Wednesday, May 07, 2008


Having written about the pressure being put on Iran to "make a deal" it seems timely to mention the pressure that faces developing nations. Only a few years ago, the people of Pakistan had hardly heard of air conditioning. Today, the country is suffering from energy blackouts because too many people own air conditioners. A few years ago, 100's of millions of peasant farmers were considered well off if they owned a bicycle. Today, a motor scooter is no longer a luxury. Owning a car is not uncommon (though not like America where the number of cars is 77% of the number of people (basically at least one car for everyone of driving age).

The change in wealth is obvious but even after the change, the average person in the developing world still spends about half of his disposable income on food. The high price of food is putting great pressure on the people and the political leaders of many countries. For some, the worst is not over.

Over the next several years, the value of the US dollar is likely to bounce back, like it did from the mid cycle correction year of 1995 to the peak cycle year of 2000. The bounce could even be larger this time because the bottom was much lower. As the dollar rebounds, the cost of US goods purchased in other currencies will increase. The price of American corn in terms of a foreign currency will go up in relation to how much the US dollar goes up.

A country such as China, which has become industrialized quickly, will suffer more than some. Industrial countries use a lot of energy per dollar of GDP created. The USA enjoys a highly diversified service economy where the price of fuel is a relatively minor piece of total costs. A chart on the Carpe Diem site makes a slightly different point. It shows that even though the inflation adjusted price of oil in America is now at an all time record price, the average American only spends 8% of his disposable income on gas, compared to 12% in 1980. Never-the-less, the number has risen from the low it made about 5 years ago.

As is evidenced in the low readings of the University of Michigan consumer surveys, Americans are feeling pain. We should remember the story of the fellow who whined about the pain in his foot only to immediately see a man in a wheel chair who had no feet. Americans are feeling pain but hundreds of millions of people are going to bed hungry.

The government of Brazil just set up a sovereign wealth fund. All this means is that the government has decided to save some of the extra income it is expecting from its new found energy wealth. At some point, Americans will whine when some of this money is lent to us or invested with us. Most Americans applaud an individual who saves some of his earnings. Most Americans at one time or another have been blessed by their ability to borrow another persons savings in order to buy a house or a car. For ages, Americans have bought cars from GM and financed them from GMAC. Now we fuss when we buy goods from China that are financed by Chinese savers. We are not forced to buy the goods or to borrow the money! The hypocrisy drips from those who complain about sovereign wealth funds while driving a big car to a home in the suburbs.

It is time for us to educate ourselves about the benefits of international trade. It is also time for us to learn to keep our government officials out of the way. Had the FOMC not held interest rates so low for so many years, the housing bubble would not have been so large and if the FOMC had not held short rates above long rates for 19 months the popping of the housing bubble would not have been so damaging. Even the lenders were basically forced to grant sub-prime loans. The mess the people are demanding for the government to clean up was a mess created by too much government intervention.

A couple of weeks ago, the Canadian government paid farmers to kill pigs. Government reports showed that the meat to be produced was going to be less valuable than the cost of the feed. In the short run, this is the type of action that will alleviate pain in the developing world. The grain being used to create a pound of pork is enough to feed a pound of grain to 7 or 8 people. The long term problem is that the farmers learned exactly the wrong lesson. The next time, they will distrust the market, grow too much and wait to make a profit off the government.

Those who vote for Hillary or Obama like the sound of government financed health care. They fail to appreciate what it is like to live in Canada where one must wait about 9 months for knee replacement surgery. The people of the third world generally have to suffer without knee replacement. In the USA, the surgery is very available. It is not covered by many insurance policies but it is also done at deeply discounted prices or even for free for the poor in America. The wait for life saving heart bypass surgery in Canada is 48 days.

The relative freedom Americans enjoy is a blessing. The majority of people living under great stress are living in other counties. The pain of this economic slowdown will not last. Australian farmers have planted 93% more wheat this year and the potato crop in China is too bountiful to store. The market will even over come the stupidity of government intervention. Still, it is time to write your representatives to request that the insanity of food based ethanol and millionaire farm subsides be stopped!