The Jackass Reality Show

April 23, 2008

I went to another supermarket, and then another, and there was no butter at those either. Everywhere I went there were notices saying Japan has run out of butter.

Yes, the opening sentence was not referring to Egypt, Haiti, or the Philippines.  Japan too is in the cross hairs of the Mad Max eCONomy.

While soaring food prices have triggered rioting among the starving millions of the third world, in wealthy Japan they have forced a pampered population to contemplate the shocking possibility of a long-term — perhaps permanent — reduction in the quality and quantity of its food. A 130% rise in the global cost of wheat in the past year, caused partly by surging demand from China and India and a huge injection of speculative funds into wheat futures, has forced the Government to hit flour millers with three rounds of stiff mark-ups. The latest — a 30% increase this month — has given rise to speculation that Japan, which relies on imports for 90% of its annual wheat consumption, is no longer on the brink of a food crisis, but has fallen off the cliff. According to one government poll, 80% of Japanese are frightened about what the future holds for their food supply.

A must read article out of the Asia Times points out that today’s crack up boom (CUB) commodity and input goods crisis should be laid squarely at the feet of America’s jackass reality show eCONomic policy on the US Dollar and inflation. The article points out the tendency of the USD “rich” countries to convert (or CUB) depreciating low yield USDs for “stores of value”, ie. food, energy, metals, input goods. So not only are individuals hoarding but a defacto hoarding has been underway from large institutions and governments.

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. China has bid aggressively for rice all year, and last week banned rice exports, along with Vietnam and several other producers.

China is exchanging its depreciating reserves of US dollars for things of value, notably rice, with frightening consequences for dependent countries, and deadly consequences for American foreign policy. The chart below shows the price of 100 pounds of rice against the euro’s parity against the US dollar during the past 12 months. The regression fit is 90%. There is an even tighter relationship between the price of rice and the price of oil, another store of value against dollar depreciation. For developing countries whose currencies track the American dollar and whose purchasing power declines along with the American unit, this is a catastrophe

Is this all about Malthusian shortages? Not especially is my general conclusion. The CUB psychology switch to holding rice and a multitude other goods in lieu of US treasury bills in a declining currency paying 1%, is incredibly lethal at the margins. Let’s just call it crack up boom elasticity.

Global rice production will hit a record of 423 million tons in the 2007-2008 crop year, enough to satisfy global demand. The trouble is that only 7% of the world’s rice supply is exported, because local demand is met by local production. Any significant increase in rice stockpiles cuts deeply into available supply for export, leading to a spike in prices. Because such a small proportion of the global rice supply trades, the monetary shock from the weak dollar was sufficient to more than double its price.


Of course the US is hardly immune from all this. Indeed, some incredible Mad Max stories are making the rounds on that front as well. CUB elasticity is once again mentioned in this article.

Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks. At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy.

There have been so many stories about worldwide shortages that it encourages people to stock up. What most people don’t realize is that supply chains have changed, so inventories are very short,” Mr. Rawles, a former Army intelligence officer, said. “Even if people increased their purchasing by 20%, all the store shelves would be wiped out.”√Ǭ†

“Strangely” though all this mysteriously fails to show up in the 0.2% core inflation numbers dutifully reported by the Ministry of Truth. This of course leads to a complete loss of credibility and in turn encourages even more crack up boom behavior. And the traders wait with baited breath for another interest rate cut. In the real world there is no relief on the import front whatsoever. Where’s the love in these numbers?


One Response to The Jackass Reality Show

  1. sue on July 8, 2009 at 1:38 pm

    I read your website every week, its great and got lots of information to take in and lots of interesting articles.

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