Monetary Policy As a Cause of Global Food Inflation

An idea I presented at the 2013 “Non-Obvious Dinner” April 2nd in Wilmington, DE

The history of the next 5 years will be told in prices of corn and onions

–World will see major food inflation with significant political and economic consequences

–Government policy in the developed world is focused on asset price stability

–Official “core” inflation numbers exclude food and energy

–Policy does not address food prices which

–represent 50% or more of the income of citizens in the developing world

–and which are rising at 3-5% more per year than official inflation numbers

–In 2007 and 1H 2008, we saw a preview of this when record wheat and other food prices caused riots in 22 countries.

–This event was driven mostly by extreme weather events.

It was the first chapter where we saw food prices contributing to political unrest

–wage increases needed in China, which has seen a 10x hourly increase in last 15 yrs

–Note that the US worker is 5x as productive as the Chinese counterpart (due to high US automation).  When the average hourly wage in China crosses $4, as it has due to the demand by workers, it approaches parity with the US worker.

–Food inflation also contributed in part to the Arab Spring.

–More recently, the demand for higher wages in response to food price increases led to shooting deaths of 34 miners in S Africa.

 

–Going forward we have the confluence of extreme weather

–record drought in US in 2012, record flooding in Japan and India (where there are food riots over price of onions)

–Plus depreciating dollar

–US policy makers have strong incentives to inflate their way out of our current debt problems

–This raises price of food stuffs in local currencies globally as many food commodities are priced in USD

–We have already seen record prices for wheat and maize in 2012

–Policy makers are targeting a “core” inflation number for price stability without recognizing the global consequences of their policies.

–Ethanol is a large contributor to rise in food prices.

In addition to predicting the political instability caused by rising food prices over the next 5 years, I foresee two additional changes:  1) strong pressure from the UN and World Bank for the US to limit corn based ethanol production.  2) A move to price global food commodities using gold as the “numenaire” for quoting prices (but not using gold as payment.)

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