Monday, July 23, 2012


July 23, 2012

This morning's key headlines from 

  • Food price surge expected after worst U.S. drought in 50 years
  • Food price surge may lead to global riots, as in 2008
  • IMF will end bailout for Greece, possibly forcing exit from euro currency
  • Analysis: Euro crisis is saving Germany tens of billions
  • Iran announces multiple currency exchange rates
  • Catholic Priests protest Church attacks in Vietnam

Food price surge expected after worst U.S. drought in 50 years

FAO Food Price Index through June, 2012
FAO Food Price Index through June, 2012

The FAO Food Price Index has been declining since a major spike up in 2010, but that's about to change. This summer's drought, now covering more than half of the United States, is the most widespread since 1956, and is likely to get worse. Record-setting triple-digit temperatures have already occurred across the country. The National Weather Service counted 86 records last month, including 118 degrees in Norton, Kan., on June 28. Other record highs included 111 degrees in Yuma, Colo., 106 degrees in St. Louis, and 105 in Logan, W. Va. Between the extreme heat and the lack of rain, corn yield projections have been slashed, and will be slashed again in August. Corn prices have risen to historic highs, and beef prices have been surging as well, as corn makes up about 95% of cattle feed grains. Toledo (OH) Blade 

Food price surge may lead to global riots, as in 2008

Damaged corn crop in Woodville, Ohio
Damaged corn crop in Woodville, Ohio

The world price of food has been growing steadily since 2002, as the effects of the 1960s "Green Revolution" have petered out, and population growth has been exceeding growth in food production. Food price shocks in 2008 sparked a wave of riots in 30 countries around the world, from Haiti to Bangladesh, and rising food prices helped trigger the Arab Spring uprisings in 2011. The American drought is now expected to trigger a new world food price shock. According to one analyst: 

"Food riots are a real risk at this point. Wheat prices aren't up at the level they got to in 2008 but they are still very high and that will have an effect on those who are least able to pay higher prices for food."

Global corn prices have already shot up 40% since June to hit all-time highs, soy bean prices have jumped 30% to record levels, and wheat has surged 50%. Guardian and UN Food and Agriculture Organization (FAO) 

IMF will end bailout for Greece, possibly forcing exit from euro currency

According to reports from Germany's Der Spiegel, officials from the International Monetary Fund (IMF) are signaling that they will stop paying bailout money to Greece, because Greece has failed to meet its austerity commitments. Readers may recall that one of the conditions of the 130 billion euro bailout is that Greece must reduce its annual budget deficit from its current 160% of GDP to 120% of GDP by 2020. As I wrote in a lengthy analysis at the time ( "28-Oct-11 News -- Markets explode on crazy Rube Goldberg eurozone deal"), this demand was based on ridiculously impossible future economic assumptions that overlook the generational changes that are taking place. And now it's "already clear" that the "Troika" -- consisting of the European Commission (EC), European Central Bank (ECB), and the IMF -- will reach the conclusion, when it meets this week, that Greece's 120% commitment will not be met. It's already clear, for example, that the 3 billion euros that Greece was supposed to earn from asset sales this year will turn out to be only 300 million euros. 

Greece has been begging EU officials to get it more time to implement its austerity commitments, and this was a big discussion in Greece's recent election that brought Antonis Samaras to office. But the Troika has decided that giving Greece more time would mean that it would be necessary to increase Greece's bailout package by an additional 10-50 billion euros. German officials this weekend torpedoed any possibility of renegotiating Greece's austerity agreement. "That won’t work -- that’s a Rubicon we can’t cross," said German foreign minister Guido Westerwelle. 

The result is that Greece will go bankrupt next month, when it's due to make a 3.8 billion euro bond payment, and will be forced to leave the euro currency. 

This discussion comes at a time when the euro crisis is rapidly building in Spain and Italy, with 10-year bond yields (interest rates) well above 7% and 6%, respectively, after officials in those countries announced that they won't be able to meet their own deficit commitments. 

Last year I proposed the "Kick the Can Theory" for the European financial crisis. It says that if you want to know what's going to happen, just assume that European leaders will look for a way to "kick the can down the road," meaning that they'll do the minimum possible to postpone the crisis a little longer, to prevent a current disaster without fixing the problem, so that the crisis will recur in worse form weeks or months later. 

There's already a can-kicking solution being proposed for Greece next month. The Greek government will sell 3.8 billion euros in short-term government bonds known as T-bills, and sell them to Greek banks. The Greek banks would then deposit them with the ECB to be used as collateral for 3.8 billion euros of new ECB bailout money. Voilà! 3.8 billion euros created out of thin air! Problem solved! Der Spiegel -- Translation and Bloomberg 

Analysis: Euro crisis is saving Germany tens of billions

We've been reporting how yields (interest rates) for some bonds issued by Denmark and Germany have been falling and have actually gone negative, meaning that investors have to pay these countries to keep their money safe. This is a result of the euro crisis, and an analysis indicates that the euro crisis has thus earned Germany a windfall of about 100 billion euros, in all, with 10 billion euros saved in 2012 alone in reduced interest payments.Kathimerini 

Iran announces multiple currency exchange rates

With Western sanctions on Iran causing rapid domestic inflation, Iran's parliamentary economic commission announced on Saturday that there will now be three official exchange rates of exchange for the U.S. dollar: 12,260 rials per dollar for "the import of basic goods," 15,000 rials per dollar for import of "capital and brokered goods," and the open market rate, currently 19,100 rials per dollar, for luxury goods, like toys and foreign cars. The new plan is drawing severe criticism from the Ahmadinejad administration. Radio Zamaneh 

Catholic Priests protest Church attacks in Vietnam

Vietnamese Catholic priests have sent a letter to President Nguyen Tan Dung protesting against what they said were violent local government backed attacks on a church in a northern Vietnam province which have angered Christians in the communist state. A non-Catholic mob, paid by government officials to participate, occupied the church on July 1 and smashed property, before church members called for help from fellow Catholics in nearby parishes, who came in groups and overwhelmed the attackers. Radio Free Asia 

The Catholic Church has played a major role in Vietnam society for over two centuries, since the the Tay-Son rebellion, the most celebrated military event in Vietnamese history, united the north and south in 1789. The generational Awakening era that followed the Tay-Son rebellion changed Vietnam enormously, and became the high point of Vietnam's literary culture, thanks to the French, who also introduced the Catholic religion, converting hundreds of thousands from Confucianism and Buddhism. The Catholic religion was an important symbol in the 1950s, when Ho Chi Minh's violence forced over half a million Catholics to migrate from North to South. Vietnam's crisis civil war in the 1970s united the North and South again, but now the new attacks on the Catholic Church indicate that new, younger post-war generations are renewing the hostilities that occurred in the under Ho Chi Minh. 

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