Friday, January 21, 2011

Fighting inflation

There is no word in economics that frightens me more than the word "inflation."  Because whenever the word is used to describe events, open class warfare against the Producers is certain to follow.

Inflation supposedly describes the loss of a currency's buying power.  It is usually described as a thief in the night that destroys the value of the money so carefully saved by the frugal and virtuous.  And so inflation has been accorded a special place in the pantheon of economic sins because it undermines the power of the creditor classes.  The cure for such inflation is the existence of "hard" money--money whose value does not change due to external economic circumstances.  Of all the hard money strategies, the most enduring revolves around a mystical belief in the store of value found in gold.

But oh the misery brought the world by the believers in the gold standard.  When USA went back on the gold standard following the Civil War in 1873, this act triggered a depression that decimated living standards of farmers and factory workers.  When Britain went back on the gold standard in 1923, the economic calamities that triggered eventually led to the Great Depression of 1929.  The "Crime of 1873" led to a political revolt in USA that saw the rise of the Greenback and People's parties.  The 1929 catastrophe saw a rise in the Fascist Parties in Europe.  The USA escaped fascism only because the first item of Roosevelt's agenda in 1933 was to get us off the gold standard.

Whenever prices rise, the gold standard zombies comes staggering forth and 2011 is certainly no different.  We now see gold prices top $1300 and right wing nuts like Ron Paul and Glenn Beck now push for a return to the gold standard at every possible opportunity.

Unfortunately for the gold bugs, rising prices can be caused by a host of complicated factors that have virtually nothing to do with monetary policy.  For example, the current economic problems are almost totally tied to rises in the price of energy.  And while the price rises in energy are exacerbated by the speculators, the basic problem is the "iron law of non-renewable resources" usually associated with the late Barry Commoner who postulated that "every barrel of oil burned makes the next barrel harder to find and more costly to extract."

Then there is the problem of food prices.  Not only is food production intimately linked to energy consumption, but there are the additional complications of rising populations, loss of prime farmland to non-agricultural uses, and now the bizarre weather patterns caused by climate change.  Those are the triggering factors but the real catastrophe happens when the speculators, who hope to profit from human misery, get in the act and make food so expensive it triggers riots.

