01/24/11 Buenos Aires, Argentina – En garde, Fellow Reckoner! We’re under attack!
Jean-Claude Trichet, head of the European Central Bank, has sounded the alarm.
“All central banks, in periods like this where you have inflationary threats that are coming from commodities, have to…be very careful that there are no second-round effects” on domestic prices, Mr. Trichet told The Wall Street Journal from his office overlooking Frankfurt’s financial district.
Can you believe it, Dear Comrade? If we are reading Mr. Trichet’s comments correctly, it would seem that the world’s food and energy communities are consciously rallying against us. Long thought to be soulless, mindless vegetables and minerals, commodities have apparently taken it upon themselves to “become” more expensive, to raise their own prices. We can almost hear the battle cries coming from the fields: Ears of corn unite!
Farmers are warned to sleep with one eye open lest an overzealous head of lettuce break ranks and attack under cover of darkness.
Mr. Trichet is busy marshalling the euro zone’s 17 member countries ahead of this weekend’s World Economic Forum in Davos, Switzerland. He’s encouraging them to strengthen “surveillance” of each other’s fiscal policies.
The fearless Frenchman noted that it is budget discipline that most benefits growth and job creation by “improving confidence of households, enterprises, investors and savers.”
Amazing! What would we do without the world’s central bankers, our frontline defense against self-inflating food prices? How would we know to save and invest if it were not for the battlefield cries of these intrepid, fiat fiddlers?
Waste…malinvestment…market distortions…worldwide food riots… There we go but for the grace of all-knowing central planners everywhere.
And yet, despite the best efforts of our monetarist saviors, food prices have been stubbornly rising across the planet. The Moscow News has the story:
Food prices shot up in the second half of the year following the summer’s global drought, and a similar catastrophe in 2011 could send the world towards disaster.
The average basket of food products rose 10.6 per cent, exceeding inflation, which reached 8.8 per cent.
But global food inflation reached 25 per cent year-on-year at the end of 2010 – up from its low of 7.5 per cent in June before the drought hit.
What’s going on here? How is it that an army of corn – up 94% since June, as Chris Mayer points out below – has outsmarted our finest academics?
Here’s a thought: Perhaps, as Milton Friedman so eloquently explained, inflation really is “always and everywhere a monetary phenomenon.”
True, in accepting this fringy position we’d also have to believe, as Friedman posited, that there’s “no such thing as a free lunch.” Crazy? Sure. But let’s allow our imagination to wander for just a moment…
Let’s say that, by inking trillions of dollars in new bills, central banks are actually causing inflation rather than raging against it.
What then?
Yes, yes… We know the “Bernankes” of the world are acting with our best interests at heart. We understand they know just which lever to pull and which knob to turn at precisely the right moment. But what if, somehow, they got it wrong? Would we see inflation leaking into the markets, pushing up prices at the pump and the grocery store?
What we need here is a recon mission. So tell us, Fellow Reckoner, what’s going on in your neighborhood? Are you noticing a price creep in your monthly bills? Could it be that inflation is already here, that it has infiltrated our defenses and lurks in our very midst?
Joel Bowman
for The Daily Reckoning
Joel Bowman
Joel Bowman is managing editor of The Daily Reckoning. After completing his degree in media communications and journalism in his home country of Australia, Joel moved to Baltimore to join the Agora Financial team. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world.
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Joel, your articles have been awesome lately. Keep up the good work!
Regarding the debate “inflation vs. deflation vs. one after the other,” you may be interested in this essay:
http://www.professorfekete.com/articles/AEFPositionPaper1.pdf
Professor Antal Fekete is one of the leading experts on monetary economics, and the founder of the “New Austrian School of Economics.” We’ve learned a lot from him.
Enjoy!
With all due respect, Professor Fekete has spent his career in academia; James Turk has been in the real world. Think about that and then re-read Fekete’s essay.
