Is the Fed Causing a Global Food Crisis?

Harpers_cover_3
The Federal Reserve’s irresponsible bailout of Wall Street’s most reckless players is having very significant repercussions, both in the US and abroad.

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:

Bizinflate430"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.

Gr2008041800213Digging 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
News).   

~~~

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.

>


Previously:
Inflation ex-inflation
http://tinyurl.com/4qaek6

Agflation !
http://bigpicture.typepad.com/comments/2007/06/agflation.html

Sources:
Asia Risks `Silent Famine’ as Food Soars, WFP Warns

Jason Gale and Paul Gordon
Bloomberg, April 21 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axuenSYeMBJU

The Fed’s inflation gauge isn’t realistic, critics say   
Dean Calbreath
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
http://www.washingtonpost.com/wp-dyn/content/article/2008/04/17/AR2008041703769.html

Related:
Era of cheap food ends as prices surge
Steve Hawkes, Greg Hurst and Valerie Elliott   
Times Online, April 23, 2008
http://business.timesonline.co.uk/tol/business/industry_sectors/consumer_goods/article3799327.ece

Moms’ new battle: The food price bulge
Parija B. Kavilanz,
CNNMoney.com, April 21, 2008: 10:33 AM EDT
http://money.cnn.com/2008/04/21/news/economy/moms_foodshopping/index.htm

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What's been said:

Discussions found on the web:
  1. Greg0658 commented on Apr 25

    BR quotes “Compare that with 6% in the U.S”

    Do you believe that? If its true … then in quintiles please, pretty please, pretty please with brown sugar on top.

  2. HRW commented on Apr 25

    If the dollar is weakening then, to the extent that food prices are set in dollars, this should help people in poorer countries – as long as their currencies aren’t pegged to the dollar. If food prices go up even faster than the dollar goes down – then it’s bad news. But I still don’t get the bit about the Fed.

  3. jim commented on Apr 25

    The problem with this whole mess is how deep is the rabbit hole and how soon can some one turn it around. I don’t think the current chairman has a chance in hell. But, I’m not sure they really want the economy to turnaround.

  4. Steve Barry commented on Apr 25

    The Fed is responsible for food inflation in th U.S…indirectly, in countries pegged to the dollar, the Fed’s cuts have the same effect, but its the countries’ fault for keeping the peg. Any further rate cut, given the inflation we actually have, is beyond reckless.

    Meanwhile, how is MSFT down 4.5% and QQQQ indicated higher?????? That alone should trigger an investigation.

  5. Ross commented on Apr 25

    I rarely take issue with the Master but U.S. food consumption at 6% of total consumption seem a stretch. Is this just another Government stat that needs to be debunked?

    Does this figure include food purchased away from home? I know a guy that spends at least 10% of his income at Mickey D’s.

    Anyway, food for thought?

  6. wally commented on Apr 25

    I think it would be good to lay down some basic definitions before beginning a discussion. Inflation is when the value of money goes down because everything else goes up: food, clothing, wages, houses,.. everything. That’s inflation.
    But we don’t have that today, do we?
    We have price increases in certain areas only. Not wages. Not houses. If there was inflation people who had jobs would be getting raises; people on fixed incomes would be hosed. We don’t have that today… everybody except the wealthy are getting hosed. Wealthy people, even those who are total cock-ups who ran massive businesses into the ground and lost billions for others, are just fine.
    You can’t fight what we have today like it is inflation because it is something other than that.

  7. cinefoz commented on Apr 25

    The credit crisis was / is the kind of problem that creativity, a commensurate reserve of emergency credit, jiggling a few interest rates, and a fairly short time period can easily fix. Holding all things equal, it’s the kind of problem that has more in common with having to carry a large, heavy bag of sand around that, fortunately, has a small hole in the bottom. It becomes lighter with time. Then is is only an empty bag.

    The real problem is the already weak dollar becoming even weaker due to the required lowering of interest rates. Commodity speculators saw a perfect storm of oceans of money, credit that needed somewhere to go, falling dollars that raised prices, idiot investors piling on the next sure thing, food being used for fuel, accommodative FOMC rates, and even real demand being pushed up enough to be effective in a sales pitch.

    Ditto the falling dollar and the effective sales pitch. Fortunately for dealers, not many investors can work fractions so that a 1% decline in the dollar can somehow cause a 10% increase in commodity prices due to the falling dollar.

    When oil hit $115 with upward momentum and other commodities kept pace, This is what spooked me last week. Corporate profits are unsustainable and prices are not going to go down any time soon if this is just the beginning. The bear rally of late is a sucker rally. If commodity prices were not parabolic, the rally would have been a money machine for everyone, even if markets declined a bit in May.

