Egypt's Hunger

The nation of Egypt is the Arab world's largest nation population wise, with 83 million souls. In 1980, it's population was only 45 million.. and herein lies a good part of Egypt's problem.. population growth colliding with the limits of agriculture. Food prices are rising fast in Egypt, where the vast majority of the population has to spend a large (and sharply increasing) percentage of their incomes on basic food. As I explained last week, declining food production this year in combination with Big Ben's printing presses and increased demand from newly wealthy China and India have put the world's food situation in a precarious position, especially for poor nations like Egypt.

Like Tunisia, part to the problem is the corruption and nepotism of President Hosni Mubarak's government, which used heavy handed security forces to intimidate anyone brave enough to speak out. Hundreds of activists have "disappeared" over the last couple of decades. Corruption is at every level of government. Egypt also spends lavishly on it's military, supposedly as a defense against Israel. Mubarak's government has recieves about $3 billion in US aid each year, about half of which is military aid.. mostly paid as a ransom to keep the peace with Israel. To our credit, the US has helped the Egyptian people as well through US and UN aid agencies and trade treaties. The lifestyles of most Egyptians is acceptable; those with the right connections have it much better. Most Egyptians want what we all want.. a better life, education and peace. Mubarak's sham elections, corruption, heavy handed police and the setting up of his son, Gamal Mubarak, as heir apparent nauseated most, but life was still OK for most Egyptians. Full bellies and hope for a better future make for happy people. There was some semblance of economic growth, hope and justice for most.

As food prices began to rise last year however, those full bellies began growling for those at the bottom of Egypt's economic food chain. Riots and protests in several nations emboldened those who were hungry to begin their own protests last month. Mubarak's tough police units moved in swiftly and little was ever heard of the matter here in the outside world or on Egypt's media outlets. But when food price protests turned into violent mobs in Tunisia and forced out that nation's corrupt leadership, the Egyptian leadership began to get scared.

Sure enough, ever more bold and violent protests have taken hold in Egypt, culminating in today's bloody mayhem, when police opened fire on protesters, killing two protestors and a policeman. Earlier this week, ZeroHedge reported that large shipments of gold were leaving the nation. Today we saw tens of thousands violently protesting, throwing rocks and bottles at police in an event organized by protesters via Twitter and other social network sites. Today the Egyptian government blocked Twitter in Egypt. The police, obviously feeling threatened by flying debris, opened fire on protesters in Suez, killing one. Tonite we have confirmation that the heir apparent Gamal Mubarak and his family have fled to London with 97 suitcases. This is huge news.. it will show the Egyptian people that their corrupt government is crumbling. Members of Mubarak's political party were burning their membership cards. It looks like the rats are fleeing the rotten ship of state. I look for Gamal's departure to embolden the protesters tomorrow and unless something drastic is done I think Mubarak himself will join Tunisia's Ben Ali in exile before the weekend is out.

Tunisia was a small, insignificant nation not noticed in the grand scheme of the Great Powers. Egypt is a very different animal.. it has a very large military establishment and is a stone's throw from both Israel and Saudi Arabia. For US interests in the region, this could be a huge blow depending on what follows Mubarak. The peace treaty with Israel hangs in the balance. Egypt's army is infinitely stronger than Saudi Arabia's. The nightmare scenario for the US is that an Islamist government takes over in Egypt if Mubarak does fall. My guess here is something different.. I think Mubarak will go, but the Army will keep order and arrange new.. and free.. elections. This might actually work out well for the people of Egypt.. but I do think that any new government will be far less friendly to the US. The Army will not allow sweeping cuts to it's budget, and so while they'll have a new government, little of importance will change.

As with Tunisia, overthrowing corrupt, despotic regimes is the easy part. Delivering on things like food prices and stability is a whole other matter; the protests continue around the clock in Tunis days after the President fled the nation. Indeed when instability rears it's ugly head, the common people do the exact thing they should'nt.. hoard food, thus exacerbating the problems. The instability will deeply affect Egyptian financial institutions; bank runs are one likely event, as is a stock market massacre. Those who do empty their bank accounts will begin hoarding food, petrol and other basics. Solving the people's hunger for democracy will be the easy part. With a rapidly growing population and declining global harvests, solving their hunger will prove a mighty task indeed, especially if the ending here gets quite ugly.

