FrankRep
02-28-2008, 12:19 AM
Is Inflation Leading to Panic?
The John Birch Society (http://www.JBS.org/)
Feb. 28, 2008
ARTICLE SYNOPSIS:
Inflation is leading to market distortions, serious signs of which are showing up in grain markets.
Follow this link to the original source: "'Panic' wheat buying across the US (http://nqr.farmonline.com.au/news_daily.asp?ag_id=48995)"
COMMENTARY:
Speaking to Congress on Feb. 27, Fed Chairman Ben Bernanke indicated that the U.S. economy was facing yet more trouble and that further rate cuts were on the way. According to the Los Angeles Times (http://www.latimes.com/news/nationworld/washingtondc/la-fi-econ28feb28,1,4622344.story), "Bernanke said the nation might also have to cope with more inflation...."
Naturally, when interest rates decrease because the Fed increases the money supply, the value of money decreases meaning it takes more dollars, relatively speaking, to purchase any given item. In other words, when the Fed talks rate cuts, it is talking about creating additional inflationary pressure in the economy.
That's just what the economy does not need. Consider, for instance, the turmoil in agricultural commodities markets right now.
"'Panic' Wheat Buying" was the headline in the North Queensland Register above a report from Arlan Suderman, a Farm Progress grain markets analyst, on the U.S. wheat market this week.
Suderman noted that wheat "prices rallied by $5.75 a bushel on Monday, being up by nearly 30pc at one point compared with Friday’s close."
The reason:
Panic over commodity shortages continues to emerge as the dominant factor in the global markets, with both end user and speculative buyers of corn, soybean, cotton, rice and a host of other commodities taking note of what’s happening in the wheat pit.
While US has made improvements to increase crop production efficiency in recent years, the world hasn’t really put sufficient investment into production agriculture for several decades.
The net result has been declining stocks at the same time that expanding global wealth has demanded more raw commodities.
This is exactly what tends to happen in an inflationary economy that is tending toward hyperinflation (http://www.econlib.org/library/Enc/Hyperinflation.html). As the result of rapid devaluation of the currency, those holding cash are penalized as the value of their cash holdings decreases. To counter this, actors in the economy are eager to trade their cash holdings for commodities (wheat, gold bars, etc.) in order to decrease their exposure to the risk of further currency devaluation.
This can lead to perceived hoarding of commodities, something Suderman senses is in the offing. "Sentiment in the marketplace is changing from, 'buying just-in-time' to one of, 'buy what you need at any price' and then to 'buy even more to restock the shelves'," he writes. "In other words, there’s evidence to suggest that we’re beginning to enter the hoarding phase of the inflationary cycle."
And that is very bad, if not unexpected, news.
SOURCE:
http://www.jbs.org/node/7254
The John Birch Society (http://www.JBS.org/)
Feb. 28, 2008
ARTICLE SYNOPSIS:
Inflation is leading to market distortions, serious signs of which are showing up in grain markets.
Follow this link to the original source: "'Panic' wheat buying across the US (http://nqr.farmonline.com.au/news_daily.asp?ag_id=48995)"
COMMENTARY:
Speaking to Congress on Feb. 27, Fed Chairman Ben Bernanke indicated that the U.S. economy was facing yet more trouble and that further rate cuts were on the way. According to the Los Angeles Times (http://www.latimes.com/news/nationworld/washingtondc/la-fi-econ28feb28,1,4622344.story), "Bernanke said the nation might also have to cope with more inflation...."
Naturally, when interest rates decrease because the Fed increases the money supply, the value of money decreases meaning it takes more dollars, relatively speaking, to purchase any given item. In other words, when the Fed talks rate cuts, it is talking about creating additional inflationary pressure in the economy.
That's just what the economy does not need. Consider, for instance, the turmoil in agricultural commodities markets right now.
"'Panic' Wheat Buying" was the headline in the North Queensland Register above a report from Arlan Suderman, a Farm Progress grain markets analyst, on the U.S. wheat market this week.
Suderman noted that wheat "prices rallied by $5.75 a bushel on Monday, being up by nearly 30pc at one point compared with Friday’s close."
The reason:
Panic over commodity shortages continues to emerge as the dominant factor in the global markets, with both end user and speculative buyers of corn, soybean, cotton, rice and a host of other commodities taking note of what’s happening in the wheat pit.
While US has made improvements to increase crop production efficiency in recent years, the world hasn’t really put sufficient investment into production agriculture for several decades.
The net result has been declining stocks at the same time that expanding global wealth has demanded more raw commodities.
This is exactly what tends to happen in an inflationary economy that is tending toward hyperinflation (http://www.econlib.org/library/Enc/Hyperinflation.html). As the result of rapid devaluation of the currency, those holding cash are penalized as the value of their cash holdings decreases. To counter this, actors in the economy are eager to trade their cash holdings for commodities (wheat, gold bars, etc.) in order to decrease their exposure to the risk of further currency devaluation.
This can lead to perceived hoarding of commodities, something Suderman senses is in the offing. "Sentiment in the marketplace is changing from, 'buying just-in-time' to one of, 'buy what you need at any price' and then to 'buy even more to restock the shelves'," he writes. "In other words, there’s evidence to suggest that we’re beginning to enter the hoarding phase of the inflationary cycle."
And that is very bad, if not unexpected, news.
SOURCE:
http://www.jbs.org/node/7254