    All the necessities of life are draining out the discretionary money that bolster profits. The cheap dollar is speculator insurance. Speculators can count on the FOMC to protect them unless things change next week. (Note to FOMC: They’re laughing at you.)

    Traditional inflation measures have become a reflection of total stupidity and incompetence. ‘Core rates’ are insidiously designed to measure just about everything that is not increasing in price.

    So, what should the FOMC do next week? They should reaffirm that liquidity will be protected at all costs, raise rates 1/4% to prove they are as smart as their education would imply, issue a statement of Godzilla proportions against sustaining inflation due to commodity speculation, repeat the statement on speaking engagement, and follow through with another hike if markets appear to doubt their resolve.

    The recession that MIGHT result from this would be one we would recover from. The one building now due to artificially low rates will be one for the history books, and it is now only beginning.

  8. Eric Davis commented on Apr 25

    “Only a quarter point”… which in more real terms is cutting the funds rate by 10%… Just as significant as a half point cut when we were up at 5%.

    but the Rest of the world doesn’t start with dollars, so they get a discount when buying food, from “the worlds breadbasket”.

    No worries, our xenophobia and the general blame game, will maintain the shell game.We will blame the “towel heads”, “Chinese”, “Speculators” “short Sellers”, “Bears”.

    Not realizing that much of the blame goes to Our Weak dollar Policy, AKA “Devaluing our Currency into prosperity”, and Real Inflation(too much money, chasing too few goods)…..

    Extra Funny is that, with all these headwinds…. We keep getting “Weather issues”… Not to argue Global Warming.. Since I think Global Warming all has to do with the lack of Piracy. But it is funny we keep getting weather issues as headwinds…. If you can find “Shits and Giggles” in the Global Poor, being unable to eat.

    No worries, Sally Struthers will step in.

  9. Mickey commented on Apr 25

    Lets see, USDollar gets weak food gets expensive causing food riots, USDollar suddenly gets strong again for no good reason…. can you say Plunge Protection Team?

  10. stuart commented on Apr 25

    Joseph Stiglitz… he “gets” it. Tried to drown him out, but wouldn’t take any of it. Way to go Joe.

  11. Will G commented on Apr 25

    If we are playing the blame game, fingers should be pointed at the ass backward farm subsidy programs of the EU and US, not the Federal Reserve. Last I checked, the third mandate of the Federal Reserve was not to control the world food supply.

  12. E commented on Apr 25

    I like to bash the Fed as much as the next guy, but I like to remind myself that situations usually have multiple causes. When talking about something with as many inputs as the worldwide price of food, it’s an oversimplification to pin it all on the Fed.

    But if I were to come up with my own oversimplificiation of the global food crisis it would be that the US government has started subsidizing the practice of burning food for fuel. That can’t be good.

  13. J. Bridges commented on Apr 25

    Newsflash…

    “Asteroid hurtles toward planet Earth; 99% chance of wiping out all life.”

    Wall St. strategist Jim Paulsen notes, “we’re feeling pretty good about that 1% chance of survival. So, I recommend buying equities here.”

    Let’s just call today’s rally the Early Check short squeeze. Ridiculous.

  14. BG commented on Apr 25

    “Many states appear to be in recession- AP”

    Ahh!! Say it Ain’t So!

    Larry, et. al. at Spin Central last night said the Recession is already Over!

    You know the day after the world ends, that crowd will be calling it a great buying opportunity in an ongoing bull market with Goldilocks skipping along the bottom of the screen.

    I have never seen such malaise and the unwillness of some people to admit mistakes made and errors in judgement. No one is accountable for anything anymore. That is the biggest problem of all.

    Greed and deception is so thick you can almost reach out and cut it with a knife.

  15. doug champion commented on Apr 25

    Starving masses provide recruits for the military and a ready market for genetically modified agricultural products. I would say the fed is quite aware of the impact….

  16. Steve Barry commented on Apr 25

    “Lets see, USDollar gets weak food gets expensive causing food riots, USDollar suddenly gets strong again for no good reason…. can you say Plunge Protection Team?”

    I still don’t know how massive QQQQ component MSFT is down over 5% pre-market and QQQQ is up .06.

  17. Ross commented on Apr 25

    The year 1998 should be remembered as the year of symbolic coincidensese. There was a change in the way inflation was gauged, LTCM, the asian debt crisis, the Russian debt repudiation and the repeal of Glass Steagal. I know I have left something out.

    “May you live in interesting times”.

  18. Barry Ritholtz commented on Apr 25

    Six percent of about a $50k median income sounds about right. But “food” as a category includes purchases of food for home preparation (i.e., supermarket).

    If memory serves, McDonald’s and other restaurants are in a different category (Dining)

  19. brasil commented on Apr 25

    so let me get this straight …6 months ago there was enough food and things were humming along…now that we have appropriate blame in place let the pirates crush the poor ..as long as we can kick GW and the FED for the next 10 years …more complaint commentary from Golf and Yacht clubs of the world…but Warren Buffet says we should raise Cap gains..lol ..hypocritical slob..