When Population and Agriculture Collide

In the late 1700's, a British mathematician named Thomas Malthus did some calculations and determined that the human population growth was on an unsustainable path and would one day collide with the limits of agriculture. Since then, this scenario has been called the "Malthusian Catastrophe". In 1968, one Paul Erlich published a book called Population Bomb and explained that poor, overpopulated Third World countries could not possibly feed themselves. Egypt, India, Nigeria and Bangladesh "would have to be left to their Malthusian fates", he argued.

It should've already happened.. and would've happened already.. had not technological breakthroughs occured. By 1961, India was on the brink of famine. In 1960 India, with the help of the Ford and Rockefeller Foundations, established the IRRI (International Rice Research Institute), which came up with the IR8 brand of rice. Although IR8 would need pesticides and fertilizers, this new type of rice could produce two crops per year instead of one; rice production in India went from two tons per hectacre to six by the 1980's.. and in optimum conditions upwards of ten tons. Several other nations followed suit, including the Phillipines, who's rice production went from 2.7mm tons per year to 7.7mm tons in the 1980's, allowing the Phillipines to become a rice exporter for the first time in it's history. More recently, a new form of rice was developed for Africa called NERICA (new rice for africa), which has succeeded in increasing rice yields in a few nations. Political and other problems slow this program, but it's there to embrace. These new HYV's (high yield variants) are not only for rice, but corn and wheat as well. There has been some criticism of these HYV's.. they are not a flavorful or as nutritious as regular breeds.

Needless to say, the world has yet to see it's Malthusian Day of Reckoning for the most part. Where hunger does exist, it's usually because of political problems more than agricultural problems. The last time the US tried to intervene to help in a famine (Somalia) became a bloody mess. Somali workers employed by the UN and US refused to eat American food; they preferred Somali food, which was being hoarded and sold by warlords.

But things look like they are beginning to change again. The UN's FAO (Food and Agriculture Organization) issued their annual food outlook and more importantly their prices outlook, and it was grim. They give a measurement of cost. In 2000, their measurement of cost was at 96. This report lists it now at 227, a record, even surpassing 2008 when food riots gripped several nations. Their report listed that grain prices have risen 32% in the second half of 2010. A lot of this was due to some unfortunate events; fire and drought swept Russia and the Ukraine, both of which then halted all exports.. a ban which will go through 2011 as well. The FAO's Chief Economist Abdolreza Abbassian said "We are entering new and dangerous territory" and went on to question whether we are prepared for it. This week, the USDA cut forecasts for grain production and acreage in the US as well, adding to the problem.  The floods in Australia have left a key grain producing region under water as well.

Part of the problem.. especially for very poor nations like Egypt and Bangladesh.. is that they must now compete with a China which has begun to change their diet from rice and vegetables to a more meaty diet. One pound of meat takes from 15-30 pounds of grain to produce. As China and India get richer, their meat demands are skyrocketing.. as are their grain imports, squeezing supply further for the poorer nations as prices increase. Jim Rodgers, an investor previously associated with George Soros and more recently noted for his bearishness of Western economies and bullishness of China's, came out yesterday and added rice to his list of buy's, which has included only one thing in the past.. gold. Investments in new agriculture ETF's like WEAT have skyrocketed as well as investors pile onto the northbound train, further increasing the price. Rodgers believes the price of rice will skyrocket. In 2002 when I was a commodities trader, the price of a bushel of Wheat was around $3.65. Today it's $7.73. Other grains have experienced similar rises. Wheat will likely hit $9.00/bu this year. On a longer timeline, the world is slowly but surely seeing a decrease in the acreage available for agricultural production based on many things like urbanization, desertification and soil erosion.

