No “Super Normal” Inflation

Just the regular kind…

OK, so it’s been a momentous month. We’ve had an election and we’ve had The Fed actions. The election has been pretty well covered everywhere, so I’ll just mention that this was a pretty good outcome everywhere other than California (where, one supposes, we can demonstrate just how horridly badly the Social-Dimocrat policies fail to bring prosperity…)

But just after the election the market stayed flat.

That’s because the outcome was predicted days (weeks?) in advance by markets.

But the next day, they were rocking… Because The Fed announced “QE-2” was sailing to the tune of about $600 Billion of asset purchases. Quantitative Easing is when the government issues a boat load of bonds (that normally would suck cash out of the currency markets as folks bought them) and they are bought by The Fed (who can wish up cash on a whim by twiddling computer bits). Thus no cash is withdrawn from anyone.

But wait, there’s more… as The Federal Government spends that cash, it is put INTO the economy. So, in essence, when The Fed (Federal Reserve Bank) buys US Govt bonds, it “monetizes the debt” and make more cash. $600 Billion more in this case.

More supply of cash generally means it is worth less. In severe economic down turns, the ‘velocity of money’ drops, so more cash can just make up for the change of velocity; but it’s a dangerous game to play. We could suddenly just decide to go spend more and increase velocity overnight. (As I have just done. I’ve got somewhere over $1,000 on the Amex right now and rising fast, as part of this trip, that would not have existed 2 months ago…) So we have a very large Fed Elephant dancing the Cash Tango with the public…

“I have rejected any notion that we are going to raise inflation to a super-normal level in order to have effects on the economy,” Bernanke said. “Our credibility must be maintained,” and “it’s critical for us to maintain inflation at an appropriate level,” he said.

“Our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation which I think we all agree would be a worse outcome,” Bernanke said.

Quotes are from the Bloomberg article on the event.

The “disinflation” in question is the failure of your home price to rise and of your salary (if you still have one) to rise too. It’s not talking about your rapidly rising gasoline prices, food prices, utility prices, imported goods prices, ….

So the bottom line is that they WANT inflation of 1.7%-2% and they don’t have it yet.

The Fed’s preferred gauge for consumer prices, which excludes food and energy costs, rose 1.2 percent in September from a year earlier, the slowest pace since 2001. Fed policy makers have a long-run goal of 1.7 percent to 2 percent inflation that they see as consistent with achieving legislative mandates for maximum employment and stable prices.

Gee, only 1.2%. So it will take more than one lifetime to make any currency you hold completely worthless. Better to have 2% where the value can inflate away in time for you to notice before you die.

(Yes, DIS-flation can be a killer to an economy. But I’d rather have a target of 0%-1% than a target of about 2%…)

Mr. Bernanke’s Crucifix

He’s set himself the goal of averting the Second Great Depression. But he’s been trying to do it while carrying the cross of Fanny and Freddy on his back. Barney Frank and the Dimocrats have so buggered the housing and mortgage markets (and from them, the entire banking industry) that we’ve gone to near financial meltdown globally, leading to his Crucifix (and no, it was NOT just regulatory issues… the CRA was a root cause.) All those $Trillions of bad mortgage paper. Issued at the demand of the CRA (which said, in essence, issue bad mortgages or lose your banking license) and then repackaged and sausage stuffed via the government mandated vehicles of Fanny and Freddy (among others).

So he’s got to sop up that bad paper, but it’s a very heavy cross to bear. The collapse of those prices is the “disinflation” he’s trying to end. Yet the bad debts are piled high and wide.

Of necessity, the ‘easy money’ policy will cause other prices to rise apace (thus the rise of gold and other metals prices once the added ‘quantitative easing’ was announced). We’re blowing loads of hot air into everything in an attempt to keep the housing bubble from leaking flat too much now that it’s burst. The effects will not be uniform.

Similar to metals, stocks rose the following day. They are seen as a ‘real asset’, so expected to ‘hold value’ in the face of a cheapening currency. But perhaps not as well as some other assets. Oil, too, rose.

So The Fed is betting that in the end, it will all work out to a happy ending:

Damning With Faint Praise

Not exactly a ringing endorsement:

Former Minneapolis Fed President Gary Stern said he would have supported the Fed’s asset purchases.

