On a trip to Canada recently I couldn't help but notice the extensive media coverage paid to the worldwide food price inflation, as well as the riots breaking out in many countries over food shortages.
And of course the list of reasons given by the so-called 'economists' interviewed are completely devoid of the one all important reason fueling what may arguably become an epic food price inflation: the declining value of the US dollar.
Many countries around the world peg their currency to the dollar, either through what are called soft or hard pegs.
As I have written on numerous occasions, these countries are paying the price for their 'loyalty' by importing the inflation the US is creating. In order to support the US currency and keep theirs from appreciating, countries must create more of their own and sell it in the open market to buy dollars. This increased supply of their own currency fuels the inflationary conditions in their own countries.
Akin to a destructive typhoon that has hit shore in some and about to in others, the inflation monster wasn't an issue so long as it was gestating and churning over open water after developing and departing US shores.
But as it starts to hit the many nations foolish enough to have invited the storm, the question that arises is how will the affected countries respond?
In my opinion, as this food crisis grows and civil unrest intensifies worldwide, all nations impacted by it will finally be forced to stand up and walk off this particular field of dreams.
For if it is one thing and one thing alone that all politicians understand it is power, and remaining in power. And in most places that means votes.
The question for the longest time has been 'when,' as in when will countries begin to un-peg from the dollar. That's already happened in some places, but I believe is about to pick up pace as prices of not only food but also all basic necessities spiral out of control. The un-pegging will cause those foreign currencies to strengthen, bringing down domestic prices virtually overnight.
Authorities here in the US have, up until now, been able to 'fool' the people into believing there was no inflation, by working to bring down the cost of their big screen TV's and other imported consumer electronics. By doing so, the rising costs of life's necessities have been camouflaged, as it were, since the average consumer was left par for the course after all was said and done.
But in a slowing economy and home equity cash-out's a thing of the past, the now frugal consumer is hurting, having to carry and service large debt while also feeling the full force of the price increases for everything from food, energy, health care and all other necessities that can not be outsourced on the cheap.
As this inflation spread it can therefore mean only one thing: countries will let go of their currency pegs sooner rather than later.
This will come as a complete and total shock to those currently calling for a massive dollar rally and corresponding collapse of gold and commodities prices.
It is why we have been picking up more of our favorite gold, silver and energy stocks this past week. Some of these stocks are trading it ridiculously low prices, a few approaching their cash on hand. It is these stocks that will have the most explosive moves to the upside in the months ahead.
The MurkyMarkets.com website by Christopher G Galakoutis is a running macroeconomic commentary on the state of the financial markets with emphasis on gold, silver, the currency markets and energy. Visitors to our new site are always welcome.
Originally published as a subscriber post 5/4/08
