Tuesday, April 22, 2008

Fed and Financial Community Cause Global Food Shortage

Gaius of Blue Crab Boulevard has posted a blog about a New York Sun article concerning food riots. The current global food shortages are a symptom of Alan Greenspan's and Ben Bernanke's excessive liquidity policies. As Howard S. Katz has pointed out in his blog, the banking system in the United States and globally has lent counterfeit Fed money (or excess liquidity) about which the financial community has been ecstatic for the past three decades (calling it stabilization of the credit markets, priming the pump, reducing unemployment, ending recession, stopping depression) to build homes that no one could pay for. At the same time, too little investment was made in commodities. Thus, the sub-prime crisis and the current global shortage of food are direct products of the banking system's lending practices and the Fed's expansion of the money supply since 1981. Ludwig von Mises, the Austrian economist, called this process malinvestment. For the past 25 years the Fed printed money and stimulated home building. Too many homes were built and sold to people who could not pay for them. Too little investment went into expansion of food and commodity production. The sub-prime crisis of today results from the mistakes that the banking community made in response to the hot Fed money that Greenspan and Bernanke have been creating under four presidents, Reagan, Bush, Clinton and Bush II.

The Bush administration's solution to the malinvestment of the past three decades has been...more malinvestment. The Bear Stearns bailout, the current loose monetary policies of the Bernanake Fed and further government transfers to banks to prevent defaults from incompetently made loans keep real estate prices high and continue the massive malinvestment that has occurred in the housing sector.

From an investment standpoint, it is clear that commodities will be hot for the next few years as rising interest rates freeze out new investment in commodities (see Howard S. Katz's blog for more on what he calls the "commodity pendulum"). From a moral standpoint, the American public should be ashamed of itself for allowing this orgy of self indulgence among the various players in the financial community; for allowing transfer of wealth from people who need to eat to wealthy stock investors and hedge fund managers; and for allowing the incompetence and mismanagement that the economics establishment and the Fed have demonstrated.

To quote Gaius:

"The New York Sun reports on a trend that is not at all pretty. In some areas of the country, rice, flour and cooking oil are in such short supply that retailers are limiting the amount people can purchase. This is happening right here in the United States.
The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come. "

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