Scarier than revolutions: a tempest in a shopping cart

While the attention of the media is largely devoted to looming storm clouds over the Middle East, it may well be that the next tempest to shake the world may in fact be expected in your teapot. Not to mention your shopping cart. And your gas tank.

In fact, while the uprisings in the Middle East may well be harbingers of historic change in the region, they are also a direct result of another set of factors that could conceivable eclipse them as the big story of the year for 2011: rising global commodity prices. In Tunisia, Egypt, Yemen, and Jordan among the most notable complaints of protestors has been the skyrocketing food prices.

As noted here, that fact is part of a vicious circle that is worrying markets. Bad global grain crops last year produce unrest in the Middle East this year. That in turn pushes up energy prices due to concerns about disruptions in energy flows. That in turn pushes up food prices further as something like 30 or 40 percent of the cost of most food products is related to energy costs associated with processing, packaging, and transportation.

But that's not the whole story. Look at the headlines coming out of China this week about a spreading and significant drought that is likely to further negatively impact food supplies and push up prices. Look at the other headlines about Chinese and Brazilian concerns about inflation. Or the headlines from today (and many recent days) about how inflation worries are depressing stock prices.

In fact, among the very few people who are not that worried about inflation is U.S. Fed Chairman Ben Bernanke who, testified Wednesday, said that while it may be a problem for the emerging world, "inflation is expected to persist (in the United States) below the level Federal Reserve policymakers" feel they have to worry about it. Of course, just because he doesn't worry about inflation here in the United States, doesn't mean Americans aren't going to feel the pinch if food and fuel prices go up. In a rough economic environment like this one for many Americans that squeeze will be particularly acute ... and included in that group are the politicians who will hear the howls of their constituents if prices get above the level average people feel is fair to them. Furthermore, if inflation in places like China, Brazil, or elsewhere in the emerging world causes them to tighten their monetary policies or it negatively impacts  real growth, there could be meaningful negative knock-on consequences for the United States.

At the hearings attended by Bernanke, Republican Budget Committee Chairman Paul Ryan of Wisconsin was not quite as sanguine about the issue as was the Fed chief. He said, "My concern is that the costs of the Fed's current monetary policy -- the money creation and massive balance sheet expansion -- will come to outweigh the perceived short-term benefits. We are already witnessing a sharp rise in a variety of key global commodity and basic material prices, and we know that some producers and manufacturers here in the United States are starting to feel cost pressures as a result."

Bernanke shrugged off the problem with an argument that it was limited to the emerging world where there was a lot of growth and consequent overheating. This is why, of course, it is dangerous to let economists do economic analysis -- because they tend to miss the political and security consequences of events. That said, sometimes they miss the economic ones too. Bernanke also suggested that rising oil prices are due to increasing emerging markets demand, aren't coming from the United States and there's nothing monetary policy can do about it. Well, International Energy Agency reports aside, one of the reasons oil prices have spiked in recent years due to the fact that investors use oil as a hedge against the dollar and price the commodity in dollars and therefore there are at least two reasons why a weak dollar policy like that pursued by this Fed (their long slow cruise on the QE2 ... that's "quantitative easing two" for you landlubbers) ends up pushing up oil prices.

I have plenty of respect for Bernanke. But when the Chinese Central Bank, the European Central Bank, the Brazilian Central Bank, and several Fed governors all are concerned, I think it's time to take his "what me worry" view with a grain of salt. We've seen it in prior instances when what came next was a considerable financial calamity.

According to the U.N., last week world food prices peaked for the seventh consecutive month, led by prices in wheat, milk, sugar and, yes, even tea. Some are predicting tea market shortfalls of 50-60 million kilos for 2011. (This is thanks in part to droughts elsewhere in the world including, to pick one example, Kenya. The connection between prices and strange global weather patterns are so great that one would think that they might even grab the attention of those skeptical about climate change ... but of course, to discount science it helps if you also discount causality and logic so perhaps this will be another loud warning on that front that will be ignored.) For a provocative take on this turn ... with a grain of high priced salt ... to one of London's favorite tabloids, The Evening Standard, for today's piece entitled, "The Men Who Ate the World."

As the piece notes, chocolate prices are also skyrocketing which particularly pains me. At the same time, it offers the only silver lining to this worrisome trend. While spiking food prices may be politically and economically destabilizing, they could have the secondary effect of counteracting the world's also worrisome obesity epidemic which was cited by Josh Keating in his piece at FP on the most recent study showing that more and more people are starting to look more and more like the planet itself.

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David Rothkopf

Bad romance: ranking Obama's most difficult relationships

While it is often ruefully noted that you can't pick your relatives, there is an expectation in life that you can pick your partners. Barack Obama is discovering that when you are president of the United States, that's just not the case.

In fact, if there is one theme that runs through every corner of the Obama presidency it is that he has been forced into partnerships that are so complex, difficult, and undependable that it must leave him yearning for the relative simplicity of good old fashioned enmities. This was illustrated yesterday as the president made the short walk across Lafayette Park to visit the U.S. Chamber of Commerce, symbolic headquarters of the U.S. business community, a group with which the president has come to realize he must work more closely going forward.

But in and amid all those complicated relationships, which are the most difficult? Naturally, there are many ways to measure this but we'll stick with one: Which among the most difficult are most likely to blow up in his face during the next two years?

