Use Your Noodle, Or Else
In the United States, we had the highly amusing spectacle of the US Mint rushing through a new law criminalizing — with a possible penalty of a $10,000 fine and five years' incarceration — the heinous felony of honestly acquiring, then melting down for export, the nation's small change.
As one wit put it, this was a remarkable instance of inflation driving out fiat money! Strictly, it was a case of fiat money driving out token money, but the point — and the irony — remains unimpaired by our pedantry.
Indeed, the real sign of our debased times is that the US Mint was concerned that its more enterprising citizens would find it profitable to extract the copper and nickel content of the coins (which now cost the Mint 75% more to make than their face value represents) and export them to where they might reach a higher price. This is not without historical precedent, but in happier days such an arbitrage tended to present itself when the coins' gold or silver content exceeded their nominal value at the mint, not that of the mere base metals of which they were made.
But though all this may make for a powerful morality tale, its economic significance is obviously minimal. Sadly, the same can not be said for the events unfolding over on the other side of the Pacific, where there is a palpable air of fear emanating from the Chinese authorities, due to the recent steep rise in prices of grains, flour, and cooking oils.
As China News began an article on the issue:
"Noodles are expensive now, and mantou [steamed bread] becomes smaller." Many Chinese people have found the changes of their breakfast recently. What has driven up the food price is the rising of the prices of grain and cooking oil in the whole country.
Unsettled by the potential for social strife inherent in such a development, Premier Wen even went so far as to commit the classic act of the worried economic dirigiste when he appeared on TV to warn that the nation would "prevent a small number of merchants from hoarding and thereby raising prices."
"Hang the speculators!" the cry went out, though if the regime itself wants to "hoard" that seems to be alright, since the State Council — which routinely tends to buy up surpluses of, say, cotton in order to support prices — was also urging city governments to "build stocks and processing capacity for edible oils and grain products."
Displaying another typical instance of interventionist paradox, Wen also pledged that the regime would maintain "appropriate" prices — i.e., those high enough to shield the incomes of farmers facing a cost spiral due to such things as more expensive fertilizer — and yet, in the same breath, that it would act to ensure "stable" prices for consumers.
Apparently, this will all be achieved by paying subsidies to "low-income urban residents and poor college students," while, in another development, the Ministry of Communications has ordered that transportation companies, as well as major highways, railways, and ports must ensure the setting up of "green passageways" for the "quick delivery of grain and related food products across the country" by giving "priority to the distribution of grain, edible oils, and poultry products", and by acting to "upgrade their work efficiency."
Ahh, economic improvement by exhortation — that should do it!
Premier Wen went on to pledge that his government would cap prices of oil, steel, and public services, including health care and education, at the same time that the newspapers were full of stories about how coal prices were rising — thanks in part to the host of new regulations and levies being imposed on producers by that very same government — and how Beijing was planning an 8% rise in household natural gas prices in an effort "to promote energy-saving awareness and meet big transportation costs."
In one last contribution to the famous "socialist calculation debate," China has now realized that its ambitious biofuel plans may not be entirely without their adverse consequences for national wellbeing either. With corn farmers having learned to keep an eye on local futures prices (though not to use the instruments themselves, it seems!), they are said to be reneging on earlier contracts in order to take advantage of a recent rally which has been triggered partly by a poor global harvest and partly by interventionism in favor of biofuel production elsewhere, most notably in the United States.
"Corn supplies are definitely enough for this year, but the problem is that the farmers won't sell," one nameless analyst was quoted.
For his part, noting that China's arable land is insufficient to support its vast population (while simultaneously forgetting that the law of comparative advantage means it doesn't need to!), Zhai Huqu, president of the Chinese Academy of Agricultural Sciences, told Xinhua that:
"We can do research on using corn and other grains as an energy substitute but it cannot be industrialized. It will be a disaster for us if we depend on a huge amount of corn and other grains for energy."
Sadly for Mr. Zhai, it seems that some 76% of the 1.02 million tonnes of biofuel produced last year relied on corn for its feedstock, while much of the rest used wheat and sorghum.
That may have to change, for Zhu Zhigang, vice-minister of finance, clearly agreed with his colleague, telling the China News Service that:
"China will carefully evaluate the grain consumption of the biofuel project and its influence on the food chain. The government will impose strict controls on any biofuel project using grain as the raw material."
Oops! There goes another Five Year Plan flushed away down the Iron Rice Bowl of economic constraint.
Whatever the follies of all this we should not be too harsh on the poor mandarins and apparatchiks trying to hold China's extraordinary boom together, for we should rather treat this as a fairground mirror, reflecting idiocies — in a somewhat magnified fashion, perhaps — perpetrated by ruling cliques much closer to home.
Indeed, the political lesson is that our own rulers invariably tend to behave in an equally ill-founded and self-contradictory fashion whenever they rush out to "do something" whether motivated by the arrogance of believing that their particular prejudices are somehow superior to our individual valuations, or simply in order to remind us of their abiding importance to our lives by keeping visibly busy in office.
As just one example, bemoaning higher home prices or more congested roads, while subsidizing "key-workers" — i.e., public sector drones — to put more pressure on them is a classic UK tactic.
In the United States, haranguing "price gougers" is a favored ploy of headline-hungry congressmen, yet a moment's thought will show that the "economic royalists" being condemned are justifiably seeking to ration limited supplies of, say, fuel by seeing which customers want them most urgently, while acting to protect themselves against the capital loss of a higher replacement cost of their rapidly depleting inventory.
Finally, the promotion of hopelessly inefficient "green" fuel methods such as wind power, while shutting down viable, emissions-free nuclear power stations without replacement, is a current European foible based primarily on superstition rather than science.
But, if these are the political inferences, the economic lessons are even more clear cut: namely, that the resource constraints engendered by the worldwide boom are beginning to hit where it hurts most — in the bellies of the foot soldiers of the army of globalization and, as Napoleon famously remarked, we would do well to remember that an army marches on its stomach.
But for now, who wishes to fret about such mundane matters?
Haven't stock markets everywhere made new highs? Accordingly, cannot the gains of asset price inflation provide more virtual collateral for a banking system which ex–New York Fed Chief Bill McDonough recently admitted was the "issue on everyone's minds"? Can the tapping of such notional benefits not help offset lack of more regular income among the hordes of small investors now being attracted, mothlike, to the flame of soaring equity values?
Though not unique to the Middle Kingdom, a recent piece in the China Daily nicely summed up the mood prevailing there:
It has been years since Zhang Yichi, a fund manager with China Asset Management, has seen so many people crazy about the stock market.
"I am puzzled because the market has climbed to such a high level, and there's no sign of its stopping."
"I bought some funds in April, and you know what, they doubled in value," Yu Na, a young woman, who works at an Internet company, says. "I should have put more money in," she says with regret. "I am afraid the steep rise will not happen again."
For those who have heard about friends, colleagues or acquaintances doubling their money recently by buying stocks or funds, the coming year is suddenly getting great attention.
Zhang gives his answer to investors curious about stock market returns: "The return for mutual equity fund investors is likely to be around 20 to 25 per cent in 2007," he says confidently.
All those hoping to reap the inequitable riches from yet another highly inflationary year — a much less arduous task than that of creating real wealth or generating genuine income — will just have to hope he is right.