by the derangements of identity politics, don’t get the idea that economic mismanagement is the order of the day. Even if it is. If the Fed tightens the monetary supply and hikes up rates there’s a chance that inflation might just be brought under control by the time the mid-terms hit in November.
Internationally, of course, these considerations carry far less weight.
What the wider world is experiencing as a result of these domestic concerns is a sharp and unwelcome appreciation of the value of the US dollar. After all, if after a period of glut there are suddenly going to be fewer dollars around, surely they will be worth more. Not only that, but in a world that’s got used to zero or near-zero interest rates, holding dollars all of a sudden looks likely to generate a yield too.
On one argument, that makes the dollar even more attractive than gold, which never offers a yield, although those who worry justifiably that US foreign policy is straying rather too close to nuclear war continue to bid up the metal.
As well as being the ultimate protection against risk of all kinds, gold is also, of course, the traditional hedge against inflation. And that’s probably why, although the gold price is weakening, it’s not been the subject of the kind of heavy selling we’ve seen in some asset classes.
Metals of all kinds have been weaker, aided on their downward trajectory by short-term pessimism about ongoing lockdowns in China. Could China be going into recession? Is it really conceivable after all those spectacular years of double digit growth. Of course: as Echo & the Bunnymen famously sang at about the time the Chinese miracle first got going, Nothing Lasts for Ever.
But although that’s an interesting new dynamic for a world that’s increasingly uncertain about what it can and can’t hold onto, it doesn’t help with inflation. A slowdown in the Chinese economy is only going to make cheaper goods even more scarce. And meanwhile, on the other side of that same coin, the Americans and Europeans are scrambling to disconnect their supply chains from China anyway, which will also – you guessed it – push up prices.
Much of these wounds are self-inflicted.
Gold bulls have been saying for years that quantitative easing would likely cause inflation, only to be rebuffed by experts touting the smoke and mirrors of modern monetary theory as proof that they were wrong. When inflation did inevitably come, it was touted as temporary, and then, for a while amazingly, even as a good thing.
And the gold bulls were told that although they’d been right, they’d been right for the wrong reasons. But had they really?
How much easing and stimulus did anyone actually think the world could take? Did central bankers really think they could print money forever and get away with it? Perhaps they did.
And it might just have worked. But the problem was that there was no margin for error.
And of course, it only took a few popularity-seeking politicians to double down on everything and to compound the risk twofold – first by creating a global covid panic that required massive lockdown spending packages and supply chain chaos; and second by failing to resolve the war in Ukraine.
Both problems are now intractably baked into the global economy, and it’s hard to envisage an easy way out. Cue, big defeats for the Democrats in the mid-terms, further escalation of the culture wars in the US, and increasing division.
It may not reach the levels of Sri Lanka this year or next. But the underlying tensions are the same. And they’re not going away any time soon.