It starts with the US dollar, now off 40% from its highs earlier this decade. This has had a huge impact on commodity prices, and is the prime reason so many countries are considering dropping their peg to the US Dollar.
Overseas, price spikes in basic foodstuffs has led to riots and political unrest. Considering that in many regions of the world most of a family’s income goes to basic survival purchases such as food shelter and energy, it doesn’t take much in the way of price rises to lead to significant turmoil. According to Bloomberg, the average household in India spent 32% of its income on food last year. Compare that with 6% in the U.S., and 43% in Indonesia, or 36% for the Philippines.
Hence, the 50% rise in the price of rice in recent months is leading to increasing turmoil.
In the US, the results aren’t nearly so dire. With Sam’s Club and Costco limiting rice purchases to four 20 pound bags per visit, starvation isn’t an issue. But the Government’s credibility is, as more and more folks come to the realization that the official statistics are nonsense. And, the absurd Fed focus on the core rate of inflation has people shaking their head in wonder over how out of touch our Central bankers are. Consider this recent San Diego Union Tribune column:
"For the Federal Reserve, the core inflation rate amounts to a green light to continue its policy of lowering interest rates in order to keep the economy from falling into a deep recession. A higher inflation rate could conceivably make the central bank freeze or raise interest rates.
But many economists say the core rate does not show how inflation is affecting the typical consumer. Because salary raises for most people are not keeping pace with the rising cost of living, people are using a greater percentage of their wages to buy a smaller amount of goods."
That’s typical of the sort of coverage that is gaining traction — and it only took $120 Oil and $5 milk to get some attention focused on the issue.
We’ve been beating the drum on this for years now. The cat is out of
the bag, and we will have to see if any of the candidates have the
stones to step up and address the issue.
Digging deeper into this situation is the cover story of the May 2008 edition of Harpers is titled "Why the Economy is Worse than We know" (pdf) (print). It contains a review of the myriad ways the government has corrupted the way official statistics are reported for jobs, inflation, GDP, etc. (I have a brief mention in it).
The article is by Kevin Phillips, the author of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.
Meanwhile, more and more people are recognizing the reality beneath the
spin. The President and members of congress seem genuinely perplexed at
the public’s negativity. (Public’s View of Economy Takes Fast Turn Downward).
They keep blaming the Iraq war for this, despite the fact media
coverage has dropped significantly (and completely disappeared from Fox
The Fed meets again next week, and the expectation is for "only" a quarter point rate cut. That is how distorted our perspectives have become — parts of the world is having food riots, and merely taking rates down another 25 bps is somehow perceived as a moderate action.
Asia Risks `Silent Famine’ as Food Soars, WFP Warns
Jason Gale and Paul Gordon
Bloomberg, April 21 2008
The Fed’s inflation gauge isn’t realistic, critics say
San Diego UNION-TRIBUNE, April 17, 2008 http://www.signonsandiego.com/news/business/20080417-9999-1n17inflate.html
Public’s View of Economy Takes Fast Turn Downward
Jennifer Agiesta and Jon Cohen
Washington Post, Friday, April 18, 2008; Page A07
Era of cheap food ends as prices surge
Steve Hawkes, Greg Hurst and Valerie Elliott
Times Online, April 23, 2008
Moms’ new battle: The food price bulge
Parija B. Kavilanz,
CNNMoney.com, April 21, 2008: 10:33 AM EDT