  20. mickslam commented on Apr 25

    Even the Harpers article shies away from the cold truth: The U.S. hasn’t had any economic growth at all for the last 8 years because we are understating inflation to such a large degreee.

  21. Jim Walker commented on Apr 25

    As the social catastrophe of rice price inflation continues another country has joined the list that is now restricting exports. Indonesia yesterday announced that it will not allow exports of excess rice production. It joins the ranks of Cambodia, China, Egypt, India and Vietnam. Only Thailand, of the major rice exporters, is still supplying the global market (with the prime minister there urging Thais to eat less rice so that farmers can earn more via exports. Well, it would do the rest of the world a favour too). The Bank of Thailand has increased its inflation forecast for the year to between 4-5% on the back of spiraling food prices but it is probably one of the least affected since the strengthening baht over the last year or so has taken much of the sting out of dollar price increases in commodities. Would that other Asian countries – China, Indonesia, Malaysia – had learned that lesson.

    Rice prices are up more than 50% in the last few months but it would be remiss not to mention oil prices as they hit US$119/bbl for West Texas and $116/bbl for the more widely-traded Brent Crude. On our calculations US$102/bbl was the previous peak in oil prices in real terms (from 1979). We are now well past that previous real peak and in exactly the same boat as we were then – in a world where credit conditions are tightening, not because of rising interest rates this time but because of risk aversion in the banking system. The effects are the same; rising commodity prices are now taking the steam out of discretionary spending power in consuming countries. For already troubled Americans this is doubly bad news. For Europeans, the strength of the euro mitigates the effects somewhat but damages economic activity in other ways, mainly through lower exports and investment.

    Meanwhile! , in two of the world’s powerhouses – China and India – companies and individuals are being given no incentive to economise or to use fuels more efficiently because of wrong-headed government policies. In turn, these oil-intensive subsidy policies exacerbate the global imbalance that is pushing the price ever higher, although, we do fear that there is something more at work than mere economics supply-demand at these prices. Eventually this will be felt in a deteriorating current account and fiscal position in China (the fiscal position in India is already critical). We expect the turnaround in the external accounts in China to be particularly swift and to the surprise of everyone (including the Chinese authorities). As exports slow sharply and imports continue to rise at around 30% YoY we could easily see a halving in the Chinese trade surplus in 2008 (to around $130bn from $262bn last year).

    That is how fast residuals swing. If you are a buyer of oil at these prices you should be a seller of Chinese (and other export-dominated country) equit ies, US retailers and European exporters. Everywhere you should be lightening up on consumer discretionary stocks, especially those in the mid-low range.

  22. michael schumacher commented on Apr 25

    Takes a special set of “skills” to induce massive amounts of inflation and export it around the world. All in the name of saving the stupid banks and the administration that caused all of it.

    For what?? An election.

    No wonder the USA is hated amongst the rest of the world as we prove over and over that we are willing to throw the rest of the world under the bus so that the hedge funds of the world can continue there “work”

    I am ashamed to be part of this country when those food riots are a direct result of the greed allowed to continue both those in power.

    Shameful

    Ciao
    MS

  23. Greg0658 commented on Apr 25

    if quintiles are to much data for the media world, ie: give me a 1 liner

    how about wack off the top 10% and bottom 10% … call that average

  24. Moses commented on Apr 25

    It is great,
    the farm subsidies are at fault even though they are the reason we have no shortages in food.

    I think they are as ludicrous as the next guy, that is until I want some corn and there isn’t any.

  25. bdphil commented on Apr 25

    Did anyone catch the Presidents’ comments this morning? He said that the “economic stimulus” payments will start hitting accounts on monday and will help people deal with the higher food/fuel prices. Looks to me like these payments will end up being more of a cost of living adjustment rather than a boost to discretionary spending. So the rate cuts and various dollar depreciating activities drive down the value of the dollar, but not to worry, the government will just send us all some more dollars to balance it out. Nice plan.

  26. Steve Barry commented on Apr 25

    PARDON THE CAPS, BUT I AM RANTING LIKE CRAMER…THE PRICE OF RICE IS UP 50% IN FEW MONTHS, THE AVERAGE FREAKIN CHINESE EARNS ONLY $2000 A YEAR, AND THEY ARE GOING TO PICK UP THE GLOBAL ECONOMY??? THEY ARE GOING TO BUY ENOUGH PCs AND IPODS TO KEEP TECH TRADING AT 35 TIMES TRAILING PEAK FREAKIN EARNINGS?????? I WOULDN’T BLINK IF NASDAQ WAS CUT IN HALF OVERNIGHT.

