Edward: We certainly didn?t ever get off the roller coaster. The late 19th century was a rather benign chapter in economic history – more like the 1960s than the 1930s. I am not aware of any major country that suffered a drop in the average life expectancy at the time that could be compared to what Russia experienced in the early 1990s, e.g. (Admittedly I didn?t look at the colonies. I also didn?t previously conceive of all those oil barons as expropriators of Russian Congo.)

“If Xie is right, and I certainly buy this, then maybe even the 1920′s is too recent. maybe we need to go back to the 19th century, and particulary 1875-1914 to get some idea of the kinds of instabilities we might get to see. China is only the first example here.”

Oh, I like that. Fits in nicely with the “China as Wilhelmine Germany” meme that I’ve been carrying since about ’92.

But we’ve been through this show before. Keep mobility up for capital, labor and finished goods and all should be well. No biggie, right? :^)

Bernard “Wild-eyed Optimist” Guerrero

?Two shekels of silver have been borrowed by Mas-Schamach, the son of Adadrimeni, from the Sun priestess Amat-Schamach, the daughter of Warad-Enlil. He will pay the Sun-God?s interest. At the time of the harvest he will pay back the sum and the interest upon it.? ? Babylonian inscription, circa 2000 BC

“All of this is obviously the case Bernard, but the problem is that this takes time to come into operation. Most of the detail in the market mechanism is to do with timing, bottlenecks, speculation, things like that.

So in the short term there could well be an important spike.”

I think we’re just differing in terms of the probable severity. It appears to me that grains are among the easiest commodities to ramp up capacity for, so any spike should be relatively short and mild. The worst effect would be in the futures markets for contracts hitting settlement soon after the initial run.

All of this is obviously the case Bernard, but the problem is that this takes time to come into operation. Most of the detail in the market mechanism is to do with timing, bottlenecks, speculation, things like that.

So in the short term there could well be an important spike.

Vis a vis this I will just touch here on a point I want to develop in the future. The Morgan Stanley China-Watch economist Andy Xie recently came out with what I consider to be the economics meme of the decade: stop thinking about the global economy as a series of slightly inter-connected national economies, and think of it as one global *developing* economy with nation state based market imperfections.

Once you do this glass half-full, glass half empty conversion you can see a lot of things more clearly.

In particular this.

It became fashionable back in 2000 to follow Stephen Roach and Larry Summers down the road of speculating that what we had now was a new type of business cycle, with more similarity to the boom-bust variety seen in the 1920′s. The principal conclusion that was drawn from this was that the ‘problem du jour’ might be Irving Fisher style debt deflation. This is necessary background to understanding all the current fuss about Greenspan and 4 years without a rate rise.

Now………..

If Xie is right, and I certainly buy this, then maybe even the 1920′s is too recent. maybe we need to go back to the 19th century, and particulary 1875-1914 to get some idea of the kinds of instabilities we might get to see. China is only the first example here.

Bottom line: we are no longer dealing with a nicely controlled set of fairly ‘mature’ economies, carefully managed. We are up on the roller coaster. Potentially dramatic price swings in agricultural prices would be just one symptom: with of course overshoot up, and overshoot down.

If this view is right it might also help put other global phenomena (eg Al Qaeda) in another context.

Needless to say this deserves (at least) a full post. But you asked the question, and out it came .

You state: “When China finally turns to the world market, it will inevitably turn to the United States, which controls nearly half of world grain exports. This presents an unprecedented geopolitical situation which will see 1.3 billion Chinese consumers who collectively currently enjoy a $120-billion trade surplus with the United States ? a quantity large enough to buy the entire U.S. grain harvest twice over ? competing with their American equivalents for the right to eat U.S. produced food. The probable consequence of all this: a food price explosion both within the United States and across global markets”

Maybe not. Additional upwards price pressure, certainly. But in the above statement you seem to assume that the grain supply is essentially inelastic on price. This doesn’t take into account the huge potential for cheap capacity increases that’s available due to a number of factors. The farm-belt states of the US, for instance, have seen years of rural depopulation due to overcapacity and a lack of pricing power. Further, the ongoing attempts worldwide to decouple subsidies from production mean that in many cases you have available agricultural labor and capital that is essentially being paid to _not_ produce. This all adds up to a great deal of un- and -under-utilized capacity that should prove responsive to relatively mild price signals. (Unlike, say, refinery capacity) A price “explosion” should be unnecessary.

Bernard Guerrero

?In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit.? ? Warren Buffet, 2002 Berkshire Hathaway annual report