The Largest Supply Side Shock Since The OPEC Crisis Of The 1970s

food storeMy Comments: I realize that many of you have no idea what happened in the 1970s. I’d like to forget some of it so you’re ahead of me.

The OPEC Crisis was a move by oil producing nations in the middle east to cut supply drastically, which caused gas prices to jump dramatically and leave those of us driving cars standing in line for hours to buy a few gallons at what would now be gas at $14.99.9 per gallon. Most of us try to bury bad memories.

James Montes says we’re in for another crisis, only this time over food. And it plays into what is happening in Ukraine. Up to now my reaction to that issue has been to blame Putin and his ego, along with his need to re-assert the primacy of the former Soviet Union. This article puts an entirely different light on the matter.

It also brings to mind a remark made some years ago by someone I followed daily by the name of Thomas P. M. Barnett (whatever happened to him? Is he still alive?) He said that in 25 years, there would be three primary economic drivers in the world: The US, China and India. We would have supremacy as we are the only one of the three that can feed itself and share our bounty with the rest of the world.

Makes you wonder why the Tea Party folks want to deny global warming and not find ways for us to retain our position as #1.

Apr. 27, 2014 James P. Montes, Equity Management Academy

Summary
• World food shortages causing social unrest.
• Ukraine crisis spreading.
• Inflation will spread beyond food prices.

A future filled with inflation, creative government expropriations and changing borders in Eastern Europe.

The Ukraine was not a local, spontaneous, organic event, but part of a larger pattern of social unrest in Brazil, Argentina, Thailand, South Africa, and across the Arab world, which share a common thread: A rising cost of living for at least two years before all hell breaks out. When food costs rise dramatically, people ask, “Why is the wealth in my society being distributed to some other guy and not to me?” The question led to the overthrow of dictatorships in the Middle East and, in Ukraine, the answer was to join the EU. The Russians said, “No way.” If Ukraine joined the EU, it would mean NATO right on Russia’s border, which would be like a Cuban Missile Crisis for them.

Russia was far more interested in retaining Ukraine as a close ally. Ukraine is the world’s fourth or fifth largest food producer, all the gas pipelines that supply Western Europe go through Ukraine, and Russia’s only warm water port, Sevastapol, is in Ukraine.

The crisis over Ukraine is spreading as other pockets of ethnic Russians in Georgia, Lithuania and Latvia, as well as other ethnic groups, such as the Scots in Britain, the Catalonians in Spain, and the Venetians in Italy, decide that, since their governments are in such deep debt, they want greater local control over their economic futures.

What is causing the rise in food prices?

Most people believe that with so much demand for food from China and the emerging markets, that the world does not produce enough food to meet demand. In a world where banks are not lending, farmers are incredibly dependent on credit, especially in emerging markets, and if they can’t borrow, then they can’t buy feed, so they can’t plant. This chain of events is causing the largest supply side shock since the OPEC crisis of the 1970s. Chinese food prices are up 17.3% in a year. US beef prices are at an all-time high. The size of the US cattle herd is at its lowest level since 1951 because the cost to raise cattle is virtually the same as the market price for beef. Inflation has eaten away any profit from the increase in price, so there is no incentive to raise more beef.

Inflation will spread beyond food prices. Even as the United States becomes more energy independent, US energy prices rose 16.5%, far above the official inflation rate. Natural gas is relatively cheap because there is no distribution network, but a network is now being built and, once completed, the price for natural gas will rise rapidly.

In global terms, certainly China, and increasingly Russia take the view that the US, UK and Japan are all choosing to write off their debt or default on their debt by going down a more inflationary path. Therefore, China and Russia want to acquire more gold. The Chinese foresee that if the West debases its currency enough, the Chinese will be left with the only viable, hard currency.

In pursuit of the acquisition of gold, Russia and China are already decreasing their purchase of US Treasuries. Belgium is now the largest buyer of US Treasuries. The Chinese and Russians do not want to buy any more US paper assets. They want to buy real things, infrastructure, property, gold, and agricultural assets.

Since governments lack the funds to fulfill the promises they’ve made to the public, expect various forms of expropriation to become more common. Inflation is expropriation…It takes money out of your pocket. Colorado’s legalization of marijuana is a way to generate government revenue while lowering the cost of enforcing drug laws. Italy imposed a 30% withholding tax on all inbound wire transfers. Governments are also seeking scapegoats for the recent economic downturn. Governments are launching investigations into various exchanges, the LIBOR and other organizations to constrain the financial industry and to raise additional revenue through huge fines.

There are more innovative ways for governments to raise money, which are consistent with raising GDP, rather than inflation, which, hits the poor the hardest. With food prices rising, the poor are driven to eat cheaper food with empty calories, which can only harm their health. There is a coming division in society between those who own real property and stocks, which do well during inflation, and those who do not own such assets. Such a two-tier society isn’t sustainable and creates the elements for social unrest.
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