  27. Alfred commented on Apr 25

    It would be interesting to see in detail how this methods of calculating rising prices (inflation) are different from each other. Very often the government has a convenient way of explaining this adjustments in their models. I have a hard time to understand how statisticians are able to cope with this questionable practice in their long term projections. It is easy to argue that monetary policy needs to be flexible and adjust to the real world ever so often, but maybe what we really need is the opposite, a more stable and consistent framework of monetary policy. We would not have soaring energy prices, soaring food prices and soaring Wall Street bonuses as well.

  28. michael schumacher commented on Apr 25

    Steve-

    We do not have a market any longer…all we have is a perpetual “up” machine that operates this way AT ANY COST.

    How’d you like that futures pump in anticipation of the “wonderful” consumer #’s?

    They will do anything and unfortunately are getting away with it.

    Other than try and profit from it, which I am a little bit, that does nothing to stem the problem of inflate for growth at any cost.

    And options traders? don’t get me started on them…they’ve already priced in an almost 50% haircut in financial stocks but the rest of the market seems to ignore that as well.

    This is my job…it is becoming increasingly difficult to throw away fundamental strategies used for years, with great success, in order to jump on the “up” train.

    Ciao
    MS

  29. Strasser commented on Apr 25

    … and we have this stuff headlining WSJ online:

    “Stuff Your Pantry to the Gills — Your Wallet Will Thank You

    “Flour, rice, milk, and cheese prices are up by more than 10%. Eggs are up 30%. Meanwhile, bank accounts max out at around 4% interest, making full cupboards a better investment…”

    Maybe we can have a run on grocery stores and clean off the shelves. Are you kidding me?!

  30. bk commented on Apr 25

    I thought I saw something that said that the average price of a week’s worth of groceries for a family of 4 has risen to $210 (which seems modest to me, but I’m in NYC, so I can’t really talk). That would be $840 a month, or a bit over $10,000 a year. If people can no longer afford to dine out, their total costs for food may actually decrease, but even eating every meal in the minimum on a $50,000 median income would appear to be 20%.

  31. Strasser commented on Apr 25

    Brasil,

    “Warren Buffet says we should raise Cap gains..lol ..hypocritical slob”

    Easy for him to say, isn’t it? Likely he won’t be paying any since he is giving most of his away.

  32. E commented on Apr 25

    You guys just don’t understand hedonic adjustments. Sure, food prices are way up, but that’s probably because food is yummier than last year.

  33. BG commented on Apr 25

    Jim Walker wrote:

    “Meanwhile! , in two of the world’s powerhouses – China and India – companies and individuals are being given no incentive to economise or to use fuels more efficiently because of wrong-headed government policies.”

    I can think of one Country, who hasn’t had a national energy policy in the last…oh ~30 years or so.

  34. Steve Barry commented on Apr 25

    “You guys just don’t understand hedonic adjustments. Sure, food prices are way up, but that’s probably because food is yummier than last year.”

    That’s true…the last few Whoppers I had were really good. If Nasdaq crashes though, I’ll be eating prime rib every night.

  35. cinefoz commented on Apr 25

    bk said:

    I thought I saw something that said that the average price of a week’s worth of groceries for a family of 4 has risen to $210

    reply: JESUS CHRIST! Learn to cook. Buy a freezer load it up when things go on sale. Buy in bulk when items go on sale. Cut out the trans fat, sugary crap, and prepared meals. That food bill should come down by 1/3 without serious effort and 1/2 if you plan well and get a little lucky with the sales, even accounting for voracious appetites from kids.

  36. Alfred commented on Apr 25

    How did we get that far?
    The world has to starve because the Fed has an infatuation with Wall Street.
    How appalling is that!

  37. Moses commented on Apr 25

    The high price of corn is causing cattle people to thin their herd vs feed them corn.

    This is going to result in lesser supply of beef at some point in the future.

  38. Jim D commented on Apr 25

    Wally –

    Cost push inflation. Wages can lag in such an inflationary scenario.

    Or, if this really is speculative, it could pop well before wages actually began to rise.

    I used to think that global wage competition would prevent wages from rising. If fuel gets expensive enough, then far-away workers get more expensive too, since transport of finished goods goes through the roof.

  39. chris commented on Apr 25

    So what’s the solution? Make Americans too poor to eat? I think that will lower food prices, but it doesn’t sound like that great an idea to me.

    The Fed doesn’t have some magic inflation-fighting wand. It lowers inflation by throwing Americans out of work and forcing the rest to make do with lower wages. If you see some evidence of a wage-price spiral, I’d love to see it. If inflation is really 11%, then that means real wages are in a free-fall.

  40. Francois commented on Apr 25

    6% on food in the US?

