Is the Fed Causing a Global Food Crisis?
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:
"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 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
Hard numbers: The economy is worse than you know
Kevin Phillips, Harper's Magazine
Tampa Bay Times, Sunday, April 27, 2008
http://www.tampabay.com/news/article473596.ece
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
Download HarpersMagazine-2008-05-0082023.pdf
Friday, April 25, 2008 | 07:20 AM | Permalink
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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.
Posted by: Greg0658 | Apr 25, 2008 7:46:35 AM
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.
Posted by: HRW | Apr 25, 2008 8:15:05 AM
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.
Posted by: jim | Apr 25, 2008 8:20:21 AM
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.
Posted by: Steve Barry | Apr 25, 2008 8:21:59 AM
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?
Posted by: Ross | Apr 25, 2008 8:26:12 AM
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.
Posted by: wally | Apr 25, 2008 8:40:06 AM
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.
Posted by: cinefoz | Apr 25, 2008 8:40:18 AM
"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.
Posted by: Eric Davis | Apr 25, 2008 8:41:59 AM
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?
Posted by: Mickey | Apr 25, 2008 8:43:07 AM
Joseph Stiglitz... he "gets" it. Tried to drown him out, but wouldn't take any of it. Way to go Joe.
Posted by: stuart | Apr 25, 2008 8:51:57 AM
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.
Posted by: Will G | Apr 25, 2008 8:53:34 AM
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.
Posted by: E | Apr 25, 2008 8:58:03 AM
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.
Posted by: J. Bridges | Apr 25, 2008 9:00:10 AM
After you're done with the Harper's piece, "Food is Politics is Food" by Stan Goff and De Clarke is another good read.
Posted by: Bruce F | Apr 25, 2008 9:02:12 AM
"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.
Posted by: BG | Apr 25, 2008 9:06:05 AM
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....
Posted by: doug champion | Apr 25, 2008 9:23:18 AM
"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.
Posted by: Steve Barry | Apr 25, 2008 9:27:47 AM
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".
Posted by: Ross | Apr 25, 2008 9:29:58 AM
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)
Posted by: Barry Ritholtz | Apr 25, 2008 9:32:42 AM
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..
Posted by: brasil | Apr 25, 2008 9:36:13 AM
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.
Posted by: mickslam | Apr 25, 2008 9:36:49 AM
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.
Posted by: Jim Walker | Apr 25, 2008 9:37:26 AM
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
Posted by: michael schumacher | Apr 25, 2008 9:41:17 AM
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
Posted by: Greg0658 | Apr 25, 2008 9:48:59 AM
Barry, I think this video from last night's Daily Show sums it up nicely
http://www.thedailyshow.com/video/index.jhtml?videoId=167005&title=criceis-in-the-u.s.&byDate=true
Posted by: Grant B | Apr 25, 2008 9:49:30 AM
