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April 22, 2008
Getting Ready For The Next One
Spengler at The Asia Times is taking a look at the world food crisis and sees it as a monetary phenomenon. He has charts and graphs. I think he is right. The global food crisis is a monetary phenomenon, an unintended consequence of America's attempt to inflate its way out of a market failure. There are long-term reasons for food prices to rise, but the unprecedented spike in grain prices during the past year stems from the weakness of the American dollar. Washington's economic misery now threatens to become a geopolitical catastrophe.Except we are not letting them become partners by buying assets. No such thing occurred, of course, as Washington has made it clear that it would not allow sovereign funds to own the likes of Citicorp. What are the world's investors doing with the trillion dollars a year they used to invest in American securities, including subprime derivatives and various forms of collateralized obligations that turned out to have more obligation than collateral? They aren't buying American companies because they are not permitted to. They are buying food and other stores of value instead.Spengler thinks that this will end the run of the dollar as the world's reserve currency. I think Spengler, who is usually so astute has missed the boat on this one. As he points out the normal way inflation is sopped up is the purchase of productive assets. A call on future production. Since in its wisdom, the US Government (yes it is true - a case of wise government) will not allow the purchase of major assets, the only thing left to sop up all those dollars is production. Where does that lead? More investment in productive capacity. Leading to even lower cost production than the currency imbalance would indicate. It then becomes a virtuous cycle. As the dollar rises due to all the production being absorbed, the production prices do not go up as fast as straight monetary calculations would indicate. By dumping dollars these folks (who are taking a short term view and panicking) have outsmarted themselves. BTW the same thing is happening in oil. Productive capacity is rising but people are buying oil like crazy with dollars as a way to store value. Gasoline inventories in the US are rising. And what happens when the tanks are full? The excess buying stops. What happens to prices then? Look for big declines in the price of oil once the buyers run out of dollars. H/T LarryD by e-mail. Cross Posted at Power and Control Instalanched. Thanks Glenn! posted by Simon on 04.22.08 at 10:41 PM
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Cervus, Thank you. The article has another important value though. It points out that world supply is rising faster than demand. Eventually (if not this year, the next or the year after) production will exceed actual demand plus inventory demand. Prices will then tank. In the mean time America is improving its production capacity for goods and will be in a great position for the next cycle. Something I didn't mention was the new depreciation schedules for small machine shops. It is allowing a lot of small shops to automate or improve their automation capability. We are taking some hits now. They are setting us up for future success. M. Simon · April 23, 2008 02:21 AM I've lost all hope on the oil/energy front and have given in to despair. Cervus · April 23, 2008 02:44 AM In this case I have to disagree with Spengler on the advisability of letting sovereign funds buy of major assets in our economy. The issue being that sovereign funds, being government agents are inevitably going to be used as instruments of their government's policies. Problems can arise when single investors are too big, when the investor is a government, abuse is a certainty. LarryD · April 23, 2008 09:47 AM A perfect example of government abuse in the marketplace is Salle, Fredde, and Fannie. Or the Federal Reserve system for that matter. Steve · April 23, 2008 11:45 AM Post a comment
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Hate to break it to you Simon, but that article you linked to was from back in the middle of March. Gasoline inventories have been dropping for five, likely six weeks now. We've also had a couple weeks of unexpected oil supply drops. If this trend continues tomorrow, expect oil well over $120 on Friday.