    OK! So, for a family with a household income of 100K, they’d spend 6000$ /year, or about 125$/week on food?

    Sorry, but that doesn’t compute well with my own experience, nor the one of any family I know, except the Economides of America’s Cheapest Family fame.

  41. cinefoz commented on Apr 25

    On the other hand, the average fat ass could afford to lose a lot of weight. This would be of benefit to those of use who will pay for future debilitating fat ass based diseases via higher taxes and increased health insurance premiums. Goldilocks would see this as a long term benefit of the events of today. I guess there’s a little Pollyanna in every disaster.

  42. Steve Barry commented on Apr 25

    “How did we get that far?
    The world has to starve because the Fed has an infatuation with Wall Street.
    How appalling is that!”

    I guess its ok for baseball players to make $10 Million a year…CEOs to cash in billions in stock options for losing shareholder value…Hedge Fund managers to make ________________ (fill in the blank) while other parts of the world are starving. But don’t complain if the starving people rise up and strike back. Remember, it was by sheer luck that you were not born into some of these impoverished nations.

  43. Mr. Obvious commented on Apr 25

    Look at this:

    http://www.mouseprint.org/?p=413

    Re: Country Crock margarine…used to be a 3# tub…but is now a 2# 13oz tub (that’s a 3 oz cut). Of course, the price is the same. Oddly, the container looks exactly the same as well….

    Unilever’s response:

    Unilever Foods takes great pride in offering the highest quality products at reasonable and fair prices, and we apologize for the inconvenience our recent packaging change has caused.

    In order to maintain price, we have reduced the size of the container for several reasons:

    – Increased costs of raw materials, including ingredients and packaging materials
    – Transition to Trans Fat Free products
    – Tamper resistant containers

    [In a separate letter, the company added:] A redesign of the product line was undertaken which involved packaging changes that had an impact on the net fill weight of the products. Prior to implementation, the changes were thoroughly tested with consumers to ensure optimal consumer satisfaction.

    ——

    Nestle just did this with their Nesquik. Same “size” packaging, decreased contents from 56 oz to 40.7 oz. Same price. Oddly, they claim the same amount of servings as well, even though the serving size is the same (2 T).

  44. wally commented on Apr 25

    Having read the posts here, I want to reiterate: this is particularly and peculiarly not inflation in a classic sense: it is selective price rises. Wages are not up. Housing is not up. Lots of commodities and manufactured goods are not up.
    Throwing out cures for classic inflation may therefore be the wrong approach.
    I tend to agree with the idea that there is a lot of speculation, opportunism and, hoarding – even by countries – involved.
    the problem is that the central banks are the natural pals and allies of exactly the financial group that is doing the speculation. If Ben Bernanke wanted to help average US citizens – and literally save lives of people who are starving elsewhere in the world, he’d have to knife people in his ‘peer’ group. The US would also have to stop prancing around pretending that energy use can be addressed without real change.

  45. MarkD commented on Apr 25

    forgive the caps i’m ranting like cramer

    too good!

  46. SPECTRE of Deflation commented on Apr 25

    Last time I looked we didn’t control the price of oil. Everything including farming requires oil. You want food prices to go down, reduce the price of oil. Short of this, the world is shit out of luck. It’s not the US!

    Ethanol is pissing on a 5 alarm fire so forget about that argument as well. The world moves on rice and not corn.

  47. Andy Tabbo commented on Apr 25

    Fed Rate cuts are not responsible for Food Riots. That is a ridiculous assertion. We have hoarding and riots going on because of our nation’s ill-conceived ethanol/biofuel boondoggles and poor harvesting conditions the last two years. We have seen the peak in grain prices earlier this year. Wheat is off a mind blowing 40%…soybeans are off 20%….higher prices cure high prices. Period.

    This has nothing to do with the dollar. Bernanke and Co. are staring at a massive asset deflationary spiral….

    AT

  48. Dave commented on Apr 25

    Harper’s? Kevin Philips? When you have to use arguments from sources whose economic knowledge is dismal doesn’t that mean you really don’t have an argument?

  49. Steve Barry commented on Apr 25

    “We do not have a market any longer…all we have is a perpetual “up” machine that operates this way AT ANY COST.”

    MS,

    Machines can breakdown suddenly, no? I am 100% in QID and I have no fears…QQQQ short interest is non-existent and volume on this up-move has been pathetic, though the streak of 24 straight days of below 100 day MA on volume for QQQQ ended by a hair yesterday. I am fully positioned for when the machine throws a piston.

  50. Francois commented on Apr 25

    Barry, I just finished reading the Harper’s article, and I have a question:

    Big investors have to be aware of the fact that stats have been fudged over the years and the situation is not good, to say the least. So, why risking their money in an economy that is worse than it look like?

  51. Pat G. commented on Apr 25

    The FED isn’t “causing” the global food crisis but their actions do contribute to it.