“I would have voted in favor of it mainly because I think it’s worth a try and might have marginally positive effects on the rate of growth of the economy and unemployment,” Stern said Nov. 5 in a Bloomberg Radio interview at the conference. He retired from the Fed in 2009.

Reminds me of that other phrase of hope you can believe in “This time for sure!”…

Then, in the end, we also have the Obamanation spending at a horrific rate (all that new cash from The Fed QE and then some, er, and then a lot, er, and then a gigantic amount… words fail me…) all the time bemoaning their shortage of money and the need to hike taxes horrifically to make up for the budget shortfall. “Tax beatings will continue until morale improves”.

So what the QE giveth, the Tax Man taketh away.

Faced with expectations of looming inflation, uncertain government policies, certainty of tax escalation, and governments (at all levels) showing all the wisdom of a high school kid with a new credit card and an invitation to a Frat Party – if they buy some booze; individuals and companies are sitting on their cash much more than usual. Adding to the ‘low velocity’ burden on Bernanke’s Crucifix…

He’s trying desperately to get the velocity of money back up, but the rest of the government is doing all the things that cause the velocity of money to drop. Oh, and spending in a crazed manner to make up for it.

This we call “monetary and fiscal policy”.

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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13 Responses to No “Super Normal” Inflation

  1. pouncer says:

    Thinking of inflation and Alan Greenspan, and climate…

    It seems to me that lacking either understanding or fine structure, fast acting control over climate, a slow and steady temperature rise is, analagously to inflation, a better thing than uncontrolled and unpredictable booms and busts of temperature. Just as deflation is worse than inflation — in many views — I view ice ages as much worse (disruptive) than modest (0.5 degree per century) warming.

    And the current consensus modeled methods to acheive such warming — emit CO2 — are better than means to suddenly cool the atmosphere, too — set off nukes to simulate Krakatoa.

    All in all, burning carbon seems less dangerous all the times.

  2. Paul Hanlon says:

    I’d love to know how they compute inflation. Here in Ireland, house prices are not factored into inflation, although I think that rents are, but these do not correlate with each other very well.

    Another thing they do is discount things like computers. Because a computer now is so much more powerful than a computer previously, they add an amount to the price of a computer now to take into consideration its extra power. Computers have been dropping in price despite this, so they have a big disinflationary effect on the Retail Price Index, allowing other things to rise in price without adding to inflation. However, if they don’t weight this properly according to its ratio in the overall economy, then a distortion is introduced.

    Every year, the Economist magazine issues The World in, say for instance, 2011, which should be out very soon. In it, they give forecasts for every country for their GDPs and other metrics. I’ve been collecting these since 1988, and have every one bar 1990 (loaned it to someone and never got it back).

    In the 1988 issue, America’s GDP per person was $19,820, and in 2010, it was $47,920. Would you say that the average American is two and a half times better off? It’s unlikely, because inflation erodes that growth in productivity.

    Let’s take a more extreme example to illustrate what I’m trying to say, my own country Ireland. In 1988 GDP was approx €7000. I say approx because we had Irish pounds then, it was during a very rare time when Ireland had its own free floating currency. Before that we were tied to Sterling, now we’re tied to Euros.

    In 2010, Ireland’s GDP was €40000, or almost a sixfold increase from 22 years ago. There’s no way things have improved six times over in that period of time, but let’s say they doubled (even this would be pushing it). In order for inflation to erode things to that extent, it would have needed to be about 5% pa, yet according to official figures, it never exceeded 3%, and was much lower than that most of the time.

    Something is going on with the way inflation is being calculated. It is higher than official figures are stating. And that matters, because people see their wages rising, but yet cannot understand why they seem to be going backwards. It’s a rather nasty “confidence” trick being perpetrated on us by our own governments.

  3. E.M.Smith says:

    FWIW, there is a metric I like. One ounce of Fine Gold has purchased one gentleman’s suit of clothes throughout most of recorded history. Yes, in the last couple of decades we’ve had some odd excursions, but the average holds true.

    So to compute inflation is not really that hard. One ounce, or one suit, your pick.

