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Proof That High Inflation Leads to More Public Violence


World  (tags: violence, inflation, world, research )

JL
- 577 days ago - bdlive.co.za
NEW research appears to show a direct link between inflation and social violence. In the months before the Marikana massacre, in which more than 30 miners died, there was a spike in nondiscretionary inflation



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JL A. (275)
Sunday February 17, 2013, 3:15 pm
Proof that high inflation leads to more public violence
Feb 11, 2013 | Ciaran Ryan
New research throws an entirely new spin on the economic as opposed to the political causes of social upheaval, writes Ciaran Ryan

NEW research appears to show a direct link between inflation and social violence. In the months before the Marikana massacre, in which more than 30 miners died, there was a spike in nondiscretionary inflation — the inflation the poor experience — from 3% to more than 10%. The same is true of the xenophobic attacks in 2008. Just before these attacks, nondiscretionary inflation surged to 20%. The recent violence in Sasolburg was also preceded by an acceleration in inflation.

Chris Becker, an economist with ETM Analytics, which produced the research, says SA could be headed for a world of trouble based on recent trends in the inflation rate experienced by the poor.

The consumer price index (CPI) averaged 5,6% last year, while average nondiscretionary inflation was 6,1%, spiking to 10,3% in October. The difference between the two inflation rates may appear marginal, but it is the volatility of nondiscretionary inflation that seems to be causing the trouble.

Nondiscretionary inflation hits the poor hardest. It is more volatile than the CPI, which is smoothed by the inclusion of items such as mortgage and technology costs. Taking these discretionary or luxury costs out of the calculation, ETM came up with what it calls nondiscretionary inflation.

The goods that are included in the nondiscretionary goods basket are foodstuffs (bread and cereal, meat, vegetables, clothing), household costs (owner’s equivalent rent, water and electricity), healthcare and medical aid, vehicles, transport, communication and education. "These goods we consider to be the nondiscretionary or nonnegotiable expenses of most households. Ironically, it is on these goods and services that low-income households spend most of their incomes," says Becker.

South Africans, including trade unions, have long complained that inflation experienced by working people is far higher than the published CPI figures. Becker provides proof of this, arguing that "workers have a strong case why they should be awarded above-CPI wage increases. At the same time, companies say they are unable to afford it."

A recent economic report by Absa says statistical changes to the calculation of CPI introduced last month could add 0.3% or 0.4% to average CPI inflation this year, and possibly more. The new CPI inflation basket gives more weight to petrol (from 3.9% to 5.7%), electricity (from 1.9% to 4.2%), and insurance prices (from 7.7% to 10%), while reducing the weight of consumer durables, such as fridges and vehicles.

The recent weakness of the rand, however, will further aggravate the price of import-linked commodities, such as fuel and food, on which the poor spend a disproportionately large part of their incomes.

"Is it a coincidence that nondiscretionary price inflation accelerated right at the time that unrest broke out in the farming regions of the Western Cape?" asks Becker. "Is it a coincidence that the streets of Sasolburg are burning soon after the acceleration of nondiscretionary price inflation?"

Becker conducted similar research internationally and found that countries experiencing the highest levels of social upheaval, such as Syria, Tunisia, Egypt and Algeria, embarked on huge monetary expansion in the months before the outbreak of violence. This monetary expansion translated into sharp increases in inflation just before the outbreak of violence. In Egypt and Tunisia, the violence culminated in the overthrow of the previous governments.

SA was the fourth-most profligate printer of money in the world between September 2010 and October last year, after Syria, Turkey and Brazil. Based on this, Becker predicted potential for unrest in SA.

The research throws an entirely new spin on the economic as opposed to the political causes of social upheaval. Becker says the world is entering a dangerous economic phase, where central banks, abetted by the banking system, are trying to inflate their way out of trouble. The problem is that inflation only makes the problem worse.

The conclusion, he says, is inescapable: inflation leads to violence. The root cause of inflation is monetary expansion by the banking system. "There may be legitimate political grievances, but the trigger for social conflict appears to be inflation. The poor see their meagre incomes being eaten by rising costs of basic essentials, and this very quickly leads to the kind of violence we have seen in Sasolburg, Marikana and the Western Cape farm strikes," says Becker.