  52. Shane commented on Apr 25

    wally, wally, wally

    please read up on some economics. Inflation is non-uniform. When money is created (the true definition of inflation, money creation) it does not flow to all places at once. Inflation was stock market boom 2001, inflation was housing 2005, and inflation will be commodities 20xx, finally wages will catch up. Inflation is NON-UNIFORM.

  53. Francois commented on Apr 25

    cinefoz,

    About your 8:40:18 AM post; Excellent one!

  54. Egg commented on Apr 25

    doug champion wrote: “Starving masses provide recruits for the military and a ready market for genetically modified agricultural products. I would say the fed is quite aware of the impact….”

    Intentional or not, this is quite a likely and scary prospect. If you have been ignoring the GMO controversy take a look at this video. At about minute 4 this guy explains how “genetic modification” is performed.

    http://www.youtube.com/watch?v=710tmYMxsyY&feature=related

    Just about the scariest thing I ever heard. Think genetic chaos–this technique is totally unpredictable and people who eat the foods that come from it may suffer all manner of never-before seen diseases which are moreover untreatable because they result from permanent changes to the victim’s DNA. No wonder people are up in arms about GM foods!!

    A brief history of food-borne illness in the US is enough to convince anyone that the responsible authorities (eg FDA) have always been looking the other way and will do little to protect consumers ahead of time.

  55. Alfred commented on Apr 25

    AT
    I disagree. Rising Commodity prices from oil to ags to gold are a direct result of a falling dollar. In some cases this is the only reason without any connection to fundamentals at all. Oil’s historic rise from 70 to 120 was caused by a Fed dropping its inflation fighting mandate back in September. The Fed was biased towards inflation as late as last September.

    I agree ethanol policy is “ill conceived” and contributes to the rise in food prices among other things. One is the unreasonable price for oil. Solve the dollar problem – solve the oil problem – solve the food problem.

  56. michael schumacher commented on Apr 25

    >>Machines can breakdown suddenly, no? >>

    Apparently not this one……

    They will not be able to contain everything however there will be one day happenings that will be quickly (and quietly) “dealt with”.

    I thought yesterday’s “surprise” of offering another $75b in “auctions” (love how they still persist in calling it that) was in direct response to SBUX, AMZN and APPL all being down in AH on yet more wonderful “news”.

    H&S in MSFT? That must mean any put options will be cut in half (just like the AMZN ones were on a three dollar swoon yesterday)

    This market is mental

    Ciao
    MS

  57. Pool Shark commented on Apr 25

    Food riots?

    I’m gonna make a fortune in Soylent Green futures!

  58. Andy Tabbo commented on Apr 25

    Alfred,

    I agree with you in re: oil and gold. The falling dollar is a large factor for investors herding into inflation trades–no doubt about it.

    In regards to agricultural products though, we actually had “real” shortages in wheat and are now experiencing “real” shortages in rice. This is different than energy where there is NO shortage.

    The food shortages won’t last and the high prices won’t last. We saw hoarding of wheat last year and earlier this year that helped cause the runup…but when it’s over, it’s over….when the “herd” is “all in”…markets invariably reverse.

    We’ve seen 1000% increase in “long only” commodity funds this decade….anyone who doesn’t think that flow of money is one of the causes of generally higher prices is nuts….

    AT

  59. roger commented on Apr 25

    The british newspaper, the Daily Mail, created its own basket of goods to gauge inflation. I think that the NYT should be encouraged to follow suit. It isn’t as if the government were the only entity having access to a polling company. It would be easy to come up with a basket representing average consumer inflation – which would simply measure how much more a household has to pay for its goods. It would not include how much better those goods are (or, what is never considered by the government, how much worse – hedonically, how are we to evaluate the frightening spread of microbes that are immune to antibiotics? you’ll never get that answer from the relentlessly optimistic government). Just, how much do they cost?

    Seems like a common sense idea to me.

  60. Alfred commented on Apr 25

    AT,
    I am glad that we can agree on this. I just think it is important to point out that supply and demand alone will not solve the problems before us. The Fed needs to change course and focus on its primary mandate again and start supporting the dollar. If not I fear the situation will get worse.

  61. Quiddity commented on Apr 25

    When did “core” rates become the standard talking point (by the Fed or anyone else)?

    Did people talk of “core” inflation in the 1980s?

  62. ramstone commented on Apr 25

    +1 E for the hooked on hedonics line. I’ll steal it later.

  63. winslow commented on Apr 25

    Time and time again, the Bush admistration has proven they are not credible. Sadly, they just don’t have the expertise. Even worse, the administration would never seek out advice from an expert unless they also held the same idealogical views. Thus, this country is now in a huge mess.

