Buenos Aires, Argentina May 29, 2008

I was speaking with a friend the other day regarding my concerns about the current situation between the Argentine government and the farmers. Ironically, his reply was “Well, at least the central bank holds nearly $50 billion in foreign reserves”. I immediately responded without any doubts: “That is true… I do not know what would have happened if those reserves were not there…”.

So what exactly is the relationship of the current conflict, between the government and the farmers, and policies governing the accumulation of foreign reserves in the Central Bank of Argentina (BCRA)? At first glance one might think there is “not much” but in fact there is a connection. Were it not for the present level of foreign reserves, the current dispute could have unleashed a major crisis.

The Argentine press certainly cannot complain about the government of Cristina Fernández de Kirchner for journalists now rarely have time to become bored since events are unfolding at an extraordinary pace. There is the unionist, who on the one hand is hoping for a negotiated settlement with the government, while on the other hand is striking in the fields. The current Minister of the Economy is an unknown, while controversial export duties imposed by the former, and better known, Minister remain in place.
And let us not forget there is currently an inflation rate that we are told is supposed to console us… indicating that everything is going to be alright… just wait… patiently… etc, etc, etc….

When Cristina took office expectations were high. The economic situation was going astray and many changes were expected. So what did happen? What is happening currently with the Argentine economy? For one thing, the problems surrounding inflation were never adequately addressed and that is why those problems have not only continued to plague Argentina but also seem to be spiraling out of control. We can look to the current situation with salary negotiations to see an example of what is happening. Many unions are demanding wage increases in excess of 30% while at the same time groups that had already negotiated raises of around 20% are now coming back demanding even greater increases, motivated by the current effects of this inflation – inflation that we are told is meant to console and not to concern us. (i.e. the teacher unions for the province of Buenos Aires received a 24% increase in wages three months ago, yet are currently demanding more.)

Many were hoping with a new government in place that public expenditures would be reduced. But to the contrary, they are currently growing at an expected annual rate of 40%. The country has also seen little improvement with the energy situation and when coupled with expected lowered temperatures this year one can expect adverse effects in its aggregate supply, a situation already hit by the current standoff with striking farmers and disincentives regarding investments in production.

Additionally, rising inflation is pressuring the government to increase the amount of subsidies given to transportation and utility companies (among others) since they are not allowed to raise their rates. All the while the government has tried to sweep all this under the carpet. However, the current situation has become so untenable that they cannot expect to hide these things anymore. So what is going to happen if the government decides to decrease those subsidies? How much longer can they be sustained to avoid price increases?

Six months into Cristina’s new administration, it does not seem that things have improved very much. I would even go on to say that in trying to resolve existing problems, she has created new ones that are far more serious that the ones she was trying to address in the first place. And the most pressing concern so far seems to be the current dispute over the increase in export duties imposed as a means of domestic taxation, to increase current revenues.

This increase in farm export taxes is the straw that broke the camel’s back for it has created a conflict of historic dimensions. This fact has been determined not only by the duration of the conflict but also by the level of support given to the farmers. As an example: last Sunday over 300,000 people attended a rally in Rosario Province in a show of support. That is unheard of in this country. This situation has not only frightened foreign investors, who were the first to reduce their interests in Argentina, but local ones are becoming concerned now as well.

On the edge of this fertile farmland, and in the middle of one of the biggest booms in farm prices in history, the politicians in Buenos Aires have achieved what might have seemed nearly impossible – they have created a crisis in the agricultural sector. “Day 20. The strike continues: farmers reject government’s nine new initiatives,” says the headline on La Nación.

But farm problems are not limited to the pampas. Thanks to globalisation, they’re sprouting everywhere. “Fears grow over rice crisis,” is the front page story at the Financial Times. “Silent famine sweeps the globe,” reports WorldNet Daily. Thirty-three nations face “unrest” because of food shortages, says the IMF.

All over the world, food fights are breaking out. Not because there is too much food or too little, but because it has gone way up in price. Of course, you could put that another way: the paper money in which food is priced is going down faster than usual. There’s no less food than there was five years ago. But there is a lot more paper money. Modern central banking was invented so that we should have paper money – and have it in abundance. Now, we have so much that it is causing food prices to soar.

But food is hardly in a class by itself. When one bubble pops, the authorities immediately begin pumping up another one. After the dotcom bubble deflated in 2000-2001, up came even bigger bubbles in residential housing and the financial industry. Now, both housing and finance are losing air. But the central banks are still pumping hard. Where’s the air going? Apparently, into commodities. In other words, worldwide inflation of food prices is a monetary phenomenon, as Milton Friedman might put it, not an agricultural one.

To show you the scope of the phenomenon, we pull out a copy of The New York Times from 19 October, 1896. There, it is recorded in black and white that the average wheat price was about $1 a bushel – in gold – during the previous 20 years. An ounce of gold would buy you 20 bushels of wheat. Today, you can buy a bushel of wheat for about $12, which means an ounce of gold will buy about 75 bushels of wheat. In terms of real money – gold – the price of wheat has gone down for more than 100 years. In other words, however fast farmers have added to the world’s wheat output, central banks have outdone them, planting far more acreage in paper money.

And now that governments have caused a crisis, they are hard at work making it worse. In Argentina, the farmers are few; city dwellers are many. Argentina’s Peronistas can do the maths. They make out the farmers – historically patrician landowners with large holdings – to be greedy and insensitive. The politicians imposed a 49% windfall tax on foreign sales. The measure should lower prices for Argentine consumers and raise money for the government, they reasoned. It seemed like a no-brainer. That is, until the Gauchos blocked the roads into Buenos Aires and threatened to starve the city.

In America, the maths is different, but the result is equally imbecilic. There aren’t many farmers out on the prairie, but in Washington there are more farm-state US senators than pigs. They push and shove up to the taxpayers’ trough to get huge subsidies for their hometown campaign donors – lately, in the form of bio-fuels. Corn-fed ethanol may make no sense in environmental or energy terms, but it lubricates the big wheels of national politics. In the event, it takes a third of the US corn crop out of the food chain and puts it to use in the drive train – further driving up grain prices. With bread prices on the rise, politicians feel compelled to intervene. And every intervention falls upon the crops like a cloud of locusts.

Last Friday’s 10% spike in rice prices came as governments moved to corner the market. Three billion people, many of them with very marginal incomes, eat rice every day. The price of rice rose 50% in the past two weeks, causing Thai farmers to sleep in their fields to protect their harvests, while the Philippines posts armed guards at its granaries. Vietnam, India, Kazakhstan and China have all restricted foreign sales. The exporters are coming under pressure to export less – in order to lower prices at home. The importers, meanwhile, have no choice but to try to get as much of it as possible, as soon as possible, in order to head off shortages. Result: a run on rice.

India’s trade minister warned hoarders: “We will not hesitate to take strong measures…” Of course, hoarding is exactly what a smart family should do. Most likely, there will be runs on other commodities, too – and then a run on gold itself. People will want something real… something sure… something with which they can buy rice, without having to worry about it doubling in price two weeks later. That something, traditionally, is gold.

Hoard it now, while you still can.