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  • From: "Tradingpost" <tradingpost@lobo.net>
  • To: livingontheland@lists.ibiblio.org
  • Subject: [Livingontheland] Rice, death and the dollar
  • Date: Sat, 26 Apr 2008 10:52:02 -0600


Finally, here is the real story. Connect the dots, and it's not hard to see
around the curve. This is why food and oil are going to keep going up and
inflation is soon going to be our number one problem.

"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. They are buying food and other stores of value
instead. ... 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."

Apr 22, 2008
Rice, death and the dollar
By Spengler
http://www.atimes.com/atimes/Global_Economy/JD22Dj01.html

The global food crisis is a monetary phenomenon, an unintended consequence of
America's attempt to inflate its way out of a market failure. There are
long-term reasons for food prices to rise, but the unprecedented spike in
grain prices during the past year stems from the weakness of the American
dollar. Washington's economic misery now threatens to become a geopolitical
catastrophe.

Months ago, I offered that China, Russia and other cash-rich nations held the
antidote to the incipient credit crisis: "If the US wants to remain the
magnet for world capital flows it became during the 1990s, it will have to
allow the savers of the world to become partners in the US economy, that is,
to buy into its first-rank companies."(Western grasshoppers and Chinese ants,
AsiaTimes Online, September 5, 2007.)

No such thing occurred, of course, as Washington has made it clear that it
would not allow sovereign funds to own the likes of Citicorp. 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. They are buying food and other stores of value instead.

Washington has weakened the value of the dollar as a palliative for the
credit crisis, so much so that "nobody seems to doubt that the US dollar will
lose its status as the world's reserve currency", as journalist Amity Shlaes
wrote in an April 9 Bloomberg News column entitled "Monks may hold clue to
dollar's future".

"Perhaps the dollar won't surrender its anchor role so soon," Shlaes
continued. "And perhaps that loss, if it comes, will happen because of events
that take place nowhere near men in suits at a central bank. Maybe the answer
to the dollar's riddle can be found in the cellphone photo image of a Tibetan
monk in crimson and orange squaring off with a Chinese soldier ... China
might recede into years of ethnic chaos. In any of these cases, the new
Chinese government won't be forced to deliver the same growth, and therefore
won't spend commensurate energy tending the dollar ... The flash of orange in
the robe of the monk is important enough to change the picture for the
greenback."

Misguided is not the word for this sort of thinking. However unlikely it
might be, one cannot exclude the possibility that "ethnic chaos" will afflict
China at some future point. The one thing that can be stated with certainty
is that long before chaos reaches China, it will have shattered a great deal
of the rest of the world.

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.

Rice price vs Euro/US$ rate, April 15, 2007 to April 15, 2008

As the chart makes clear, the ascent of the cost of rice to $24 from $10 per
hundredweight over the past year tracks the declining value of the American
dollar. The link between the declining parity of the US unit and the rising
price of commodities, including oil as well as rice and other wares, is
indisputable. China has bid aggressively for rice all year, and last week
banned rice exports, along with Vietnam and several other producers.

Euro/US$ rate vs rice and oil, April 16, 2007 to April 16, 2008


For developing countries whose currencies track the American dollar and whose
purchasing power declines along with the American unit, this is a
catastrophe, as World Bank president Robert Zoellick warned the Group of
Seven industrial nations in Washington last week. Food security suddenly has
become the top item on the strategic agenda.

Never before in history has hunger become a global threat in a period of
plentiful harvests. 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.

It is not only rice, of course, that the cash-rich countries of the world are
buying as a store of value; the price of wheat, soy and other grains has
risen almost as fast. This might deal the death-blow to America's hapless
efforts to stabilize the Middle East, where a higher proportion of
impoverished people eat off state subsidies than in any other part of the
world. Egypt has been the anchor for American diplomacy in the Arab world
since the Jimmy Carter administration (1977 to 1981), and is most susceptible
to hunger. Food prices have risen by 145% in Lebanon and by 20% in Syria this
year. Iraqis depend on food subsidies financed by American aid.

Reduced to essentials, America's foreign policy sought two unattainable
objectives: to stabilize the Middle East and destabilize China. That is an
exaggeration, of course, for Washington hoped not to sow instability, but
only to put China in its place over the Tibetan affair.

The George W Bush administration might as well have used the State Department
as a set for the Jackass reality show. American arrogance has eroded the
ground under many of the governments on which its foreign policy depends. It
is hard to characterize what will come next, except, like the stunts on
Jackass, that it is going to hurt.






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