Agflation: Feeding the world

I’ve mentioned Agflation previously and we’re starting to see more concern expressed at the official level. The UK Government’s Chief Scientific Adviser, Professor John Beddington, has weighed into the debate calling food shortages a problem that was as immediate as climate change. The driver of agflation is two fold: increased demand driven by population growth and increasing development and supply shortages caused by deforestation to grow biofuels.

These two drivers are causing major price rises in all food groups. This creates what might be called “real” inflation, a price rise in the cost of real goods as opposed to asset inflation which is more of a monetary phenomenon.

This is a real problem because it can’t be solved by the hammer of monetary policy though the myopists in their central bank ivory towers seem to think so.

I can imagine their conversation: “let’s raise interest rates so people eat less”.

In many countries people are exhorted to have more children especially in developed economies where birth rates among the middle classes have fallen. So how can we stop the population expanding and how are we going to feed all these people and do it in a manner than the ecosystem can cope with.

It’s a tricky question. One could argue that food shortages, famine, disease and natural disasters regulate populations. That may still be the case. But can we rely on that and should we given we are more enlightened, well supposedly.

Population growth was for a long time a favourite topic for policymakers but has only recently come back onto the mainstream agenda. There is no doubt that the growth in biofuels has played a major part in this and that governments who have set targets for biofuel supply may well need to go back and think more carefully about how the unintended consequences of this feel good policy will play out.

Money’s too tight to mention

As the credit crunch continues to spreads its woes my inbox is filling up with offers from NZ banks (all Australian owned by the way) to buy various types of debt with fabulous names:

- Perpetual non-cumulative preference shares

- Perpetual callable sub-ordinated bonds

All offering north of 10%. A no brainer for bank debt surely?

Well yes it is. Let’s face it if the bank goes belly up we’re all stuffed. How much is deposit insurance worth these days? Probably not much. But the reason behind this rush of issuance is more interesting.

Banks have plenty of cash on the books, known to us as our deposits, but recorded as unsecured liabilities in the bank’s balance sheet. Yes we are not really depositors but merely unsecured creditors.

So why do banks need to raise more debt or more to the point equity dressed up as debt? Well their balance sheets are under severe pressure and they need to meet the requirements laid out in Basel II which means they need more equity on the balance sheet in order to lend out all this cash.

This is not good news at all. It means banks are constantly trying to tidy up their financial position which is tenuous at best.

In the US mortgage backed bonds, normally AAA, are trading at their widest against US treasuries since 1986. There is some serious de-leveraging going on even in the most liquid and traditionally safe markets. This is a harbinger of further losses to come. Many players are now starting to realise that the financial system is in structural distress.

Suddenly owning a few dairy cows seems like a sensible investment.

Municipal Bonds: The Rating Game

Local cities and states have finally woken up to the way in which they are systematically fleeced by the rating agencies. Bill Lockye, the Californian Treasurer, is leading a campaign to change the way in which their bonds are rated.

Often they are rated poorly which then requires a nice fat insurance payment on top. This simply transfers more taxpayer funds to the financial sector.

Ok so it’s just another racket but what I like about this is the awakening from local financial institutions and the realisation that they can do things a bit differently.

What is to stop local governments from issuing their own bonds to their own people for local projects? Take that a step further and what’s to stop them from issuing their own local currency.

The current crisis is helping many people to see through some of the smoke and mirror charges imposed in the course of financial transactions and the system is becoming more transparent as “special purpose” structures and entities are revealed to be nothing more than methods to add on commissions and fees as many times as possible.

Economics Matters

I’ve finally finished Tim Harford’s book “The Undercover Economist”. I highly recommend it to anyone who wants to gain some insight into the economic questions that really effect us.

Forget about the behaviour of small firms or the slope of the IS/LM curve. Think about why people get out of bed in the morning, pay silly prices for a cup of coffee and can’t build a business on Cameroon. Think about how China has grown so fast. How did it happen? Why?

I was lucky enough to attend a lunch last Friday in Wellington (thanks Jim for the head’s up) and hear Tim talk about his new book “The Logic of Life”. I’m looking forward to reading it. It crosses back and forth across the social science spectrum which i believe is incredibly important for an economist to do.

It’s not just about numbers and graphs. As Tim says, it’s about people and the things they do, resources they use and how and why they do it. When I studied economics (University of Manchester 1987!) we lived in a faculty of social science with the option to major in one of 11 different topics as diverse as social anthropology to accounting and finance. These days you’re likely to find economics buried in the commerce faculty.

This approach has failed the student as it presents economics as being about business and numbers. It isn’t at all. Those are merely outcomes and outputs. How people allocate scare resources is a combination of anthropology, psychology, politics, finance, geography , history and so on.

The silo approach that many universities have taken goes counter to the understanding we have developed of systems and the extra efficiencies that coherence or consilience brings.

Economists like Tim Harford will bring new interest to this critical subject and hopefully widen the lens that it is viewed through. After all any economist who can discuss the market for blow jobs with a straight face has to be on to something

National Security: $ on the verge of a nervous breakdown

It reads like a Tom Clancy plotline: The Senate Select Committee On Intelligence gets briefed on the national security implications of a collapse in the $. Suddenly there is a realisation that the US is very exposed not just economically but politically. Those who have read “Debt of Honour” will be familiar with the plot which involves a crashing of the US financial system using a coordinated attack on the $ and the Treasury market. Alas this is now not fiction but real time.

The $ is being abandoned wholesale and the US intelligence service is right to be focusing on what this could mean for national security just as the Pentagon did when they commissioned a report on the security implications of climate change back in 2004.

With Gold heading towards $1000/oz, Oil above $100/bl, the $ in freefall and the financial system in a mess, one could be forgiven for thinking that things couldn’t get much worse. Well stock prices still have plenty of room to fall and probably another 10-15% is about right. Property will continue to sag also.

But the main problem is the US getting the big fat raspberry from the rest of the world. It’s stretched militarily, politically it’s pretty much lost all credibility and now economically its kaputski, as its Russian pals would say.

Who caused this mess? Well according to some it was Sir Alan. No not Alan Sugar of Asmtrad and Spurs fame but Alan Greenspan. This little piece on his actions in 1987 paints an interesting picture.

Let’s hope someone with half a brain is in charge back in Washington otherwise this could get very messy.

Chicken Licken: The Market Speaks

Back in January the Indy ran a story on the life and times of battery farmed chickens. As you might expect it didn’t make pleasant reading.

Now following the campaign against battery chickens The Independent reports an complete sell out of free range chickens in the UK.

Figures suggest that in 2007 the sale of battery farmed chickens fell by alomst 10 million birds whilst consumers bought 4.4 million more free range.

This is the consumer voting with their wallets and this is how it should be: a change in individual consciousness.

It’s also interesting the overall sales fell by nearly 5% suggesting that some consumers turned away from chicken altogether.  Again this is an outcome of raised awareness.

It just demonstrates what can be done when the consumer shifts.