Did you hear the one about the chap diagnosed with high blood pressure who was told by his doctor to go on a low-sodium diet? He continued with his usual diet but threw away the blood pressure monitoring equipment. Unfortunately, this person is not around with us today to share his experiences.
Much as the fervently religious may find the possibility of humans landing on celestial objects disturbing , various people who may otherwise be accused of intelligence are disconcerted by flows of information in the markets.
These involve things as varied and mundane as commodity prices or greater disclosure of derivative losses by banks. Rather than trying to accept the rationale of price changes and understand the causes for such volatility, market turmoil inevitably leads to the resurgence of off-market forces, including sundry protectionists, communists, liberals and other riff-raff. Consider the following examples, which occurred in the recent past:
America’s Securities and Exchange Commission announced new rules requiring banks to provide greater disclosure on their investment and derivative losses, prompting a sell-off in bank shares globally. In effect, people who had been holding these shares had relied on banks providing them with less information in order for share prices to keep rising and they thus feared the deleterious impact of more information.
Various governments around Asia, including China, have threatened their farmers not to raise the prices of staple goods such as rice and pork. Other governments such as those of the Philippines have threatened hoarders with imprisonment in order to combat rising food prices. These ideas are illogical on so many levels as to boggle the mind.
India’s government banned activity on many of its commodity futures exchanges, blaming them for rampant speculation in the price of rice and other goods. Without such an exchange, Indian farmers and primary producers can no longer hedge their production; this would in turn lead to greater inflation and potentially worse supply shortages in future.
European government officials have used the excuse of recent food price increases to defend the CAP, or Common Agricultural Policy (see previous article Bankrupt policies, empty stomachs, Asia Times Online, April 19, 2008). This policy is perhaps the greatest crime against humanity being committed today; in the name of European stability it is directly responsible for starvation deaths and malnutrition of millions of people in Asia and Africa.
The most extreme example of governments fearing the availability of information comes in the current tragedy in Myanmar, where the feckless but still ruthless military junta refused to allow shipments from countries such as the United States that had criticized its military, even as an estimated 100,000 people died in the latest weather tragedy. This is beyond shocking. It is not easily related to the food-linked issues highlighted above, but it still follows the same pattern of governments fearing the flow of information.
Additionally, there has also been the widely reported tit-for-tat exchange between the US government and various Asian governments, after President George W. Bush cited the growing prosperity of China and India as the primary mover of commodity prices, while Asians contend that it is America’s deeply flawed bio-ethanol policy that is to blame.
Unfortunately, they are both right. While the rise of China and India has indeed increased global demand for food as people demand better nutrition, the flawed policy of making bio-ethanol from corn has caused a substantial portion of food supply to be diverted to non-food purposes, in an unsustainable relationship. I will explain below why Asians miss a central part of the market illogic driving this process.
Trusting the markets
When told that rice prices have doubled in some parts of Asia, the natural instinct of people would be firstly to express disbelief and secondly to hoard some rice immediately (in turn pushing up the price of rice). Eventually, rising prices of rice cause more farmers to plant the crop and supply-demand equilibrium is restored thereby helping to cut unit prices. The process is painful, especially for poorer people but it works out over a period of time.
Not without coincidence, India is also a place where you can see people more intelligent than their government. A recent headline pointed to the emerging adoption of a subscription-based SMS by Indian farmers, which gave them access to latest prices for various agricultural products and also provided relevant information such as on crop weevil infestation. This is intelligent use of modern technology by farmers who want to be aware of the latest trends and updated information, all for the princely sum of US$1 per month.
As I wrote previously in Jihadi ate my homework, the context couldn’t be more poignant given the rising number of farmer suicides in the country as well as an attendant increase in conscription by economic terrorists such as the Maoists in various Indian states. A large part of the problem for Indian farmers is the lack of price information that could help them to change their crop plantings, as US farmers frequently do. Instead, many Indian farmers stick to the same old crop patterns, which combined with lower investment in agricultural equipment all too often causes heavy losses for them.
Countries like China and India cannot adopt the practices of Japan and Europe, wherein farmers are guaranteed high prices for their produce in return for no competition; this works because the populations in such places are small relative to Asia’s giants. The two countries have to use free markets as a means to control production and ensure the functioning of strong distribution channels.
At this point, some may question an apparent illogic in my arguments, involving the sale of corn by US farmers for bio-ethanol. After all, they are only selling their produce to the highest bidder, so why should they be forced to sell to the poor Mexicans making tortilla rather than the rich Americans making ethanol?
Firstly, the price of ethanol is heavily subsidized by the US government, therefore the above example is not a simple one of market dynamics. Thus, Asian governments criticizing the US for this policy are partly right. However, there is also a part where they are wrong.
The answer to that question isn’t a question of price, but rather of value, namely that of the US dollar. If all emerging countries had dumped their US dollar reserves in favor of physical commodities as I have been recommending for a long time now, the value of the US dollar would be, in a word, trash. In turn, the equivalent price paid by Mexicans for their tortilla would be higher than what Americans can pay for their bio-ethanol, essentially driving US farmers to sell their grain to Mexico rather than ethanol processors.
If Asians ever get around to understanding that the US and European governments are subsidizing their own consumption at the cost of the future value of Asian savings, they may avoid the temptation to buy worthless securities issued by these governments and instead focus on physical commodities and gold.
Communists and their acolytes in various forms, including in the form of stability-seeking market investors, like to hide behind the facade of ignorance to protect their own interests. It has been proven numerous times over the past few decades that such forms of intervention inevitably lead to painful adjustments later on, be it in the form of the collapse of the Soviet Union or the decline of Asia in the late nineties. Denial of price adjustments is the easiest way to perpetuate a problem, with the use of subsidies serving the worst possible end of actually pushing up future inflation – a lesson that Latin America learnt painfully in the past few years.
Americans used to buy gas-guzzling SUVs until oil prices doubled at the pump. Now they are queuing to purchase small cars with high fuel efficiency. As an added benefit, overall US transport emissions will decline in the next few years.
Despite all the right ammunition in their hands, it is a pity that Asians are resorting to the wrong tack in tackling the current set of problems, which have been unleashed by the US and Europe to protect their own long-term interests. Perhaps what bugs me more is the sheer lack of confidence being shown by the region in tackling its largely self-made problems.
So the message for Asians is: don’t get angry about the price of rice and other food. Get your governments to dump their foreign-exchange reserves and corner the market for physical commodities including food and metals globally. This will reduce local prices across Asia and bump them up in the US and Europe. After that, sit back and enjoy the fun.
1: A few years ago an American magazine conducted interviews of Saudi youth, during which one young person denied the possibility of America having ever sent men to the moon. This wasn’t a nuanced rejection of manned space vehicle technology based on the oft-cited (at least on the Internet) concerns about radiation and orbital velocity, but rather a rejection based on mal-education. Even on that score, there are certainly no doubts that America sent unmanned vehicles to the moon and towards various distant planets, but such notions were also dismissed in that interview. “It is not possible because the moon is holy”, the youth reportedly said.