In poorer nations, a large percentage of people's incomes.. sometimes upwards of 75%.. are spent on food. Here in the US, it's around 10%. When prices begin rising, what many people do is begin hoarding as they believe it's better to buy extra now when the price is $5.25 instead of waiting until it hits $6.25 next month. The problem with this is that this very act by itself fuels the rise in prices. This is what was happening in Haiti and other places in 2008, which resulted in bloody riots. It's beginning to happen again this year. So far, food price riots have taken place in Tunisia, Algeria and Bangladesh. Yesterday, the President of Tunisia fled the nation as hungry mobs rioted. While part of it was his nepotism, what got the ball rolling was that he was unable to keep his promise to slash the price of food for his people. Egypt's government and situation are strikingly similar to Tunisia's. As the world's population grows and demand in newly rich nations like China and India soar, there is going to be some hungry people somewhere this year.. and I fear that many of them will take to the streets in anger.

Chowchilla's Day of Reckoning

The San Joaquin Valley town of Chowchilla, known for it's dairy farms and state prison, was a growing town in a pretty part of California. Revenues from local farms and state employees fueled a dandy boom in the 1990's. Property values skyrocketed as Bay Area residents built townhomes to get away from it all. We all know the ending to this story.. it's happened nearly everywhere in America.

This month, the City of Chowchilla has defaulted on a bond that was issued for the renovation of the City Hall building.. which houses a city government that has been forced to slash their workforce by 45% since 2009. The City Hall building itself is nearing the point of being repossessed. Chowchilla's 18% unemployment rate, plummeting property values and reduction in the size of the prison workforce has left this small town with big debts and little hope of solvency in the medium term. Assistant City Administrator Wayne Padilla said Thursday that he negotiated with the bond trustee to draw down on the bond reserves Friday to make the January payment. This year they're using various measures such as this to plug the $1 million hole in the city's budget.

The problem is that there are few bond reserves left to tap, and the city's revenues are continuing to decline. "The question remains.. what do we do about the debt next year ?" said Padilla. "We have not decided whether or not to make the debt payments". Padilla took over in 2009 and discovered that the small surplus he thought he was inheriting was because they were in default of Mello-Roos bonds, which are issued for major infrastructure improvement projects. Worse, many home development projects were going belly up, leaving half built townhomes and falling city revenues as the construction projects.. and their workers.. left. The local brake manufacturer, pretty much the only industry in the small town other than farms, was slashing staff. Sales tax revenues plunged.

Padilla, who is the city's Assistant City Administrator, is also the city's Finance Director. The acting City Administrator is also the Chief of Police. But at least they have jobs. Padilla has worked with the city's police and other employees to cut pay and paid vacation in order to save jobs. He also plans on an additional "tax measure or two" by way of ballot measures to get through the tough times.

One of the few people to prosper during these dark times is one of the Chamber of Commerce members, Lee Brock, who owns a locksmithing businesses. As he makes another key for yet another foreclosed home, Chamber member Brock seemed optimistic "It'll take a while, but I'm optimistic". As his business flourishes, he can be. Most residents are not so upbeat.

Tomorrow, California's Governor Jerry Brown will present his budget and ideas on how to close California's $24 billion budget hole. Nearly everybody is going to take a hit; cigarette and gas taxes will soar, the state's university system will see further slashes. The City of Bell looks to also be in some serious trouble. One area that will undoubtedly be slashed is aid to city and local governments. Ben Bernanke added yet more misery to the mood last Friday: "We have no expectation or intention of getting involved in local finance. The states should not expect loans from the Fed". My fear is that Chowchilla's story will become all too common in 2011.

Update 1/10 7pm: Governor Brown unveiled his budget plans, and apparently a big part of the plan involves "realignment".. which is another way of saying that he plans to shift responsibility for some state programs onto already overloaded local municipalities like Chowchilla. It includes $12.5 billion in budget cuts and he plans on a June statewide referrendum to raise taxes by $12 billion. I'll give him this.. he's not just giving us smoke and mirrors like Schwartzeneggar did.. he's tackling the monster head on and means to solve it once and for all. Oh yes.. and it appears that Portugal has cried uncle.. the Central Bank of Portugal has said today (after EU trading hours) that it could use external financial support. Next domino.. Spain. I'm going to keep a close eye on Spanish bonds here; Spain could follow Portugal in rapid succession unless something very forceful is done to reinforce both Portugal and Spain.