Food Riots and Man-Made Famine 2011 
by gjohnsit 
Thu Jan 20, 2011 at 11:54:06 AM CST
It now seems likely to be one of the most tragic and inevitable global trends for 2011: food riots.
People are burning stores in India, Chile, China, Egypt, and Algeria.
The recent overthrow of the Tunisian dictator was about a lot of things, including corruption and unemployment, but it was also about food prices too. Protest signs in Tunis included examples like, "WE WANT bread and water and no Ben Ali." Some protesters waved loaves of bread to emphasize their point. 
Food price protests have spread even to oil-rich Oman.
Meanwhile, governments are taking desperate measures in the face of soaring prices. 
India has banned the export of onions after vegetable prices have risen 70% in the past year. China is implementing price controls and building up a strategic supply of foodstuffs. South Korea is lowering import tariffs on food. Many arab governments are resorting to tax cuts and hand-outs to defuse popular unrest. 
The scary thing is that everyone expects food prices to keep increasing.
Beef and pork prices are at record highs, but, if forecasts prove accurate, consumers have only just begun to see higher prices for food and fuel. 
Steady increases in the costs of grain and energy since last fall are drawing comparisons to the summer of 2008, when corn and soybean prices set a record and gasoline topped $4 a gallon, said Purdue University farm economist Chris Hurt. 
Unlike in 2008, however, grain prices are up before the first seeds go into the ground, and fuel costs are rising well ahead of the spring-summer driving season.
The key question is "why"? Why is food price inflation suddenly so high?
The first place the authorities point fingers at is extreme weather. Every year, somewhere in the world, there is unusual weather, and this year is no exception. Drought in Russia and flooding in Australia and Pakistan has hurt some food production.
But that seems to be more of a convenient excuse than a legitimate reason. (the author here seems to discount some serious reasons to make his point JL)
2010 saw the biggest global rice harvest in history, yet the price of rice increased 24%. 
Corn prices surged on the report of an unexpected 1% drop in America's production, but it was still the 3rd largest corn harvest on record. Soybeans also dropped 1%, and was still the 2nd largest harvest on record. Some are expecting a world record wheat harvest this year.
We've seen this story before. In 2008, 2.2 billion tons of cereal grains were produced--an all-time production record. Yet the world was racked by global food riots as prices rose beyond the ability of poor people to pay for it.
Shortages are not the reason for this spike in food prices. Something else is going on, and that something can be found in the financial markets.
Top financiers and politicians have accused banks, pension and hedge funds of inflating food prices around the world by speculating on commodities. 
"There is no doubt that speculators have been behind surging prices. 
Prices of wheat, maize and rice have increased very significantly but this is not linked to low stock levels or harvests, but rather to traders reacting to information and speculating on the markets," UN rapporteur on the right to food, Olivier De Schutter, said. 
Mike Masters, US equity hedge fund head of Masters Capital management, who testified on food prices to the US Senate in 2009, said speculators and hedge funds were driving prices up. 
The World Development movement in London said banks and hedge funds had poured money into food futures markets in the past three years, betting on prices going ever higher and creating a dangerous bubble.
There is enough food to feed the poor of the world. The problem is that they don't have enough money to buy it. We are looking at global hunger in a world of plenty. We are facing an artificial, man-made "famine". 
This is a crime of immense proportions. more
In the poor countries we have food riots.  In the rich countries we find gold bugs. Here we see a German who thinks gold is so intrinsically important he will choose the currency of a nothing country that teeters on the edge of catastrophe like South Africa over a global player with vast energy reserves like Russia.
The Specter of Inflation
Rising Prices Lurk in Europe's Immediate Future
By Alexander Jung  01/20/2011 
Moderate inflation isn't a bad sign. But prices in Europe are threatening to spiral upward in the near future as commodity prices across the globe explode. What's more, there may be little the European Central Bank can do about it.
Bert Flossbach, an asset manager in Cologne, can reproduce the sound made by a phenomenon like inflation. He takes two coins out of his pocket and drops them.
One is a Krugerrand gold coin from South Africa. When it strikes the table, it makes a sound suggesting fullness, substance and real value. The other is a Russian kopeck, a coin so light that it seems to almost glide down to the table. "That's the sound of inflation," says Flossbach.
Flossbach is convinced that the euro will also degenerate into a soft currency. The enormous debts facing some euro-zone governments, he says, make it inevitable. Flossbach expects galloping, double-digit inflation -- and not in five or 10 years, but soon. The only missing ingredient, he says, is a trigger, a dramatic event that will put an "avalanche-like process" in motion.
Worries and Anger
Flossbach invests in tangible assets, such as precious metals and stocks. His customers have entrusted him with roughly €4 billion ($5.3 billion) in assets, an increase of some 40 percent over last year. His message has apparently struck a nerve.
Polls show that the majority of Germans, and especially older ones, have grown worried about their savings. Many are scared that inflation will consume their nest eggs, and that they will end up footing the bill for bailing out banks and entire countries. "The large figures have really alarmed people," says Manfred Neumann, a currency specialist in Bonn.
To avert economic collapse in the wake of the financial crisis, central banks have been pumping more and more money into the economy. In doing so, economists say, they have created the fertile ground on which inflation can now thrive.
Some politicians are also sounding the alarm. Frank Schäffler, a financial expert with Germany's business-friendly Free Democratic Party (FDP), notes how the European Central Bank (ECB) has been financing government debt by printing money. "In the medium term," he says, "this inevitably leads to inflation." Michael Fuchs, an economic expert with Chancellor Angela Merkel's center-right Christian Democratic Union (CDU), is particularly worried about commodities prices, saying that they contribute to "the greatest inflation risk."
Death by a Thousand Cuts
Last week, the price of a liter of premium unleaded gasoline climbed to above €1.50 (about $7.60 a gallon) at many German gas stations. This is almost as much as it was in 2008, when gasoline prices reached an all-time high. Consumers have also been taken aback by the many other increases in everyday expenses. more
Of course, there is NO chance we will ever return to the gold standard.  There are simply too many reasons not to take such a foolish step.  However, we could see the various central bankers decide that they should take this opportunity to raise interest rates--the preferred Predator response to rising prices since 1981 when Paul Volcker "proved" that the back of inflation could be "broken" if only the spending power of the world's poor could be trashed.  The Predators will never accept restrictions on the activities of the speculators but they will happily prescribe "solutions" that will trigger a global deflation.  Considering that deflation is already happening in areas of the economy such as housing and clothing prices, it should not require much effort to spread deflation to everything (with the possible exception of energy.)

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