Inflation, a Worldwide Plague

"The surge in grain prices has caused U.S. Midwestern land values to rise as well, but prices have now expanded so far, so fast that some experts worry that the farmland market has become a bubble waiting to burst. ... The U.S. Department of Agriculture estimated that the price of an average acre of U.S. cropland rose 13% in 2007, to $2,700, more than double the $1,340 price of 1998. It predicts another 15% rise this year", WSJ, 7 April 2008.

"Inflation is back. After years of relative stability, a wave of rising prices is washing over the world economy. It comes at a most inconvenient time. The [Fed] is sharply cutting U.S. interest rates--the opposite of the usual response to rising inflation--to prevent the housing bust and credit crisis from causing a deep, prolonged recession. That's making the global response to inflation more complicated. ... High food and energy costs hit developing countries--where consumers spend a larger share of income on those necessities particularly hard. ... On Wednesday, the World Bank estimated global food prices have risen 83% over the past three years. ... But the fact that inflation is rising almost everywhere suggests some of its causes are global. As crops are sold for alternative-energy production, food prices have soared: The price of rice, the staple for billions of Asians, is up 147% over the past year. ... But the economic boom in emerging markets also means their currencies and prices are steadily rising, boosting the prices rich countries pay for imports from those poorer countries. ... Core inflation, a measure that excludes volatile food and energy prices, is not rising as quickly as overall inflation. ... In the U.S., Fed officials are concerned that food and energy prices have increased inflation even though the economy is sliding into recession. ... As [Mongolia's] income from copper exports surged, inflation reached 15.1% at the end of 2007. ... In Qatar, a rich emirate jutting into the Persian Gulf, surging revenues from natural-gas sales have led to more government spending. ... So is inflation, at 13.7% on the year in the last quarter of 2007. In part that's because Qatar followed its currency peg and moved in step with the Fed's rate cuts. ... That has triggered strikes and riots in the [UAE] by construction workers. ... 'Australia has done all right because the currency has been quite strong, and interest rates are high', says Ben Simpendorfer, an economist for the Royal Bank of Scotland. 'The Gulf states might have looked more like Australia if it weren't for the pegs'," WSJ, 10 April 2008.

"China's government allowed the country's currency to rise to its highest level against the dollar in more than a decade, despite weakening global growth, an indication that Beijing views rising inflation as a bigger danger than the risk of an economic slowdown. ... The yuan has now gained more than 18% against the dollar in less than three years, although it has been flat or even down against other major currencies, such as the euro. ... 'It's going to go a lot higher,' says Jim Rogers, a U.S. investor and self-described China bull. Mr. Rogers says the Chinese currency has the potential to strengthen to just two yuan to the U.S. dollar--a 2 1/2-times rise from current levels. ... Inflation is a social-security issue in China. Rising prices of cooking oil and meat were cited last month by residents of Lhasa, the capital of Tibet, as helping foment anger that resulted in riots. ... Already, inflation has clocked in at the fastest pace in 12 years in recent months, including the February rise in the consumer price index of 8.7% from the year before", WSJ, 11 April 2008.

"Finance ministers gathered this weekend to grapple with the global financial crisis also struggled with a problem that has plauged the world periodicially since before the time of the Pharaohs: food shortages. Surging commodity prices have pushed up global food prices 83% in the past three years, according to the World Bank. .. World Bank President Robert Zoellick warned in a recent speech that 33 countries are at risk of social upheaval because of rising food prices. ... Among other targets, [the IMF and World Bank] signaled out U.S. policies pushing corn-based ethanol and other biofuels as deepening the woes. 'When millions of people are going hungry, it's a crime against humanity that food should be diverted to biofuels,' said India's finance minister, Palaniappan Chidambaram, in an interview. ... Recently at least a dozen of 58 countries surveyed by the World Bank have reduced tarriffs to food imports and erected barriers to exports in hopes of restraining food prices domestically and moving toward 'self-sufficiency.' ... The global effect of export barriers, however, is to drive food prices even higher than they would be otherwise. ... About 18 of the countries sampled by the World Bank also are boosting consumer subsidies and instituting price controls. That prompted a warning from U.S. Treasury Secretary Henry Paulson to 'resist the temptation of price controls and consumption subsidies that are generally not effective and efficient methods of protecting vulnerable groups.' He said, 'They tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries'," WSJ, 14 April 2008.

The Chinese, Arabs and others will eventually wake up and decrease their dollar reserves. That they still support US domestic consumption to the detriment of their own people, astounds me. The Chinese should be particularly aware of their "inverse" socialism in taking from poor Chinese peasants, to give to rich Americans. Wild.

China's domestic stability is more important to it than maintaining a large trade surplus. I expect the yuan to continue to rise over the next 3-5 years.

Amazing, I agree with Paulson about the undesireability of price controls and subsidies. Now if he would only apply that logic to US interest rates and potential homeowner bailouts.