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 [1],
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.
Notes: 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.
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