Sowing the Wind, We Reap the Whirlwind

All over the world, food fights are breaking out. Not because there is too much food or too little, but because it has gone way up in price. Bill Bonner explains…

Never did God give man such a sunny day that the authorities couldn’t make it rain.

As near as we can tell, nature favored Argentina as she did few other places. She caused the Andes to rise up, and then over millions of years, let their hillsides wash downriver to be deposited in a vast, flat, well-watered, plain, with topsoil so thick farmers can abuse it for generations.

On the edge of this fertile farmland, and in the middle of one of the biggest booms in farm prices in history, the politicians in Buenos Aires have achieved what might have seemed nearly impossible; they have created a crisis in the agricultural sector.

"Day 20. The strike continues: farmers reject government’s 9 new initiatives" says the headline on La Nacion.

But farm problems are not limited to the pampas. Thanks to globalization, they’re sprouting everywhere. "Fears grow over rice crisis," is the front-page story at the Financial Times. "Silent famine sweeps the globe," reports WorldNet Daily. Thirty-three nations face "unrest" because of food shortages, says the IMF.

All over the world, food fights are breaking out. Not because there is too much food or too little, but because it has gone way up in price. Of course, you could put that another way: the paper money in which food is priced is going down faster than usual. There’s no less food than there was five years ago. But there is a lot more paper money. Modern central banking was invented so that we should have paper money – and have it in abundance. Now, we have so much that it is causing food prices to soar. But food is hardly in a class by itself. When one bubble pops, the authorities immediately begin pumping up another one. After the bubble deflated in 2000-2001, for example, up came even bigger bubbles in residential housing and the financial industry. Now, both housing and finance are losing air. But the central banks are still pumping hard. Where’s the air going? Apparently into commodities. In other words, worldwide inflation of food prices is a monetary phenomenon, as Milton Friedman might put it, not an agricultural phenomenon.

To show you the scope of the phenomenon, we pull out a copy of The New York Times from October 19th, 1896. There, it is recorded in black and white that the average wheat price was about $1 a bushel – in gold – during the previous 20 years. An ounce of gold would buy you 20 bushels of wheat. Today, you can buy a bushel of wheat for about $12 which means, an ounce of gold will buy about 75 bushels of wheat. In terms of real money – gold – the price of wheat has gone down for more than 100 years. However fast farmers have added to the world’s wheat output, in other words, central banks have outdone them, planting far more acreage in paper money.

And now that governments have caused a crisis, they are hard at work making it worse. In Argentina, the farmers are few; city dwellers are many. Argentina’s peronistas can do the math. They make out the farmers – historically patrician landowners with large holdings – to be greedy and insensitive. The politicians imposed a 49% windfall tax on foreign sales. The measure should lower prices for Argentine consumers and raise money for the government, they reasoned. It seemed like a no-brainer. That is, until the gauchos blocked the roads into Buenos Aires and threatened to starve the city.

In America, the math is different…but the result is equally imbecilic. There aren’t many farmers out on the prairie, but in Washington, there are more farm-state U.S. Senators than pigs. They push and shove up to the taxpayers’ trough to get huge subsidies for their hometown campaign donors – lately, in the form of bio-fuels. Corn-fed ethanol may make no sense in environmental terms or energy terms, but it lubricates the big wheels of national politics. In the event, it takes a third of the U.S. corn crop out of the food chain and puts it to use in the drive train – further driving up grain prices.

With bread prices on the rise, politicians feel compelled to intervene. And every intervention falls upon the crops like a cloud of locusts.

Last Friday’s 10% spike in rice prices came as governments moved to corner the market. Three billion people, many of them with very marginal incomes, eat rice every day. The price of rice rose 50% in the last two weeks, causing Thai farmers to sleep in their fields to protect their harvests…while the Philippines posts armed guards at its graneries. Vietnam, India, Kazahkstan and China have all restricted foreign sales. The exporters are coming under pressure to export less – in order to lower prices at home. The importers, meanwhile, have no choice but to try to get as much of it as possible, as soon as possible, in order to head off shortages. Result: a run on rice.

India’s trade minister warned hoarders: "We will not hesitate to take strong measures…"

Of course, hoarding is exactly what a smart family should do. Most likely, there will be runs on other commodities too…and then a run on gold itself. People will want something real…something sure…something with which they can buy rice, without having to worry about it doubling in price two weeks later. That something, traditionally, is gold.

Hoard it now, while you still can.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

April 11, 2008 — Buenos Aires, Argentina

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now.

We are back among civilized people. People who worry about money, that is.

So, what has happened in the world of money since we were gone?

Not too much, apparently.

U.S. stocks are still down about 7% for the year. The NASDAQ has lost 12%.

The dollar is still near its all-time low against the euro, at $1.57. And the yen, too, is near an all-time high. And gold?

Maybe we were right. Maybe we just had our last chance ever to buy gold for less than $900 an ounce. And maybe what we have now is our last chance to buy it for less than $1,000. The price today is $931.

Now, you can still get in on gold at just a penny per ounce, but only for a limited time. Start collecting the change off the floor of your car.

We are bullistic on gold because we are realistic about human nature. Give someone an opportunity to print money and you can be sure that sooner or later, come what may, he’ll take it.

The feds no longer tell us how much money they’re ‘printing,’ but experts say M3, the broadest measure of new money creation, is higher than 15% per year. Let’s see, money increases at 15% per year…and how fast is the supply of goods and services increasing?

Uh-oh…the IMF says the United States is headed for recession. Some economists think the country is already in recession. What that means is that the supply of goods and services is barely increasing at all. Which means, the extra money has to bid for the EXISTING goods and services.