  64. engineer al commented on Apr 25

    “They keep blaming the Iraq war for this, despite the fact media coverage has dropped significantly (and completely disappeared from Fox News).”

    Fox News is currently headlining: Iran, the bombed Syrian nuke facility, a shark attack off a San Diego beach, and how the Obama/Rev. Wright “controversy” won’t go away.

    You have to get past Jerry Springer and call girl stories before you finally get to one small entry on Iraq’s al-Sadr at the bottom of their page.

    Fox isn’t currently carrying even one story on Afghanistan or Pakistan.

    Strange, but the front page of the current WSJ is nearly the same coverage … except they aren’t covering the prostitute story that Fox has.

  65. AGG commented on Apr 25

    Pool Shark,
    About that Soylent Green stuff… Finally the “fat cats” in wall street will attract salivating admirers.

  66. Zephyr commented on Apr 25

    Action by the Fed can diminish the purchasing power of the dollar. So people in dollar zone economies would have to pay more for food and other commodoties largely sourced from other zones. However, this would be offset by those in other zones as it would leave more of those items for those other places. Monetary policy would cause nominal price increases but not real increases. However, we are seeing real price increases. This is not caused by monetary policy.

    The cost of food and other commodoties is rising because of growing real demand, not monetary weakness.

    When the poorer countries raise their income level the first thing they do to improve their lives is eat better food and more of it. The two largest populations in the world China and India are in this mode, and there are a lot of them. Real demand for food is up. And demand for meat is up. It takes 10 pounds of grain to make one pound of meat. As demand for meat increases, the demand for grain increases faster.

    We are seeing a classic demand-driven real price increase for food.

  67. AGG commented on Apr 25

    Perhaps we should visit the fed with some old corn cobs and demonstrate what “core” inflation is like.

  68. Zephyr commented on Apr 25

    The increase in oil prices and grain prices is dramatically greater than the decline in the dollar currency value. Obviously, something else is the driving force.

    If the declining dollar was the principal cause, then the price of all goods and services would be rising at comparable rates. This is not the case at all. Prices are actually declining for some goods and stable for many others. Wages are also not rising so much. This is not a currency issue. It is a real demand issue, and it will continue.

  69. SPECTRE of Deflation commented on Apr 25

    Indirectly one could argue that America has brought about inflation including food inflation through our purchases of Chinese goods and Indian Outsourcing creating industrialization and affluence that requires more oil to go along with their new and improved lifestyles. The usual slack and seasonality of gas pricing is gone. We now compete with China and India for the oil that used to be a cushion that is now gone. When you turn on the Big Screen this weekend remember that in the end, the great buy you thought you got will ultimately be your and our undoing. BOO-YAH!

  70. AGG commented on Apr 25

    Zephyr,
    Money supply (this includes electronic digits involving leverage caused by fractional reserve banking) divided by available products determines incipient inflation. Wages are peripheral to inflation because bargaining power limited by callous government and judiciary keeps wages down. Globalization has masked inflation.
    If you are part of that top 1%, it behooves you convince the rest of us that the inflated money you get up front in the fed ponzi scheme which enables you to buy assets at full value while we get to buy them at inflated prices IS THE SAME MONEY. Go for it.

  71. wally commented on Apr 25

    Shane,
    Price bubbles… all.

  72. e. nonee moose commented on Apr 25

    The “Different ways of measuring inflation” chart is almost Orwellean.

    For example, the Ministry of Plenty’s forecast had estimated the output of boots for the quarter at 145 million pairs. The actual output was given as sixty-two millions. Winston, however, in rewriting the forecast, marked the figure down to fifty-seven millions, so as to allow for the usual claim that the quota had been overfulfilled. In any case, sixty-two millions was no nearer the truth than fifty-seven millions, or than 145 millions. Very likely no boots had been produced at all. Likelier still, nobody knew how many had been produced, much less cared. All one knew was that every quarter astronomical numbers of boots were produced on paper, while perhaps half the population of Oceania went barefoot.

    We do indeed get the kind of government that we deserve.

  73. bdg123 commented on Apr 25

    Wages will catch up? Baahaah! That’s the funniest thing I’ve heard in ages. The Fed isn’t creating food inflation, Wall Street is. If you don’t understand the difference, then oh well……It’s amazing how many people on here are skeptical by nature and they can’t see what is right in front of them.

  74. Shane commented on Apr 25

    Price bubbles (the vast majority) are a reflection of cheap credit, which is a reflection of loose monetary policy, which is a reflection of inflation.

    Hmm funny how the last 10 years we had 2 bubbles and one which will be a bubble . . . stocks, housing . . . and commodities. We do not have a normal economy anymore, it is a bubble economy based on debt and inflation!

    Cheap credit (a.k.a inflation) causes bubbles!

