Priced in Gold, the cost of food has fallen. But against paper money...?
NEVER DID GOD give man such a sunny day that the authorities couldn't make it rain, writes Bill Bonner in The Daily Reckoning...
As near as we can tell, nature favored Argentina as she did few other places. She caused the Andes to rise up, and then over millions of years, let their hillsides wash downriver to deposit in a vast, flat, well-watered, plain. The topsoil sits so thick, farmers can abuse it for generations.
Yet on the edge of this fertile farmland, and in the middle of one of the biggest booms in farm prices in history, the politicians in Buenos Aires have achieved what seemed nearly impossible: they have created a crisis in Argentina's agricultural sector.
"Day 20, the strike continues: farmers reject government's 9 new initiatives," says the headline on La Nacion.
But farming's problems are not limited to the pampas. Thanks to globalization, they're sprouting everywhere.
- "Fears grow over rice crisis," says the front page of the Financial Times.
- "Silent famine sweeps the globe," reports WorldNet Daily.
- Thirty-three nations face "unrest" because of food shortages, says the IMF.
All over the world, food riots are breaking out. Not because there is too much food or too little, but because it has gone way up in price.
Of course, you could put that another way: the paper money in which food is priced is going down faster than usual. There's no less food than there was five years ago. But there is a lot more paper money.
Modern central banking was invented so that we should have paper money – and have it in abundance. Here in 2008 we now have so much paper money that it is causing food prices to soar.
But food is hardly in a class by itself; when one bubble pops, the authorities immediately begin pumping up another one. After the Dot.Com Bubble deflated in 2000-2001, for example, up came even bigger bubbles in residential real estate and the finance industry.
Now, both housing and finance are losing air. But the central banks are still pumping hard. The air is apparently going straight into commodities.
In other words, worldwide inflation of food prices is a monetary phenomenon, as Milton Friedman might have put it, not an agricultural phenomenon.
To show you the scope of the phenomenon, we pull out a copy of The New York Times dated 19th October, 1896. There it is recorded in black and white that the average wheat price over the previous 20 years was about $1 a bushel – the Dollar still being fully backed by and measured in Gold, of course.
So at that average price, one ounce of Gold would have bought you some 20 bushels of wheat between 1876 and the end of the 19th century. Whereas today, you can buy a bushel of wheat for about $12 (unbacked by gold) – which means an ounce of Gold at current prices will buy around 75 bushels of wheat.
In terms of what used to pass for real money, therefore – meaning Gold – the price of wheat has gone down over the last 100 years. The price has only risen against the paper Dollar and its substitutes. So however quickly farmers have added to the world's wheat output, central banks have outdone them, planting far more acreage in paper money.
And now that governments have caused a crisis, they are hard at work making it worse.
In Argentina, the farmers are few; city dwellers are many. Argentina's peronistas can do the maths. They make out the farmers – historically patrician landowners with large holdings – to be greedy and insensitive. The politicians imposed a 49% windfall tax on foreign sales. The measure should lower prices for Argentine consumers and raise money for the government, they reasoned. It seemed like a no-brainer. That is, until the gauchos blocked the roads into Buenos Aires and threatened to starve the city.
In America, the maths is different...but the result is equally imbecilic. There aren't many farmers out on the prairie, but in Washington, there are more farm-state US Senators than pigs. They push and shove up to the taxpayers' trough to get huge subsidies for their hometown campaign donors – lately, in the form of bio-fuels.
Corn-fed ethanol may make no sense in environmental terms or energy terms, but it lubricates the big wheels of national politics. In the event, it takes a third of the US corn crop out of the food chain and puts it to use in the drive train – further driving up grain prices.
With bread prices on the rise, politicians feel compelled to intervene. And every intervention falls upon the crops like a cloud of locusts.
Last Friday, the price of rice spiked by 10% as governments moved to corner the market. Three billion people, many of them with very marginal incomes, eat rice every day. The price of rice rose 50% in the last two weeks, causing Thai farmers to sleep in their fields to protect their harvests...while the Philippines posts armed guards at its graneries.
Vietnam, India, Kazakhstan and China have all restricted foreign sales. The exporters are coming under pressure to export less – in order to lower prices at home. The importers, meanwhile, have no choice but to try to get as much of it as possible, as soon as possible, in order to head off shortages.
Result? A run on rice.
India's trade minister warned hoarders: "We will not hesitate to take strong measures..." But of course, hoarding is exactly what a smart family should do. Most likely there will be runs on other commodities too...starting with a run on real money itself.
People will want something real...something sure...something with which they can freeze their savings for the future to buy rice without having to worry about it doubling in price two weeks later. This something needs to be instantly priced and easily traded, taking only a little space to store large quantities of wealth.
That something, traditionally, is Gold.