Muni Mess Updates

During the Depression, local governments found themselves in a pickle like today's municipalities do.. tax collections were way down, the social demands of the people way up. Initially, these towns and counties (called muni's) were not allowed to file bankruptcy. This forced some local governments to hike taxes to obscene levels.. West Palm Beach had a property tax of 41% of assessed value. After a long fight, Congress enacted the Municipal Bankruptcy Act in 1937. By then, it was simply a formality.. hundreds of towns and cities had long ago stopped paying creditors. Between the law's enactment and 1939, 106 municipalities formally filed bankruptcy.

After Meredith Whitney's startling prediction for a cascade of local government bond defaults, I did a little digging and came up with a few updates on just how bad things are in some places. It appears that in some 26 states, municipal governments are simply not allowed to file bankruptcy. Most of these are smaller and middle sized states such as Iowa, Kansas, Maine, Wisconsin etc. The bigger (and more distressed) states like California, New York, New Jersey, Pennsylvania, Ohio, Texas and Florida do allow municipal bankruptcies.

There are three states that are in the process of changing this. The first is Indiana, where Governor Mitch Daniels has given his blessing to a plan that would allow municipalities in Indiana to hand over their finances to a state emergency manager, who would have vast powers to solve the problem, including re-negotiating contracts with public service unions. This emergency manager would also be empowered to file bankruptcy if he felt it necessary. A few towns in Indiana are already lining up to surrender their governments to an emergency manager, led by the City of Gary.

Next on the list is Michigan, where Detroit has recently halted all garbage pickup and stopped police patrols in 20% of the city.. a city which is already known for its high crime. Their budget deficit in 2010 was around $450 million. The city's public service unions are'nt budging an inch, forcing the city to slash deeply. Newly elected Republican governor Rick Snyder has come out in favor of allowing bankruptcies, and Detroit will be followed to the bankruptcy courthouse by a number of other cities and towns in Michigan.

In Wisconsin, newly elected Republican Governor Scott Walker began talk of de-certifying public employee unions. The outgoing Democratic Governor Jim Doyle tried to tie Walker's hands in the lame duck session by negotiating new contracts with 17 Unions covering 39,000 state workers. But at the last minute, a few Democratic state senators, including senate majority leader Russ Decker, pulled their support and the legislation failed. The Democrats removed Decker as majority leader and tried ramming it through again, with the same failed results. The lame duck session is now over. I look for the Gov.Walker to allow bankruptcies as well as de-certifying these unions. Rumors were that the City of Milwaukee is in serious trouble and would likely be the first in line if the state were to allow bankruptcies.

In general, the benefits promised state and local public employees are exceedingly generous. In early 2000's and the ever increasing tax revenues and property values of that time, keeping these promises was not a problem. This has changed. Property tax revenue is plunging, as is sales tax revenue. Roughly 30% of the revenues for municipal governments come from the state government. In some states, this support will be drastically reduced.. muni's in bigger states will be hit hard. Budget slashing Republicans have taken over a number of state governorships and legislatures in the last election, and tax hikes won't fly. Even worse was the ending of the Build America Bonds program, which essentially allowed muni's to borrow and employee people at low interest rates. All considered, 2011 is beginning to look like 1932 for municipal governments.

Lets remember that there are 14 million people employed by municipal (local, not state or federal) governments today... they make up 11% of the entire US workforce. 90% of municipal governments have announced spending cuts are coming in 2011, with more cuts possibly coming depending on the reliability of the above mentioned aid from states. Because the unions are so obstinant, they'd rather the local government simply slash the number of employees than have any of them take cuts in pay and/or benefits. Muni spending amounts to 9% of our nation's GDP. Here's my guess.. a few dozen will file bankruptcy, but most muni's will muddle thru with a combination of slashing jobs & salaries, borrowing, and simply not paying their bills on time..including bond defaults. Muni governments will take a queue from the State of Illinois, which is perpetually six months behind on nearly all its bills, and becoming more and more delinquent. In California, state employees have endured pay cut after pay cut. I fully believe that at least 750,000 muni jobs will be lost and another million will see their wages and/or benefits slashed, mostly in bigger states. State governments will probably lay off another 250,000. Obama will try to throw them a lifeline with howls about saving teacher jobs, but I believe the Republicans in the House will nix this one. For many local governments, it's 1932 once again.