    I add to this that a loaf of bread cost a dime and a stamp a nickel about 50 years ago. The stamp is not approaching a 50 cent point while cheap break is a bit over $1. Gasoline was 25 cents, and is now 2.60 (though I did see $2.50 in some places on my drive).

    The upshot? You can make an inflation metric out of those without much effort. Find things that take a mix of labor, capital, and commodities to create. Odds are, it’s a decent metric…

    The official ways? I’d not trust them. Ronald Reagan, to get inflation ‘under control’ changed the official definition…

    So I use a basket of 1 suite of mens fine clothes, one ounce of gold, one gallon of gas, one loaf of bread, one stamp, and a couple of other odds and ends. It works far better than the “official” statistics…

    @Pouncer:

    They both are very long time scale processes that have a high degree of Official Government Pronouncement in their definitions… Part of why I’m interested in both. The skill set to de-bull-shit one applies to the other too ;-)

  4. David says:

    E.M. : “More supply of cash generally means it is worth less. In severe economic down turns, the ‘velocity of money’ drops, so more cash can just make up for the change of velocity; but it’s a dangerous game to play. We could suddenly just decide to go spend more and increase velocity overnight. (As I have just done. I’ve got somewhere over $1,000 on the Amex right now and rising fast, as part of this trip, that would not have existed 2 months ago…) So we have a very large Fed Elephant dancing the Cash Tango with the public…”

    Ok, so here is where my questions come in. How exactly does the money go into the economy? Yes, I know the Govt gets to spend it. For every $10 spent how much went to support the banks, supposedly flush with cash, which in reality is necessary if they were marked to market, to finace their true losses, how much goes to freddie and fannie, how much to foreign nations, how much to states?

    I did not get a penny from Ben’s helicopter, did you? Also, how much of the inflation we are seeing is the result of speculation and not really end user demand driven?

    Finally does not the whole system eventually have to be reset, and what form will this take? So many questions? (-;

  5. Jason Calley says:

    Hey E. M.,

    Glad you are having some fun on your trip. Sorry about the shuttle delay. By the way, if you pass Tallahassee on the way back, a detour slightly south to Wakulla Springs is a nice way to spend a few hours. Pretty spot…

    Speaking of inflation (and also unemployment) most of your readers may already be familiar with the site “Shadow Stats” http://www.shadowstats.com/ where you can see what those metrics look like if they are computed according to the traditional methods, without the current numeric hanky-panky.

  6. E.M.Smith says:

    @David: I was going to give this a longer treatment, but I’d better give a short answer rather than procrastinate and give none at all..

    Government buys stuff. Lots of it. Government ships grants to folks, lots of them. And The Federal Government can ship blocks of grants to the states for things like highway repairs.

    So there are lots of ways money makes it into the economy. Buy a fighter jet, or a load of new paintings for the bureau… Give Alabama a new highway or bridge to nowhere. Give $5 Million to Mann to spend on his pet projects. Everywhere the government spends, it can just spend more. So Congress passes a “spending bill” and the details of who gets what cash are in it. Each bill with different buckets and leaking holes…

    The “Bail Out Bill” had a load of junk in it. Agencies were set up just to hand out the money. Some to buy General Motors. Some to the banks. Some for this and that. Often with different modes of spending.

    So the “Bank Bailout” was in a couple of forms. Banks could just borrow from The Fed (just took some rule changes in some cases). The Banks could sell ‘assets’ of dubious quality to The Fed (who can hold crap on their books as they have no reserve requirements, really… In essence, it’s just a way to let the banks have easier rules for a little while. We could have simply relaxed the rules on them, but it’s easier to keep The Fed in line than to keep 5000 banks monitored…)

    So for the banks in particular, most of what they got was not free money to spend, but was a way to give them more cash in the vault and fewer loans on their books. Could just as easily have eliminated “Mark to Market” and gone back to “Mark to Model”. Then they would have needed “less reserves” and would not have needed to put money in the vault and sit on it to ‘raise reserves’…

    Now “mark to market” is NOT showing the “true losses”. In most cases there was no loss. There was just a crappy market. We’ve had crappy markets before, and banks would just ride through them. What “mark to market” said was that if you and your neighbor had $300,000 homes, and he could not make his payments, so was foreclosed, and in the forced sale the bank dumped it at $220,000 as that was all the loan was for: THEN every single loan on other homes in the area had to be marked as having “lost” $80,000 even though no such loss happened. It was a hideous error to move to “mark to market” as any trader knows “The Market can stay irrational longer than you can stay solvent.”

