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Food Prices: The road to revolution?

Posted April 30, 2008

by John Browne, Senior Market Strategist Euro Pacific Capital

Baltimore — (TFN): Last week, food shortage became an American reality. Costco, Wal-Mart and other food stores limited the purchase of certain food staples in bulk form. Purchases of rice in California and of oil and flour in Queens were restricted. Customers were angry, voicing strong concern and questioning whether the situation would worsen.

Should we be worried? While it may be premature to expect the worst, given the drift of economic events it is worth a moment to consider the possible implications.

Historically, food shortages even in developed countries, such as England, have sparked riots. In France and Russia, they led to insurrection and, ultimately, revolution.

If food scarcity and partial rationing comes on the crest of a rising tide of growing economic inequality and deterioration in America, social upheaval is a real possibility.

Could I have some more

While Wall Street paid itself some $26 billion in bonuses last year, ordinary people were being squeezed financially. For most Americans, the most important financial asset is their home. In recent years, the borrowing base it offered was an important source of spending money.

Last year, the subprime housing debacle eroded the home values of millions of Americans, even those who had borrowed prudently. In some cases, market value slipped far below the level of equity, threatening foreclosures and eliminating cash-out opportunities. Middle-income households have been especially hard hit.

This decline in real estate values has already hit the tax base of local authorities, threatening a contraction of services which will disproportionately impact the poor. Furthermore, when the families that provide the bulk of our armed forces, see government spending in Iraq increase, while services decline at home, resentment can build.

Government statistics to the contrary, the American economy has been in contraction for several months. Weak earnings posted by retailers and airlines in recent weeks confirm the trend.

More?

Although still low, the rising level of unemployment promotes job insecurity and financial fear. In addition to the weakening employment picture, inflation is raging at levels far above the official figures. Weekly trips to the supermarket and the gas station are becoming horrific experiences to Americans of modest means. For these folks, high inflation is a tangible reality. This disconnect with the mild government figures is fueling distrust and resentment.

Washington’s double talk is clearly evident in regard to the dollar, which continues to decline despite “strong dollar” rhetoric. Many have concluded that the authorities are simply lying while they pursue a deliberate policy of dollar debasement. Many American realize that weakening dollar represents a stealth tax on every man woman and child, who holds U.S. dollars. Again, this is a cost that hits the poor disproportionately hard.

If food prices continue their rapid ascent, and if hoarding or rationing result, the social climate may deteriorate rapidly. It is hard to imagine two more potent causes of insurrection than economic hardship accompanied by a denial of access to food. In some countries food shortages already are causing riots. The situation is so grave that many major food producing countries such as Argentina, China and Russia are restricting food exports, driving prices even higher.

Raising the political temperature still more is the fact that the U.S. government is encouraging farmers to grow crops (corn, wheat and soybean) to burn as fuel, while refusing to even consider cuts in generous subsidies to wealthy farmers reaping windfall profits.

Rising corn prices have led to higher prices for wheat, beef, milk and even derivatives such as chocolate, made with milk. Furthermore healthy beef and milk producing cattle are being slaughtered to divert their wheat-based food to ethanol. Food prices have been a problem for several months due to a number of reasons including droughts. Now “food security” threatens to become political dynamite.

In an effort to avert food shortages in America, should the Federal Reserve Board lower or raise its interest rates? On the one hand, a lowering of interest rates, to avoid deepening recession, would weaken the U.S. dollar, driving the dollar price of foodstuffs still higher. On the other hand, raising interest rates would mean a deepening of recession and a generally reduced ability to buy food.

The decision is difficult and complex. At the very least, however, it should give all of us food for thought.

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