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
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, Asia
Times 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
"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.
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,
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.