    I don’t know the exact amounts that went to each entity, Freddy, Fanny, etc. Mostly hundreds of billions. They put up the loans that THEY can not hold at true value and got cash that always counts as full value. Presto “solvent”. It would have been much easier and much more efficient to have just said “nobody lost the $80,000, so don’t mark them that way”.

    So you need to get a copy of the Federal Budget to find out how much goes where.

    Per the Stimulus and where it went: If you were not on the Pork List you got none. No lobbyest? No goodies.

    Realize that the present inflation rate is “too low” at 1.2% or so. The Fed is trying desperately to get it up some more… so it’s entirely NOT speculation driven. It’s not going much of anywhere yet. It will be Fed driven if they can get it to happen.

    Per a ‘reset’. No, it doesn’t have to do that. It can just keep bumping along with The Fed and The Federal Government bungling their way from one bubble or disaster to the next…

    My expectation is that Ben is trying to get enough inflation to happen that home prices rise enough to get the loan sizes under the market prices and then sell out the loan portfolio. That screws the holders of the loans in real terms, but makes them whole in nominal terms. It will also get some things like the Social Security and pension costs lower to the extent they can have the official definition of inflation used for indexing to be a bit slower than the real inflation… As Jason points you to at shadowstats…

    And, for most folks who don’t have a staff of lawyers in Washington, the way they ‘get some’ is via the home refinance. Got an old 7% loan? Refi to 4% and pocket some change. Then as housing inflation begins again, you get the benefit of that ‘value owed’ going away even as the loan dollar amount doesn’t change. If you don’t have a home to refinance, well, too bad…

    FWIW, Ben does have a chance to pull it off. It’s never been done before, and with Obama and the Dimocrats doing everything possible to get it wrong, his job is even harder. BUT, I’ve not seen him make a serious mistake yet. It’s a grand experiment, though. Trying to keep a popped bubble inflated “just enough” without blowing up the rest of the economy in the process. Great fun to watch…. And if he pulls it off, he will make economic history and be the model for the next 50 years of how to handle a financial panic.

    It would be much easier if they just rolled the financial rules back to what they were about 1970… instead of breaking most of the old protections and then hacking up the rest… Glass-Steagal worked…

  7. David says:

    Thanks as always and it helps, BTW, Glass Steagle worked and so did 20% down and a reasonable debt to income ratio. Irrational government policy and short term expediancy principals can also keep markets very irrational.

    A couple of thoughts. The inflation I was referring to was commodties such as food for an example. I know that when the value of the dollar drops there is some inflationary pressure on items traded in dollars, and this appears to be hurting the poor the most, not just here but internationally. But does speculation also drive of the price of such items as well other raw goods? Does market demand, as opposed to real “end user” demand create hardship on end users whos income is not growing? I suppose such market demands (if based on expected increase in real demand) eventually just speed up the process of greater production in those areas if the markets are correct, but when said demand is based on currency debasement speculation, on top of actuall price increases due to actuall dollar debasement, then the pain appears doubled, the price increase is not end user driven, and the pain on the poor increased. Does this make sense?

  8. David says:

    E.M, as I am not an economist please forgive any awkward terminolgy or phrasing in my questions, I hope the gist is conveyed.

  9. W^L+ says:

    I don’t think they had to mark down any loan if they reasonably expected area prices to recover before payoff.

    But anyway, under pressure from Congress, the FASB removed that requirement, so that even loans where banks had no expectation that the underlying property would be worth as much as the loan value could be held at original value. Terrible thing to do to your average non-savvy investor (but those are people that I contend should never be investors in the first place, which is why I am not one).

    In essence, they traded a little bit of transparency (critically flawed, I’ll grant) for much less transparency. (which is many times worse) A lot of seniors whose personal and pension funds are invested in banking stocks will be caught by surprise when (not if) real estate prices accelerate their slide instead of recovering. How many “greeters” can that big blue discount chain hire? We’re betting that the gamble pays off and we don’t have to find out whether we can put the whole AARP generation to work again.

