In the past few months we've witnessed remarkeable events in the market. First we have the Fed bail out of Bear Stearns. What wasn't widely covered or discussed was that this was effectively a result of a run on a bank.
Modern banking practices partial reserve banking. That is to say that the bank relies on the fact that not every customer requires their funds in cash at any one time. As a result the bank invests your funds during the intervals where you don't need the cash in your hands. Banks in the US are required to maintain only 10% reserves. A banker can then invest 90% of the banks funds to turn a profit. This is called banker's reach.
A run on the bank occurs when customers or investors lose confidence in your banking facility and demand their cash back. If enough customers demand their cash, the bank exhausts its reserve and enters a liquidity crisis. This is exactly the fate that befell Bear Stearns. It is interesting to note that Bear Stearns was a financial institution which survived the Great Depression of the 30's. Had the Fed not acted as it did to bail out Bear Stearns, we may well have been in a greater depression at this very moment.
Please don't infer from the previous sentence that I agree with the Fed. I think they served to cure the disease by killing the patient. They've borrowed excessively from the taxpayers and the US currency to temporarily asuage the bleeding, but haven't sutured the severed arteries. The Fed's own actions of forever creating bubbles and taking hindsight corrective half-measures is the very cause of our current problems, not in any way a solution.
There is no doubt that we live in 'interesting times' intended in the confucian sense. Just this week we've witnessed a second run on the bank in as many months. This time we're witnessing a run on the food bank. Reports are coming in of rationing at Costco stores of rice, flour and cooking oil. We're not talking about Costco stores in third world countries. We're talking about the continental United States.
What has happened is that large commercial bakeries and other such chains have panicked at the rapidly increasing price of these staples and snapped up local supply. Yes, eventually this will all work itself out, but the question is, why is this happening in the first place. There are a few answers:
- The price of oil. The price of oil affects the food supply in two ways. First it increases the shipping costs which are passed on to the consumer. Next, it creates a surplus of money in the Middle East which then funnels its way back into the US economy as speculation. Hedge funds use this money to invest in grain futures which artificially drives up their price.
- Biofuels. Biofuels are a useless 'environmentally friendly' measure which were put in place by politicians to placate the populace. Corn and other staples are diverted to be converted into biofuels taking food out of the food supply and putting it into our gas tanks. There has been worldwide rioting especially in regions where food constitutes a large percentage of the general publics' expenditure.
- Loss of farmland. Farmland is being lost to urban sprawl and to environmental measures whereby farmers are being subsidized not to plant crops. Sure environmentalism is great, but it turns out that humans are animals too, and our suffering should figure into environmental equations.
- Malthus. Malthus famously argued that populations grow geometrically (2,4,8,16, ...) while the food supply grows arithmetically (1,2,3,4,5,..) . We live in a world of approximately 6 billion which is expected to rise to 9 billion by 2050. Further the billions of China and India are no longer content to eat simple rice and vegetables but also want cars, beef and the more excessive lifestyle of their North American Counterparts. As a result, we can expect more shortages of gas and food until we learn to live within our means.