No need to beat around the bush about it. What this means is that monetary inflation is driving up prices.

The price of oil is $112. Wheat, corn, soybeans, rice – all the grains are near record highs too. Many countries are banning exports. Many are controlling prices. (See below…) Mexico, for example, has price controls on tortillas.

Of course, the real cause of rising food prices is a falling value of paper money. But only the European Central Bank seems to take its mission to protect the euro seriously – it’s holding rates steady. While the ECB tries to hold the line against inflation, the rest of the world’s central bankers are giving inflation all the slack they can. The Bank of England, following the U.S. lead, cut its key rate yesterday by a quarter-percentage point

Let’s go back to our war analogy. It’s a battle between the forces of inflation and the forces of deflation, we keep saying – one side unstoppable…the other immoveable.

But what kind of war is this? Glad you asked because we were thinking about that very question as we sat in front of the fire up in the mountains yesterday.

The Franco-Prussian war of 1870 was a great war. The French declared war on the Germans, for some reason that no one seems to recall. The Huns attacked, rolled up the French army …and laid siege to Paris. In the city, residents soon had to eat rats and cats to stay alive. Parisians exchanged recipes and made the most of it.

The whole thing was over fairly quickly. The Frogs capitulated, agreed to pay reparations, and the Germans withdrew (keeping the Teuton-speaking area of Alsace.)

It was a nice war because it had a clear winner…and because it was over like a good street brawl, before the cops came. And the Germans were very civilized about it. They didn’t set up bases in France. They didn’t stretch out the war for years…or make the French learn to speak German. They won it fair and square, and then went back to their strudel and frauleins. Which made Europeans think that war was not such a bad thing.

Then, came WWI. Oh la la…this was a war of a different sort. It went on for four years. At enormous cost to everyone…millions of dead…trillions in financial losses…

…and who won? Nobody.

We bring it up because this financial battle looks to us like that kind of war. A war of liquidation…in which people lose money they thought they had – either to inflation or to deflation.

Yesterday, Lehman Bros. liquidated three of its funds. And, as mentioned above, a big part of the stock market has been liquidated. And housing gains are being liquidated at about 10% per year…

…and remember, inflation liquidates almost everything…including the value of American labor. As consumer prices go up and the dollar goes down, the relative price of American labor falls. The working man is liquidated.

But if this is a WWI kind of war…everyone gets liquidated – investors, lenders, borrowers, consumers, businessmen, householders, working people…everyone. People who worry about money will have less to worry about, in other words.

*** We thought about not coming back.

Hard against the Andes, wine makers such as our next-door neighbor, Donald Hess, are making some of the best wine in the world. Next-door is a long way away – about a 40 minute drive. But it’s worth it. Not only can you stock up on wine, Hess operates a great restaurant too.

Later, after we returned home, we sat in front of the fire and dozed off.

Maybe it was the lack of oxygen, (it takes a few days to get used to the altitude), or maybe it was Donald Hess’s Malbec wine… Whatever the cause, we drifted into such a state of relaxation that Juanita, who tends the kitchen, thought she should sound the alarm.

"Senor Bonner?" she asked.

Then, seeing that we awoke readily, she was reassured, and offered us a cup of tea – mate, of course. We drank it, put a few more sticks on the fire…and drifted off again.

In the morning, we had mounted up and ridden out to a little valley about two hours’ ride to the east.

"That’s where I was born," said Jorge, pointing to what appeared to be a pile of washed out adobe bricks. Jorge, now 54, had such a broad smile we wondered what kind of a childhood he must have had.

"I lived there until I was 17. Then, we moved down into the valley."

We had been riding for about an hour. The place where Jorge grew up was an hour’s horseback ride from the ranch house, itself a 40-minute drive away from the closest neighbor, which is more than four hours from the nearest major city. Jorge must have had no other means of transportation except horseback. He must have had no access to school…or not much. He must have had little or no access to TV or medical attention.

Even now, as foreman of the ranch, Jorge gets a house to live in – basic, but not bad. He has no television, but he does manage to get a weak signal on his radio. His electricity comes from the same source as ours – a power plant we installed on the property last year. His hot water comes from a solar heater on his roof.

(Solar power was supposed to be cheap. But it hasn’t turned out that way. Something is always going wrong. And each time something goes on the frizz an engineer has to make the 5-hour drive from Salta to fix it.)

We know Jorge’s finances too – since we pay his salary. He earns less than a trash collector in America…less than a hamburger flipper…all of $500 per month. But our bet is that his net worth is higher than most Americans. Jorge can’t spend money – and can’t borrow it either. There is nowhere to spend it. And no bank would lend to him. And yet, there he is – a picture of health and happiness, a smile always on his lips, ready with a kind word for everyone.

Which makes us think the whole thing is a fraud. Worrying about money, we mean.

"You really should give Jorge a raise," said our business manager down here. "He hasn’t had a raise in three years, and inflation has been running between 10% and 20% per year. Nobody knows for sure because the government lies about the numbers. But anyway you figure it, Jorge should get more money."

"Of course…of course," we replied. "But Jorge is already richer than any of us. We have never met such a good natured, happy fellow. Obviously, money has nothing to do with it."

*** Meanwhile, USA Today tells us that top CEOs may be presiding over disasters, but they are not about to share the misery of the shareholders. The pay of the chief executives of America’s 50 largest corporations averages about $15 million says the paper. And it doesn’t seem to matter whether the shareholders are making money or not. Take the CEO of KB Homes, for example. The company lost $929 million last year. Its share price fell 70%. Still, CEO Mezger got paid 1,000 times more than Jorge.

Go figure.

The Daily Reckoning