Saturday, November 9, 2013
Food Prices as Early Warning for Hyperinflaton
It seems that in previous hyperinflations food and energy prices went up first.
Food and energy cross boarders and so foreign exchange rates impact them quickly. It seems that a currency heading for hyperinflation does poorly in foreign exchange markets.
When times get tough there are people selling off optional things but everyone keeps buying food. Even land and houses become optional as people can move in with parents or rent. So prices of some things can go down while food is going up, making it look like the overall price change is not too much. But as a leading indicator for hyperinflation, I think we should only look at food and energy.
Every household buys food most every week. So they see the prices going up on food. It does not matter so much what government says the CPI is to people who notice that a grocery cart full of food costs more than it used to. Their personal perception of the rate of inflation is shaped by what they see in food prices.
We are currently seeing food inflation in India and in Japan.
The world food price index is one way of looking at how the US dollar is doing.
If your bank account pays 1% and the price of a can of tuna is going up at 10% then you are better off investing in canned tuna than putting your money in the bank. It would be very rational to take any extra money at the end of the month and buy canned food. After enough time that most people understand what is going on, I think we will eventually see rational behavior.
If food is going to be up over 30% in 3 years it is just not reasonable to invest in government bonds paying 0.19% per year for 5 years, or less than 1% total after 5 years. Better to buy canned food.
As more and more people get out of bonds and buy real things, the central bank will make more and more new money to buy up the bonds that nobody else wants. If nobody at all were buying bonds, the government could not deficit spend, which at this point is not optional. So the central bank must buy bonds. The price of food will go up even faster, and it will make even less sense to hold government bonds.
I think we should keep an eye on food prices in any country at risk for hyperinflation.