Here's the verdict:

10. China
This, the most important international bilateral relationship, is both difficult and likely to be relatively stable because it is so complex. There is so much economic co-dependency here that the political issues are likely to work themselves out. Over the next two years trade and currency tensions may grow, but it is unlikely that either side will flirt with a big blow up prior to the 2012 leadership change in China or the presidential elections that same year in the U.S.

9. Russia
China is likely to be the U.S. most important international counterpart in the decade ahead but Russia remains the wildcard among the major powers. Stephen Cohen summed it up well on "Morning Joe" this morning: Russia's the biggest country in landmass, the leader in energy output and it has all those nuclear weapons. It also has a massive Muslim population, related challenges in its near abroad, memories of empire and what might politely be called a mischievous streak when it comes to international challenges. Oh, and it is undergoing a demographic meltdown and it is suffering from a divided less-than-dependably friendly political leadership. It's at the bottom of this list primarily because of the "next two years" focus of our metric.

8. Israel
Israel is the United States' most dependable friend in the Middle East and a vital ally. That said it is also facing massively unsettling changes from within and without that are creating enormous pressures on its political leaders. The Bibi-Barack marriage was never exactly made in Heaven but as the Israelis face demographic pressures at home, the Hezbollah take-over of Lebanon, instability in Jordan and Egypt, the prospect of a nuclear Iran, growing international pressure to cut a deal with the Palestinians and seeming growing inability of the Palestinians to cut a deal due to their own internal divisions ... what was difficult is going to get any easier. While many expect Netanyahu to offer his own concessions and a roadmap to progress sometime soon, there is real concern even among his supporters whether he can go far enough to break the logjam in the peace process. If he can't, pressure will build in this already fraught partnership.

7. Egypt
Egypt nudges out Israel only because it is so volatile right now and we don't know where the current unrest now heading into its third week is likely to head. One thing we do know, there are almost no circumstances in which the relationship will be easier for the United States. If there are massive reforms, a more pluralistic Egypt will be harder to deal with than an autocracy with a fairly dependable ally at the helm. If the current regime holds, they will never trust the U.S. in the same way as they did prior to this crisis.

6. Democrats in the Congress
Will Rogers
said, "I'm not a member of any organized party, I'm a Democrat!" And as far as we know he never sat at a cocktail party between bickering leaders like Nancy Pelosi and Steny Hoyer or Harry Reid and Chuck Schumer. (Although, Pelosi clearly had a little celebratory sip of champagne last night to celebrate the departure of Jane Harmon, a longtime thorn in her side.) Pick an issue from fighting the deficit to rationalizing our regulatory framework to investing in energy infrastructure, you'll find both Obama's biggest supporters and some of his most difficult opponents in his own party.

5. Republicans in the Congress
Republicans are supposed to be a challenge for a Democratic president to deal with. But as Gingrich and Clinton discovered, to get anything done in a divided government both sides have to work together sometimes (even if negotiating sometimes looks like a deranged game of chicken). John Boehner knows this (it's not clear that his Senate counterpart Mitch McConnell does) and has made pragmatic noises. Still, in the end, it is more likely than not that Republicans will listen to their inner consultants who say denying Obama victories is the best way to position themselves for 2012.

4. The Business Community at Large
I used to get calls when I worked at Commerce saying "mobilize the business community." And of course, I had to explain that there is no such thing. Businesses act in their narrow self-interests because that is what they exist to do. While it is clearly healthy for the president to reach out to and listen to the people who must be his partners if he is to rebuild the U.S. economy, he should not expect much response to his request that businesses think about what they can do for the United States, rather than just about their bottom lines. That's contrary to the legal mandate of most boards and to the nature of business. Business will welcome tax cuts and regulatory trims and the minute that proposals look like they'll add costs they'll fight fiercely. The bigger question is: will they be broadly loyal to Obama come 2012 and the answer is "not bloody likely." Further, watch for problems with Jeff Immelt running Obama's job commission -- his company, GE, gets the vast majority of its revenues from overseas and sometime soon it will make a perfectly rational business decision that will create jobs in China or someplace else and make someone back home in the U.S. really unhappy. (And Immelt, among America's very best CEOs and someone the president should be listening to, has often spoken to his friends about his frustrations with and disappointment in Obama.)

3. The Wall Street Community
If the business community is certain to be fickle, Wall Street will be that way only moreso. Financiers, who provided unprecedented support for Obama in 2008, and who dangled that as an issue during negotiations regarding reforms, are set to turn their back on the president in a big way.

2. Pakistan
Somehow the news that during the first two years of this administration the Pakistanis have perhaps doubled their nuclear arsenal as reported by both the New York Times and the Washington Post did not create the uproar that a rational reading of it should provoke. Not only does it make a dangerous situation much worse with unstable Pakistan now possibly vying with France to be the number 5 nuclear power in the world, but sooner or later someone is going to note that such programs cost money and that during the period the U.S. has been pumping billions into Pakistani government coffers. All it will take is for a nuke to go missing or the Pakistani government to undergo a change and become a less reliable ally and it will be hard to distinguish between the "who lost Pakistan?" and the "who armed Pakistan?" shouts and accusations.

1. Afghanistan
The difference between all these other bad partners and the really bad partner in Afghanistan is the 100,000 U.S. soldiers that are at risk in that country. One of the real nightmare scenarios for Obama is that the futility of his misplaced bet on Afghanistan is illustrated by a particularly painful series of personnel losses on the ground there, a major scandal or demonstration of unreliability from the government or, worse, both in close juxtaposition to one another. This is one of those situations in which every time the phone rings the president must worry about a calamity that will dramatically undercut both his support and U.S. interests.

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