  75. DonKei commented on Apr 25

    All I can say is–of course it’s the dollar.

    The fed has decided on inflation, rather than recession, as the best way to allow international wage arbitrage to decrease the real incomes of Americans. Simple as that. The fact many manufactured items have shown no inflationary tendencies reflects the wage arbitrage. Imported widgets get cheaper on real terms, which is good, because real wages are going down, too. We are getting poorer, but at least we have Wal-mart.

    And, of course the American economy hasn’t really grown at all in the last ten years. On a real, per capita basis, it has barely kept even for the last forty. Remember, if the population is growing 1% a year, anything less in real terms) means we’re all getting poorer.

    But “real” is not what Oz behind the curtains wants you to think. Keep bitching about the high gas prices, and blame anybody but me. That’s his plan.

  76. Jim Fay commented on Apr 25

    I don’t think the Fed alone can cause all these food shortage. Sure, the Fed can contribute to food inflation by printing so much money that gives the speculators so much money to bid up the price of commodity. But that alone cannot explain the food shortages.

    But I think there is another deeper reason for all these food shortages. That a look at http://cij.inspiriting.com/?p=422

    It’s a problem of a global misallocation of capital and resources. The Fed’s money printing exacerbate it, but it is not the root reason.

  77. ScottB commented on Apr 26

    Am I missing something, or does Phillips get confused about the birth/death issue that is part of the challenge in preliminary (but not revised) payroll employment estimates? He states its a GDP problem.

    I also think he is incorrect about discouraged workers–they were never counted as part of the labor force, always counted as not in the labor force, and so never impacted the headline unemployment rate. BLS did change how they officially measure discouraged workers, but if you ask them, they will send you numbers on all of those not in the labor force because “there weren’t any jobs”.

    By the way, I contacted BLS, and they will publish an analysis of the birth/death model in about two months (study completed, working its way through the review process).

  78. john commented on Apr 26

    I read the Harpers article. It was fascinating and echoed suspicions I’ve long harbored, the hedonic adjustment always struck me as totally ludicrous. I’m going to buy a copy of Phillips’ book on the strength of it. His conclusions that
    1. Inflation is actually running at 9-12%
    2. Unemployment is really about 9%
    3. There has been no real growth for seven years

    Are staggering. I can’t really get a sense of how accurate 2 and 3 are but 1 is undoubtedly a fair fix on where we are as I can see from personal observation. Someone above asked the question that the major financial institutions must know this so why are they investing money in the market. Well you’d think the managers of UBS knew what they were doing but they’ve just written down $37 billion. Or how about Merril or Citi. Any questions.

    The implications of some of this are fairly startling if you think about it. For a start at the very lowest level all those comparisons much beloved of pundit of what is happening now by comparison with the seventies are completely invalid because they’ve moved the goalposts. When is some one going to start challenging them on this.

    When all is said and done it does seem all of a piece with the American appetite for self delusion along with our narcissism, hypocrisy and gullibility.

  79. flipper commented on Apr 26

    Barry u just have to publish here data on the volume of commodity indices investments.

    I have the actuall number from recent SG commodity quaterly – it’s fascinating.

    Hundreds of billions of dollars and going up exponential, Nasqdaq-style.

    Analyst are talking that old ways of analysing commodity prices – supply and demand, are irrelevant.

    You now have to make an estimate of investment demand and it could be as important as actual physical demand.

    Aside from Asia growth story this is just another investment driven bubble.

    That happenes is that CBs are pumping liquidity and easing rates to help the economy, but the result is just another round of commodities rally which make fundamentals of US and Europe economy even worse.

  80. Thomas Shawn commented on Apr 27

    I am ashamed to be part of this country when those food riots are a direct result of the greed allowed to continue both those in power.

    MS-GET OUT NOW.

  81. SoNotInTheKnow commented on Apr 27

    Spectre

    ‘Ethanol is pissing on a 5 alarm fire’

    Perhaps it is time to mandate cow manure

    1500-acre Lancaster Co. dairy farm runs on ‘cow juice’

    ‘MOUNT JOY, Pa. – The Brubaker family never thought they would be in the energy business, but today their dairy farm is creating enough electricity to light a small town.’

  82. Juan commented on Apr 28

    Zephyr,

    pardon the schemetic quality but since 1987 price discovery of the woprld’s few benchmark crude oils (to which others are referenced) has taken place in futures markets. That is, prices for a physical commodity are largely dependent upon activities within particular financial arenas….which then opens price to speculative, trend following/trend making activities that can bring seperation of price from fundamentals.

    within this it’s worth noting that benchmark crudes’ real physical trade has often been too thin to permit price determination other than as above even though there are daily assessments such as Platts and BWAVE.

    it’s not about actual supply/demand at any given moment — social psychology, as expectations, does though play a large part as do information flows.

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