The following editorial was published in Price Perceptions issue #1346 on September 22, 2007

Foodflation...

The Federal Reserve surprised the world this week by reducing the funds rate from 5.25% to 4.75%. Market reaction was immediate... The Dow Jones Industrials advanced 336 points... Gold soared $10 per ounce... Crude oil attained new historic highs... And the dollar fell to a new 15 year low. It was a clear sign the Fed has chosen to temper an economic slowdown and abandon inflation containment.

By moving major industries to cheap labor markets such as China and India, global inflation has remained subdued. This gave “inflation cover” to the world’s central bankers to print money at will. As a result, the global economy expanded at the fastest rate in economic history.

Unprecedented economic expansion increased demand for nearly everything, including energy and food. Although cheap Asian labor has held the price of manufactured goods in check, the expansion has taxed the world’s ability to produce enough commodities to meet the rising tide of demand. Energy supplies are now inadequate to meet growing world demand and oil prices have ballooned. Increasing incomes and expanding populations in developing Asian nations have also taxed the world’s ability to produce enough food. Global grain production has fallen below consumption in seven of the past eight years

Because China has become a major economic power, a review of their food policies is in order...

Following the Second World War, China experienced famine and starvation. The newly installed communist government pledged to build food reserves that would cover a year’s usage. China accomplished the task in following years and maintained one of the largest grain reserves in the world. However, after their acceptance into the World Trade Organization in 2001, their leaders decided to dispose of reserves in favor of relying on global trade to offset any domestic shortfall.

With limited capacity to expand food production, grain reserves nearly depleted, and prosperous consumers demanding better diets, China is now facing a growing food shortage. Meat and poultry prices have increased 49% from last year. Vegetables are up 23% and egg prices have advanced 24%. Because food accounts for 37% of household budgets, government officials are becoming fearful of public discontent and potential uprisings.

Central bankers around the world have printed money faster than the world can produce commodities. This week’s decision by the Federal Reserve will only serve to widen the disparity between supply and demand. The initial wave of excess money printing in the late Nineties resulted in the dot-com bubble. The second wave following 9-11 led to the housing bubble. This week’s decision to crank out even more money should lead to a commodities bubble. It appears “foodflation” is destined to become the next watch- word of the global economic scene.

Bill Gary
President/Editor
CIS, Inc.


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