The Egyptian revolutionary movement will spread as food becomes scarcer
It is worth bearing this observation in mind when analysing the apparent catastrophe of a further spike in food and oil prices. I say apparent, because there are more positive ways of looking at this phenomenon which don't entirely fit with the present mood of declinism that has come to instruct all aspects of debate around the global economy.
On the face of it, rising oil and food prices are something very much to worry about. With many Western economies still flat on their backs and emerging markets slowing fast, the present surge could hardly have come at a worse time. Rising energy and food costs provide a further dampener at a time when the headwinds are already severe.
It seems that every time Western economies show some sign of climbing out of the mire, along comes another oil price shock to push them back in.
Meanwhile, the most severe US drought in 25 years has sent grain prices soaring, adding to the already debilitating effects on world food supply of a poor monsoon season in Asia and a bad harvest in Russia and Ukraine. In our own neck of the woods, high levels of rainfall have wrecked the annual harvest from potatoes to wheat, apples and Brussels sprouts.
Looking at the phenomenon globally, this is the third such food price shock in five years. Previous such episodes have spawned mass riots, and the last one is often cited as a major factor in the Arab spring.
The immediate economic effect is to reduce the scope central banks have for applying offsetting stimulus, and to undermine discretionary expenditure on other things, particularly in developing countries where food and fuel costs soak up a disproportionately large part of income.
Supply-side shocks of this sort make life particularly difficult for monetary policy, for they push both ways. They add to inflation but they also depress output, the very opposite of what happens in more normal times. There is nothing central banks can or should do to try to counter this type of cost-push inflation. You just have to learn to live with it and accept that it makes everyone, except the big producers, worse off. To try to counter it by raising interest rates would only deepen the recession.
Comment: This is actually untrue. It is not the supply of goods that determines inflation but the supply of money, which lies squarely with the banking system. As Ellen Brown writes in Web of Debt:
The rampant runaway inflations of Third World economies are widely blamed on desperate governments trying to solve their economic problems by running the currency printing presses, but closer examination generally reveals other hands to be at work. What causes merchants to raise their prices is not a sudden flood of money from customers competing for their products because the money supply has been pumped up with new currency. Rather, it is a dramatic increase in the merchants' own costs as a result of a radical devaluation of the local currency; and this devaluation can usually be traced to manipulations in the currency's floating exchange rate.
Back in the 1970s, consumer nations, angered by the actions of the Organisation of Arab Petroleum Exporting Nations in imposing an oil embargo, set about trying to punish the producers by plunging the world into a great inflation. Unfortunately, they ended up damaging themselves a good deal more than the producers.
Historically, energy prices have acted as automatic stabilisers for advanced economies. As output falls and demand for energy decreases, prices ease, which in turn acts as a form of stimulus just as powerful as anything monetary and fiscal policy can provide. But with strong growth in demand from emerging markets, this traditional relationship has broken down. We now see world demand for oil close to record levels even though many Western economies are falling back into recession. Where once at this stage of the cycle oil prices would have been back below $40 a barrel, the still strong demand from emerging markets has ensured that they remain stuck well above $100.
As far as food prices are concerned, crop failure is becoming more common. Something of a pattern of unusual and unpredictable weather seems to be developing, perhaps to the extent that we should begin to prepare for a seriously impaired crop once every two years or so.
Alongside the advent of more extreme weather conditions comes growth in demand from population increase, greater affluence and a switch in many parts of the developing world to more resource-intensive, meat-based diets.
Just to add to the tale of woe, relatively high energy prices, in combination with worries about energy security, have prompted governments to provide incentives for ethanol production, perversely adding to the pressure on grain prices.
So where is the positive in all this gloom? Nobody is pretending that high oil and food prices are anything other than extremely painful. But by rationing demand, encouraging efficiency, incentivising new investment and driving the search for alternatives, high prices also provide an absolutely vital market discipline.
Comment: "Vital market discipline" translates to "austerity measures": what the author is saying is that we should all just grin and bear it while the elite make off with trillions and we go hungry.
Austerity for the masses while the elite stash trillions in tax havens
It is said that 40pc of India's food production goes to waste. This is surely a needless rate of attrition, even in a country with as brutal a climate as India. High prices are, in a way, merely the market's way of telling us that we are not investing enough, that we must try harder in the search for alternatives, waste elimination and technological improvement, and that we must open up new sources of food and energy production. What's more, they provide the incentive to do so.
Comment: Work harder! Work makes you free!
Desperation may provide incentives, but when the banks are hoarding all the bailout money for themselves and not lending it out to the little people as those bailout deals stipulated, just where are folks supposed to get the funding they need to become productive?
Malthusian catastrophe is neither inevitable nor actually particularly likely given these pricing disciplines. At prices like these, previously untapped hydrocarbon reserves suddenly become economically viable, as do great tracks of under-exploited agricultural land. The era of cheap and plentiful may already be a thing of the past, but is that really such a bad thing?
Comment: "Plentiful" is a thing of the past, for most. But what the author doesn't realise is the extent to which the scarcity of resources is going to radically and rapidly change this world... forever.