Hello from Slovenia, here we have one liter gasoline for 1.3 EUR , and Dolmio spagetti souce just doubled ( 100 % ) in price. Bred is up 10-20% and unemloyment rises constantly. Netto salary is on averege just below 1000 EUR. …We know the signs ( from former Yugoslavia )..INFLATION is coming big time ( time to stock food and water ..)
PS: The Daily Reckoning opened my closed eyes…thanks
Oh yeah its raging here. Went grocery shopping here in Portland Oregon 1 week after Christmas: bread up 20%, coffee up 17%, cucumbers up 34%. Went to get coffee tonight, up another 25% in 3 weeks. Still holding tight to my Mogambo Investment Plan (MIP) of gold, silver and oil!
I’m sorry for those who are living in the inner cities, as they have few options to grow some of their food. Store food prices are up sharply; beware of packaging trickery to hike prices.
I’ve planted zucchini, tomatoes, and have a productive orange tree, in my garden. Better food, natural recycling of coffee grounds and table scraps (of which there are very few) are part of the strategy.
Heads up, sharp rises in utility prices are next…
Yep. Gasoline went from $2.59/Gal in Sept to $3.09 today in Central Florida. Beef up 10% or more. Lamb through the roof. My wife thinks I’m an armageddonist, and worry too much.
I will remind everyone here that we live in what can be described, economically, as a “socialist-system”.
Mises proved long ago that price calculation in a socialist system is not possible in an accurate manner and will, in time result in ever greater mis-allocations until the system collapses.
At this point in time, prices are not based on the “merits” of supply/demand (or even note/credit inflation) that would keep them fairly aligned to “market-prices”. Prices are based on the “politics” of a Socialist Commonwealth and one NEVER knows which goods/services are TRULY closest or furthest from “market-price”.
From the page on the Essay by Mises:
“When “Economic Calculation in the Socialist Commonwealth” first appeared in 1920, Mises was alone in challenging the socialists to explain how their pricing system would actually work in practice.
Mises proved that socialism could not work because it could not distinguish more or less valuable uses of social resources, and predicted the system would end in chaos.”
The chaos is a result of mis-allocations building up and upon themselves over time. The mis-allocations are a result of incorrect pricing signals, and the incorrect pricing signals are a result of “political-allocation” of resources (a Socialist Commonwealth).
At this point in time it is not possible to even tell if inflating the money/credit supply is truly/technically a “mis-allocation”. Too many other knobs and dials have been futzed with to know, not to mention all the “unknown-unknowns”…
That is how far we have gone. That is what Mises meant when he said it ends in “Chaos”.
Is the price really the price anymore? Anyone that is honest with themselves should admit that the answer cannot be known, but only speculated upon.
Hello Joel,
I like your insights!
Here in Switzerland the SNB is constantly on the look out for the menace of deflation which is apparently much worse thatn inflation and is just tugging at the bit to cut loose. They say that the strengthening of the CHF is bad news for all because it would be a shame if some of us got too much purchasing power as payment for our goods while reckless borrowers were forced to pay off their debts in real terms. Poor fellows!
Strangely enough though the price of houses, petrol, diesel, gold, silver and copper are all much higher in CHF than they were at the beginning of this period of CHF strengthening… It is also a bit more difficult to get a good paying industrial job than it was in 2008 which means that the price increases have been even higher in real terms than they were in nominal terms…
The SNB is currently recruiting. It is looking for people with PHDs in ecconomics. It seems that they will be able to sort this mess out once and for all if they get enough good people and can persuade enough ecconomic participants to behave according to the brilliant models that they will create.
Some of my colleagues are in awe of the brilliance of the SNB. I must be too stupid not to see it though because for the life of me I can’t see why we need these guys.
Kind regards, Ross
In Canada, gasoline and energy prices are fuelling inflation, the latter going up 10,5% and the first climbing by 13%. but that’s it. Everything else rose only 1.8%. No signs of panic. But then, housing prices are alarmingly high and few people panic because of it, the government is doing a good job to stabilize, for now.