Tuesday, April 15, 2008

Eco Hubris

There are a number of articles around today about the growing shortages of food around the world. Click on the title of this post and also from the NYT. Both of these articles blame ethanol use for the shortages of food that are developing and some articles have also highlighted the change in diet in the developing countries to a higher protein content. But all of these articles are beating around the edges of the real problem - government intervention in the market place.

Grain prices are high today for a variety of reasons. Ethanol is certainly one of the problems. I have ranted more than once here about agriculture subsidies of which ethanol is just another version so I won't bore you with details. Just suffice it to say that diverting 20% of the US corn crop to the very inefficient production of ethanol was bound to have some unintended consequences.

But there are other government created causes as well. Zimbabwe was once a net exporter of agricultural products and now is starving because Mugabe expropriated all the farms from the owners who had the knowledge to operate them. The land was re-distributed to Mugabe favorites who have no clue about how to produce crops. How long before Venezuela faces the same problem?

But the most egregious cause is the one no one ever mentions - monetary policy. The US Federal Reserve and the other central banks of the world are the cause of this inflation. For years the Fed has met every "crisis" with another run of the printing press. Commodity inflation is just the latest incarnation of the bubble culture produced by such profligate money printing. The editorial from the Telegraph linked above attempts to place the blame on speculators that are driving up grain prices:

Hedge funds played their part in the violent rise in spot prices early this year. To that extent they can be held responsible for the death of African and Asian children. Tougher margin rules on the commodity exchanges might have stopped the racket. Capitalism must police itself, or be policed.

By that reasoning, my clients and I are causing the death of innocents in developing countries as all our portfolios hold commodity positions (in the form of index funds). I do not accept that I am the problem or that capitalism itself is the problem. The reason I hold commodities is because it is the only true way to protect myself and my clients from the inflation caused by the governments of the world. When the Fed holds interest rates artificially low it makes it less costly for food producers and speculators to hold larger inventories of grain and other commodities. They are merely responding to the economic incentives provided by the Fed's price fixing in the money market. The problem is central banking and it is the antithesis of capitalism. Capitalism doesn't need policing - government needs policing.

Government, in alliance with do gooder environmentalists, caused this problem. And government will not solve this problem except by allowing the market to work. The starving children of Africa and Asia should be lain at the feet of people like Al Gore and Charles Greassley. Al Gore bought a Nobel Peace prize on the empty bellies of third world children by his alarmist rhetoric about the mythical dangers of global warming. Grassley bought his Senate seat by snatching a tortilla from the mouth of a child in Mexico so he could send tax dollars to corn farmers in Iowa.

The governments of the world are already compounding the problem:

Whatever the arguments, politics is intruding. Food export controls have been imposed by Russia, China, India, Vietnam, Argentina, and Serbia. We are disturbingly close to a chain reaction that could shatter our assumptions about food security.

These problems were utterly predictable. The consequences of inflationary policies have been well known for years and have not changed. To quote von Mises: "Continued inflation inevitably leads to catastrophe." and "The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy." and "Inflation and credit expansion, the preferred methods of present day government openhandedness, do not add anything to the amount of resources available. They make some people more prosperous, but only to the extent that they make others poorer."

I believe that most people who advocate government intervention to alleviate the various maladies that plague our societies are acting in good faith. I believe their hearts are in the right place. Unfortunately, the policies they advocate only make the problems worse or cause new problems which they see as more opportunity to bring the heavy hand of the state to bear.

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