    Already, a lot of foreclosures are because people realize their loan payoff values are more than their homes are currently worth. That’s going to speed up, especially for those who were in the “nothing down” school of rental properties. Most of these properties may not recover their values for a generation or more, and should therefore be marked down on corporate books, but thanks to the change, they are not. This lack of transparency means that the talking heads on CNBC can try and convince people that things are getting better. If they fail their assignment, it is “hello 1929” time.

  10. boballab says:

    EM

    I believe yo might like this little video:

  11. E.M.Smith says:

    @boballab: Nice…

    @W^L+

    It was my understanding that it was a monthly or quarterly mandatory mark to market. You didn’t have to mark daily, but the market price was not ‘negotiable’…

    BTW, it was also a contributor to the bubble. As property prices rocketed up under market forces, the banks had to ‘mark up’ their ‘inventory’ even if they felt it was not warranted.

    The “bottom line” is that “mark to market” is not ‘transparency’ so much as it is a window into the irrational nature of markets. The believers in it trust in the academic view of The Efficient Market Hypothesis while every trader knows “The market can remain irrational longer than you can remain solvent”. So if you want irrational prices to have dominance, mark to market. If you want reason to dominate, allow folks to ‘mark to model’ (or other similar methods of marking). It is simply foolish to let “mini-bar prices in a fire sale” dominate our housing values.

    But given that it’s happened, you have a pretty good grasp on the implications…

    @David: No worries about phrasing in a non-economist way. Frankly, I often find I get more clarity by avoiding the jargon…

    Your first paragraph basically sums up the stupidity of the CRA (Community Reinvestment Act). The piece of garbage promulgated by the Dimocrats, touted by Barney Frank, signed by Clinton, and the core / root cause of this whole thing.

    They mandated that banks lend into ‘redlined’ areas and that they lend to borrowers who did not qualify. Thus you got the “liar loans” and “no money down” loans. And all the rest. As the price of their votes to pass this POS, the “Vote For A Price” Republicrats demanded removal of Glass Steagal and a few other trinkets… (That’s what I’m talking about when I say the Democrats were breaking up the furniture and the Republicans had the fire extinguishers ripped out… then they lit a match when the bill passed.)

    The banks then just came up with a way to move that crap of THEIR books, as it was clearly crap.

    Then “mark to market” set a barrel of gasoline in the middle and the removal of the uptick rule advertized to the arsonists that this place was “ripe”… “Mark to Market” assured the market would be irrational for years on end (as economic slowdowns run for years and they are when you get foreclosures) and the ability to short SIVS, CMOs etc along with no limits on buying CDSs on folks who’s stock you could now short to oblivion let the “Raiders” take out life insurance on the company or individual debt items (the Credit Default Swaps…) then proceed to shoot them (the unlimited ability to short without a natural buyer showing their hand – no “uptick” rule) by shorting their collateral (the Collateralized Mortgage Obligations or the repackaged sausage of them in Special Investment Vehicles). There are a few more bits of finesse involving things like making a run on the collateral of the underwriting insurance agencies so THEY started to collapse, thus collapsing the “insurance” and thus the “market” in all the other banks collateral and causing another glorious round of “mark to market” stupidity.

    Bottom line was they built a system where it was “biggest wallet wins” in any downturn and where things were brittle to the downside and would rapidly enter a death spiral if it ever stopped inflating. The “Biggest Wallets” saw this and the rest is history…

    Per inflation, who it hits, and currencies:

    Yes, inflation hits the poor guy first. Food and fuel are globally traded, so their prices track inflation very fast. Thus they are left out of the formal CPI index… Similarly, other commodities that have real inherent worth. Things like copper, silver, coal. Stuff that “if you drop it on your foot it hurts” (to quote a very good commodity trader on CNBC). Eventually, the folks using these things notice, and raise THEIR prices (thus the ‘shrinking pesto jar’ posting and my watching things like the cost of a loaf of bread, and a suit of clothes, et. al. AND noticing things like Disney is now an $80 nominal price to enter where the last I remembered was $60(something).

