Bush Ethanol Program Is Inflationary Chaff

Back on February 8, 2007, Howard S. Katz blogged:

"Hamburger at a price of $5.00 per pound (cheapest grade); starvation in Mexico; food shortages around the world: These are some of the blunders which are just around the corner (next 1-2 years) due to the actions of the U.S. Congress, the Government of Mexico and our paper money system.

"You are undoubtedly aware that every time you buy a gallon of gas these days, 10% of it is ethanol. Ethanol is simply ethyl alcohol. It is the same stuff which is in wine, in beer and in vodka and which makes us take leave of our senses when we drink too much. It is, however, a perfectly adequate substitute for gasoline, and were car engines designed for it they could run on fuel which is 100% ethyl alcohol.

"In 2005, Archer, Daniels, Midland (the world’s largest processors of soybeans, corn, wheat and cocoa) persuaded the U.S. Congress to vote a subsidy of 51¢ per gallon to convert corn to ethanol.However, the manufacture of ethanol from corn is not a very efficient process. It takes a lot of corn to make a small amount of ethanol. David Pimentel (professor of agriculture at Cornell) estimates that it would take 100 percent of the country’s corn crop to increase the fuel supply by 7%. "

Larwyn just e-mailed:

"Inflation directly caused by Ethanol on our Grocery bills is going to make the increases in SSI, Food Stamps and other entitlement more than would be required. Last week when I sent out the information on the nitrates and phosphates growing algae and killing ponds and streams, I noted the RISE IN WHEAT PRICES - And why do you think we are now IMPORTING WHEAT - BECAUSE WE'RE PLANTING TOO MUCH CORN!!!
NOW THERE IS A WHEAT SHORTAGE!!! Guess the REPUBS from the farm states will soon be quoted "LET THEM EAT RICE!!"

Now, Rick Moran of American Thinker blogs that:

"Fallout from the ethanol scam continues to hit the economy. Not only has the rise in the price of corn due to diverting part of the the crop for fuel made much of the food we buy in the grocery store more expensive, now the drive to plant more corn for ethanol production has caused a shortage in wheat."

There is a two prong problem. First, the Greenspan Fed has overly expanded the money supply, with the result that dollars are held around the world, not only by governments like Japan and China, but also by private citizens. A student from Russia told me that the likelihood of small Russian dollar holders selling is going to increase as the dollar depreciates (and it has just hit all time lows). Small holders of dollars around the world have no more incentive to hold dollars than those who watched the Nasdaq plunge in '00-'02 had an incentive to hold on to the devalued tech stocks.

Second, through government intervention the Bush administration has worsened the problem by artificially increasing demand for corn just at the point where commodity demand is exploding around the world.

The underlying problem, though is government intervention, whether you call it Federal Reserve Bank policy or whacky energy subsidies. The Fed's claim to being a competent manager of the money supply deserves increased scrutiny and will likely get it as inflation worsens.