The slow motion train wreck continues.

A)   China and India have recently agreed to pay two and three times as much for Potash as last year. Part of the reason is more fertilizer is required to “supercharge” crops to offset reduced crop yields resulting from drought, floods, fungus, pests and simply more mouths to feed. A total of 31 countries have recently prohibited the export of rice and other grains. It is noteworthy that various forms of “protectionism” delayed the recovery from the Great Depression. History may not repeat itself but it certainly rhymes.

B)   LIBOR – the London Inter Bank Offered Rate has been the benchmark for interest rates since the 1960’s. Major banks world-wide are polled daily for their offered interest rates that they lend one another for various loan periods in various currencies. An average is calculated and used to benchmark interest rates for Trillions in corporate debt, mortgages and financial contracts. Two problems have arisen. First, banks don’t trust other banks toxic collateral so very few banks are lending to one another, thus it appears the reported rates may be more fiction than fact. Second, banks are lying (I know that’s hard to believe) about the rates they pay by under-reporting to avoid revealing how desperate they are for cash. As a result, millions of borrowers world-wide are paying artificially low interest rates. Not only does this chicanery undermine confidence in a backbone of the financial system (just what we need in times of crisis) but quite likely borrowing costs will be adjusted upwards once the finger-pointing stops. Banks being desperate for cash, don’t expect savings rates to increase.

C)   The specter of the big, bad “speculators” is starting to raise its ugly head. Expect governments to start blaming speculators and hoarders for surging prices of commodities, food, energy and stuff in general. Heaven forbid governments admit to being responsible for rising inflation due to irresponsibly running the money printing presses on steroids. Not only is inflation to blame, but so is reduced supply and increased demand. Supply is reduced for just about everything. Mine output is falling because high grade ore is being extracted faster than new resources are being found to replace them. Food supply is falling due to inclement weather, increasing urbanization reduces farmland, rising wealth in emerging economies increases demand for meat which requires 4 to 8 pounds of grain to produce one pound of meat. Something you rarely hear about is population growth. In 1980 the world population was 3 Billion. Today it’s more than doubled to 6.5 Billion. That results in increased demand. So, don’t believe the BS you’ll start to hear about inflation caused by speculators and hoarders. Governments will look for scapegoats rather than plead guilty to stupidity.

Stay tuned

Gerold  – Apr. 20, 2008
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Disclaimer: I’m not an investment advisor and these articles are for commentary only. For specific advice you should consult your own investment professional.

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