    As those costs work through, you get places like FedEx discovering their uniforms and fuel and tires are all costing more, and the price of a new truck goes up as the metals in it rise. So they raise rates.

    Eventually, and it can be a few years, “the folks” figure out they are getting ripped and the economy is stable enough for them to demand a bit of wage increase. That is the time when the official statistics tend to acknowledge the existence of inflation…. but somehow the wages never seem to catch up to the new price realities… so it’s off to an inflationary spiral as new wage increases lead to more price increases lead to…

    Different countries are impacted at different times. So, for example, Australia is having a great time as their mining sector is selling stuff for great prices. Ireland not so much…

    To Speculative Impacts:

    Do speculators in any market drive up the prices? They can, but only for a short time and only if that is the direction the market is naturally headed. Does that hurt the “little guy”? Only to the extent it makes the future of that market known now.

    So, take wheat. I can ‘speculate in wheat’ and buy a futures contract for, oh, 5 months from now. I can buy a train full, or a fleet of ocean freighters full. If I’m China and need a fleet of ships hauling that food home, it’s going to raise the prices. Perhaps for a very long time (as that wheat will be eaten…) So some trader sees China buying loads of wheat for future delivery (or maybe just sees the price rise on a chart… what I do…) and ‘buys some’. For that moment he DOES add to demand and that can cause a bit of price rise. If enough traders do it, it can cause a lot.

    BUT

    In 5 months when that futures contract expires, the trader must be out of that position or they will get a huge boatload of wheat dumped in their yard… So every “buy” for speculation has a matched “sell”. That market WILL reach equilibrium price of the natural demand and supply curves. The speculator can make that happen FASTER by stepping in front of a natural buyer 5 months in advance, or they can get creamed by being on the wrong side of that trade when it collapses as they try to dump to exit that position with no natural buyer…

    Basically, the “speculators” in futures and options can flick the price out of line a little bit for a little while, then they either get ratified by the natural buyers or they get crushed. Those that mis-read the natural direction of the market get crushed and don’t last long.

    One Exception:

    There are some very thin natural markets that have had investment vehicles created for them where a huge number of dollars can rush in, or out, on a whim AND they buy the actual commodity. The Exchange Traded Fund (ETF) for Gold is one. Buy a share of GLD and the fund goes out and actually buys a chunk of gold for you. This creates real market demand (unlike all the ETFs that use the more common futures and options methods). So at this time the GLD fund is a major holder of gold and a significant impact on the market size.

    Such funds are not the typical vehicle of choice of major traders and are most often used by ‘John Q. Public’ to take a position…

    In the end, trader dislocations in markets are just not nearly as significant as the real market forces of natural buyers and sellers along with the currency buggery of central bankers and the gross incompetence of governments at running economies. Mostly they just make the impacts of other stupidities show up faster; and that being an embarrassment to the Ministry Of Stupidity (or Stupid Authorities) they like to assert it’s the traders causing it (as opposed to noting that traders are just seeing a trend early and getting at the front of the line of what IS coming…)

    Another example: Rice. About a year (or maybe two?) ago we had a ‘rice shortage’. This was widely touted as being caused by ‘speculation’ in rice. I dug into it. The truth was that Bayer had being doing some experimental ‘grows’ of GMO rice in the USA that was not an approved rice. The genes ‘escaped’ (pollen on the wind, you know…) into some surrounding fields. This was not discovered for a couple of years. When it WAS discovered, ALL the contaminated rice seed was ordered removed from markets and destroyed. (Though, importantly, harvested stocks of rice for food were not ordered destroyed in the USA.)

    OK, so far, it’s a small issue of a few hundred acres of rice getting turned into experimental frankenseeds and being burned. So what made this a Global Crisis?

    The fields in question are what is called “foundation seed stocks”.

    A seed producer has a vault with a few pounds of each ‘ascension’ of their prized seeds. To make the millions of tons of seeds needed to plant a full crop, they do a couple of grow outs to make ‘foundation seed stocks’ that are almost all pure, but not as perfectly pure as the stuff in the vault. Then these foundation seed stocks are planted and grown out a ‘few’ times to make the bulk needed for planting. It can take a couple of crops / years to make the volume.

