The G20 Agenda – Speculation Demand and Global Economics Alan S Alexandroff Director Online Research & Director of Strategic Partnerships Digital20, Munk School of Global Affairs

Summary The multiple explanations for food security issues Speculation and Poverty Looking at exchange rate 2

The Threat to Food Security French President: “The day there are food riots, what country at the G20 table will say this does not concern them? I don’t see a single one.” (January 24, 2011) food security and volatility in commodity prices – the role of derivatives in commodity- price swings - are a priority for the French President. The President has called for the regulation of commodity markets – and the effort to avoid food riots in the world’s poorest countries 3

Factors in Food Prices and Volatility Supply Speculation Demand 4

Structural Factors – A Growing Era of Consumption Grains and land in biofuel Population growth effects Income increase large emerging markets Urbanization of population Government income support programs High oil prices Production shortages – weather, water usage, plagues & diseases, low prices Dollar devaluation Investment fund speculation 5

Alternate Views The view from the IFIs –More wide-spread price increases than 2008 –Supply shortfalls – weather –Policy reactions (Russia) raised amplitude –More short run impacts The view from a Central Banker –Avoid a two tier system – one of market driven exchange rates; the other managed exchange rates –A demand phenomenon 6

Canada’s Mark Carney GBC While there have been supply disruptions due to geopolitical unrest and natural disasters, and while speculative pressures have reinforced, on occasion, the direction of fundamentally driven price moves, the Bank’s view is that a large, sustained increase in demand is the primary driver of this boom. The breadth and durability of the commodity rally underscores this conclusion. “The Paradigm Shifts: Global Imbalances, Policy and Latin America” (March 26, 2011) 7

Not Just Speculation & Poverty Volatility in Commodity Prices –According to the WB the rise in food prices 36% during the past year has added 44m people have fallen in to extreme poverty –Food price inflation hits the poor the hardest – they spend a greater proportion of their income on food –The impact on Algeria and Tunisia 8

More Regulation – The French President Trade through exchanges – rather than over the counter Traders of commodities must put down a deposit for part of the financing for the commodities 9

The Other French Priorities Monetary Reform – The US Dollar as an International Reserve Currency The Depreciation of the Current Int’l Reserve Currency The Dilemma of Moving from Here to There 10

Exchange Rates and Imbalances The impact of the exchange rate The reaction to quantitative easing and persistently low interest rates The reaction to capital flows in emerging markets – Brazil, Korea, etc., Chronic undervaluation 11

Still Moving Apart - China Growth – 9.7% for the first quarter year over year (fourth quarter 9.8%) Consumer Price Index- 5.4%(from a year earlier in March 2010) – target 4% Foreign Exchange Reserves – rose $197.4B in this first quarter reaching $3.0447Trillion – marks the highest level of inflow from both foreign investment and speculation 12

China’s forecast China for the 4 th time orders banks to raise reserves – large banks to set aside 20.5% of their cash – an increase of half percent Food prices are rising as are wages, housing and raw material prices Inflation partly a product of stimulus spending in infrastructure spending – this is monetary stimulus not unlike the US 13

China forecast Rising commodity prices – including food - now feed wage demand and underlying inflation Transmittal of inflation to RoW 14

Still Moving Apart - US S&P Outlook – Monday (April 18 th ) US sovereign debt - remains triple A but for the first time in 70 years moves from stable to negative (1 in 3 chances of an actual downgrade in the next two years) 2011 – deficit of 10.8% of GDP US Treasury – higher prices are not from US policy but rather emerging market efforts to down the value of their currencies in the face of growing capital inflows 15

US forecast The emerging markets have led to lower prices in the US – but with rising prices and inflation the opposite may now be the case 16

Still Moving Apart - BRICS 40% of the global population 18% of global trade 45% of current growth 20% of the global GDP 17