Hyperinflation is now here: Food prices rising

The Globe and Mail says that 7% price increases in food could be on their way to Canada. What is to blame?

Bad crops around the world, oil trading for more than $100 (U.S.) a barrel and the economic recovery are driving prices higher.

Key words that do not appear in the article:  money base, quantitative easing, Ben Bernanke, Federal Reserve Bank, Bank of Canada, low interest rates, deficit spending.

The media’s general lack of awareness and insight into what ails the world leads me to believe that they are stuck on stupid.

My investment conclusion:

Short:  US dollar, all fiat currencies

Long:  Wine kits, beans

Hyperinflation is now here II: Food prices

Bruce Walker writes today at the American Thinker that food prices are what is going to do in President Obama’s chances in the next election.  One of the signs of hyperinflation is spiraling out of control food prices, and Walker points out that the food commodities are up 27% over the last six months.  I don’t know about you, but a 54% annualized increase in food commodities looks a lot like hyperinflation to me.  I wrote a post in August 2010 that dealt with food prices, which I reproduce here:

August 3, 2010

What’s wrong with inflation? Do you have enough to eat?

Monty Pelerin has a excellent article on inflation this morning.  He maintains that the great temptation for government will be to try to solve the problem of debt and unfunded obligations by inflating it away, and that, since politicians are cowards, they will not make the tough decisions to avoid inflation.  He writes, however, about the consequences of inflation:  “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

I believe that the real danger of inflation may lie in the consequences it will  have on the food supply.  Never mind that food shortages have never been a problem in the living memory of most North Americans (unless they are over 75 or immigrated here from a war zone or something).  Today, obesity in developed countries is feared more than starvation.  So I made the following comment on Pelerin’s blog:

I am reading Adam Ferguson, When Money Dies (1975). He tells the story of Frau Eisenmenger, an Austrian who at the end of WWI had sufficient investments to live on and care for her family (31). She went into her bank in 1918 to withdraw some funds and her banker advised her to buy Swiss Francs, but it was illegal to hoard foreign currencies, and so she declined. Eventually, her savings became worthless. Her situation was greatly helped by her daughter working in the “American mission” paid in dollars, renting a room in her apartment to an American, and speculative investments in the Austrian stock market.

I fear that what will happen is similar to Europe in that period, when food was scarce and required a large percentage of income to procure. Eventually, the price of food will sky rocket and so more dollars will be created ex nihilo. Then the farmers will refuse to supply their food to people for worthless dollars and food stamps from the government, and they will have to stop producing–because their costs have to be covered too. Then, we will see shortages like never before. A farmer offered Frau Eisenmenger three month’s provision for her grand piano (33); and an acquaintance of hers sold her own piano for a sack of wheat flour.

Commodity inflation is caused by monetary inflation

Cullen Roche of the Pragmatic Capitalist in his Dec 23 blog (via the Business Insider) made the claim that the rise in commodity prices has nothing to do with quantitative easing (emphasis his):

Well, I think it’s becoming pretty clear where the commodity price inflation is coming from – China and genuine economic strength.  The entire inflationist argument in the United States has been pretty much dead wrong for over two years running – whether you believed in hyperinflation, high inflation or default due to “money printing” you have been well off the mark.

Yet the inflation markers Roche is looking at exclude explicitly food and energy prices.  As one commenter on Gonzalo Lira’s latest blog points out, the media and the Federal government are lying:

Further the media and the FED are blatantly lying about inflation. Look at this CNN article that uses the slight [sic] of hand approach when talking about China’s inflation problems [Chinese inflation spikes on food costs].  After talking about the dangers China faces with it’s inflation it states in the article “Compare that with the United States, where the CPI has been sluggish for months. In October, the U.S. CPI increased a modest 1.2%, according to the Bureau of Labor Statistics. Excluding the volatility of food prices, the U.S. CPI rose 0.6%.”

So when it’s in China it’s inflation and when it’s in the US it’s not.  I’m not making this up.

But the fact is that somewhere around QE1, the Chinese stopped buying US debt and have been diversifying their holdings.  They are, for example, investing in oil companies in Canada.  This has resulted in a tremendous dilemma for the US.  How can they keep the behemoth of the US government running without that the Chinese invest in the Federal debt with their US dollars, made through the trade surplus with the US?  The answer is QE2, and Gonzalo Lira estimates that 60% of the new US treasury debt is now bought by the Federal Reserve.

And now, the problem of food inflation is much worse than ever.  Today, both the Financial Post and the Globe & Mail have prominent articles on the recent food inflation numbers.  Of course gold is holding around $1375; oil around $88; but these may end up skyrocketing in price soon.  Blame it on speculators if you like.  But this has everything to do with QE1,2 … infinity.  For the Federal government is now monetizing its debt and there is nothing even the newly elected Congress can do about it.  Even if they refuse to raise the debt ceiling, the government will just borrow the money from the Social Security and nothing will stop Bernanke from monetizing old debt as it expires.  When a government does this, they can expect commodities to increase: heating fuel, food, gasoline, textiles and eventually electricity.  These are the very things that we eat, wear and burn to live.  Now it’s happening and all over the media there is denial–not just the Pragmatic Capitalist, but all over the major media, even smart smart people like Niall Ferguson are still claiming that deflation is the problem.  But excuse me, when people can’t afford to eat anymore, that’s a problem isn’t it?  Are they stuck on stupid?

What happens during hyperinflation?

1.  Commodity prices, especially food, soar

In Weimar Germany food inflation was severe.  A bag of potatoes could buy a grand piano.  People used all of their disposable income just to put food on the table.

2.  Financial markets are highly volatile

The stock market in Weimar Germany would soar and plummet.  But in the end, shares in stocks lasted while the Weimar mark became worthless.  Commodity prices, though in a secular bull market, will remain volatile with huge swings as it rises steadily upward.

3. Gold and silver retain their value

In Zimbabwe, everyone who is able is a gold panner so as to buy food, for it is now possible to buy food with gold dust.

4. More stable currencies are desired

Many countries around the world use US dollars because their own currencies are so unstable.  Apparently US dollars are now legal tender in Zimbabwe.  In Weimar Germany, it would have been useless to own the likewise hyperinflated Austrian kroners instead of marks, but useful to own US dollars or Swiss Francs.

5. Real estate is uncertain asset

It may be worthwhile to own real estate debt just before an hyperinflationary period, for the value of that debt will plummet faster than interest rates can rise.  But it is also probably true that rental income will not keep up with inflation.  I read a story about hyperinflation in Chili in which a man was offered a condominium for his car.  The condominium, according to the author, is now valued in the hundreds of thousands, while the car sits in a junkyard.

What to do?

Perhaps it’s a good time to hoard large stores of food before the prices get completely out of hand.  Either that or an investor must have something that can be used to barter for food, such as wine or precious metals (in bullion–bars or coins), gold and silver.  In my view, the Canadian loonie may serve the role that the Swiss Franc did in Weimar Germany.  It is true that the loonie has suffered laughable interest rates, but the Canadian economy is resource rich and those economically healthy parts (e.g., China) of the world are pouring their money into the economy up here and are abandoning US debt.  So it might be good to have some Canadian money or some Swiss Francs.  I wouldn’t bother with the Euro at this point.