    So when those planter quality seeds were found to be genetically contaminated crap, that put the seed supply back a couple of years. And no, the other seed producers don’t have enough just laying around to pick up the slack. Seeds are perishable, so you only make the quantity you expect to sell each year…

    The result was a lot of rice farmers getting no seed and needing to shift to some other crop for a while. There was also a rapid swap to some slightly different varieties of rice once it was figured out what was going on.

    But wait, there is more…

    Rice was plentiful and cheap in the USA. We were a bit more ‘lax’ on letting the harvested stuff in storage be sold. I bought a lot of it. Several OTHER COUNTRIES put a ban on imports of USA rice while this got sorted out. So the food riots in places like Southeast Asia were more a result of government actions than actual food supply shortages.

    Now, what will a Nightly News Pablum Show report? That long complicated story involving genetics, the nature of seed production and grow out, the potential for some non-approved (but probably safe) GMO seeds in your food as a reasonable choice if starvation is the alternative, the various responses of a few dozen governments world wide? Or “Speculators drive up rice prices”… Which one fits the 30 second sound bite limit?

    Yup, “speculators did it” is the “easy story”. Took me a few months to sort out what was the truth. (I’ve posted in comments on other sites the details with links, don’t think I’ve preserved it here… but it’s available). The “key” for me was that as “rice prices soared” and “rice became scarce” it was still in my local store in 20 lb bags for dirt cheap. Something didn’t add up. So I went digging…

    The point? When you see “speculators did it”, take it with a pound (or ton?) of salt. Almost all the time, speculators just make visible earlier what is already in the works. (Yes, there are occasional odd cases where a very well funded speculator will try a physical corner on a market, like the Hunt Brothers in Silver back in the ’70s? but those are really fairly rare, and usually blow up dramatically in their faces…)

    In short: As folks see a load of, oh, wheat price increases. Some folks will go buy 10 lbs of noodles and put them on the shelf, raising demand (and thus prices) a bit more than normal. Some speculators may buy a ‘wheat futures’ contract and move prices up for a short time (but must eventually sell out ….). To the extent he gets in front of the noodle maker who then has to pay more to get that wheat, the price will be reflected faster. But… Since folks DID buy those noodles, that demand would still show up. It would just show up 5 months later without the speculator… (And where speculators can, and do, lose their shirts is when the farmers plant more wheat due to the higher prices and the burgeoning new crop is seen by OTHER speculators who start selling well before that 5 month contract matured… or just the farmers selling futures on that grain at the high price to ‘lock in profit’ can drive it down…)

    Hope this long ramble helped…

  12. Paul Hanlon says:

    Well, you are right about Ireland :-((. There’s speculation that our gubmint is going to the ECB for a “bailout” (which will be anything but), but I think this is premature for two reasons.

    One, we have an upcoming budget, which makes it far more likely that it will wait for the reaction to that before deciding one way or the other. Two, if a bailout is sought, the first thing that will be cut is our government / public sector. You don’t see turkeys voting for Christmas, do you?

    Don’t get me wrong, we blew this all by ourselves, but the problems have their genesis in us joining the Euro. It’s been an unmitigated disaster.

    Where before the Central Bank could raise interest rates to head off inflation (and did, up to 22% at one time), now they couldn’t, and with Euroland interest rates at 2%, plus a load of baby-boomers just coming in on to the property market, house prices were only going one way.

    Up, up to a point where average house prices were 9 times average wages. And people were still getting mortgages!! Man, we Irish never do things by half measures, and we sure know how to throw a party.

  13. E.M.Smith says:

    As there are some O’Brahenny’s (spelt phonetically from only what I’ve heard, so probably wrongly spelt..) in my ancestry (from County Mayo IIRC). So: I too can attest to the “no half measures” and “great party” observations ;-)

    Yeah, that’s the problem of a shared central bank. If you are not where the ‘average’ is located, you get screwed by the central bank actions. By Definition, somebody is NOT going to be near the average…

    So if your economy is going great, and Germany is in the doldrums, you get “stimulated” via low interest rates. Oh Boy…

    I do note that Ireland decided to knuckle under to the EU Ministerial Imperium and sign away sovereignty. No worries though, as it worked out so well when England was the foreign sovereign last time…

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