"Low-income groups will not understand why their real incomes are suddenly falling, but will know that, for the money they are spending, their shopping trollies are getting less full.

"When workers band together and demand that their employers hike their salaries at CPI plus several percentage points to keep up with nondiscretionary price inflation, this may occur several months before the actual acceleration of price inflation. Employers say this is unrealistic and are willing to grant only CPI-related wage increases. These workers have few outlets to express their discontent but through mass protest and violence. The result is tension between labour and business, and as long as these nondiscretionary inflation trends continue, the tension will persist. The problem is that this tension is now so acute, that it is turning violent."

While SA is not the only delinquent in the monetary expansion game, the inflationary threat — which appeared to be under control just two years ago — is once again rearing its head. Previous periods of monetary expansion have led to similar, even worse, bouts of inflation, such as from the mid-1980s to the early 1990s. This, too, was a period of social upheaval in SA, culminating in the first free political elections in 1994.

The current financial crisis is global and contains within it the seeds of hyperinflation. US economist John Williams argues that the traditional CPI inflation measure has become a tool of governments and no longer measures the actual out-of-pocket expenses of ordinary people. He launched a website, Shadowstats.com, to deconstruct what he says are manipulated US government inflation and employment statistics.

Based on these corrected US inflation figures, Williams believes the US is on the cusp of hyperinflation. In a report written last year, he says: "Before the systemic solvency crisis began to unfold in 2007, the US government already had condemned the US dollar to a hyperinflationary grave by taking on debt and obligations that never could be covered through raising taxes and/or by severely slashing government spending that had become politically untouchable."

The US economy has entered a severe structural downturn, which helped to trigger the systemic solvency crisis, according to Williams. "Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover obligations."

Becker says the only sustainable way to put an end to the destruction of the living standards of the poor and middle class in SA is for the Reserve Bank to tighten monetary policy, allow interest rates to rise, and let the rand strengthen. That would rein in inflation and protect the poorest from the ravages of runaway price increases.

This is the dilemma facing the Reserve Bank. Raising interest rates under present conditions is politically dangerous. But to allow inflation to continue its current course will be even more fatal in the longer run.

• Ryan is a freelance writer.
 

Angelika R. (143)
Sunday February 17, 2013, 4:45 pm
It did not really need new research to discover this old knowledge. IT's been out there, has always been this way
 

JL A. (275)
Sunday February 17, 2013, 5:08 pm
I like the distinction the researchers made of public vs. private violence (e.g., domestic violence). You cannot currently send a star to Angelika because you have done so within the last week.
 

Bob P. (427)
Monday February 18, 2013, 7:15 am
Thanks
 

JL A. (275)
Monday February 18, 2013, 7:37 am
You are welcome Bob
 

Roger Garin-michaud (62)
Monday February 18, 2013, 1:29 pm
noted, thanks !
 

Traci Phillips (2)
Monday February 18, 2013, 1:32 pm
Makes sense
 

Jaime A. (32)
Monday February 18, 2013, 1:34 pm
Noted, thanks.!!
 

Natasha Salgado (520)
Monday February 18, 2013, 1:42 pm
This is not news???? These days if someone looks at you the wrong way or maybe you bump into a person or just speaking up for your beliefs, well Bang Bang you're next....it's the new sub-human mentality. What a kind,ethical and loving world we live in....NOT.
 

Allan Yorkowitz (453)
Monday February 18, 2013, 2:51 pm
From earliest times, when a man could not feed his family, there has been historically an outcry against the government. There is nothing new to this :latest research".
 

JL A. (275)
Monday February 18, 2013, 3:14 pm
You are welcome Roger and Jaime! You cannot currently send a star to Natasha because you have done so within the last week.
Beliefs often exist before the evidence from research confirms them Allan--the proof did not exist in the earliest times.
 

Elizabeth M. (66)
Monday February 18, 2013, 3:36 pm
Well it makes sense to me! Thanks for posting J.L. A. Read and noted.
 

Many Feathers (134)
Tuesday February 19, 2013, 6:34 am
so does many things
 
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