May 19, 2009 – 8:31 am


Think this is no biggie,? Think again. This is how food riots begin. Witness:

More lenders are tightening their restrictions for agricultural loans in the Midwest at the same time that repayments on loans have dropped, The Federal Reserve Bank of Kansas City says. 

The Federal Reserve reported Friday that its quarterly survey found that the percentage of lenders raising collateral requirements reached another record high in the Tenth Federal Reserve District. The rate of loan repayments also fell for the second straight quarter.

Turbulent agricultural conditions contributed to the tightened farm credit, the agency said.

“The thing to take away from all of this is … farmers are positioning themselves to get through turbulent times,” Federal Reserve economist Brian Briggeman said.

The fact that the Federal Reserve is in charge of things tells you that the foxes are in charge of the hen house.

The fact that a single entity, the Federal Reserve, engages in and has a monopoly on monetary policy has detrimental effects on the economy. As long as we try to keep up this fiction, that the Federal Reserve has a long-term focus, that attempting to fix interest rates will not distort the economy, and that the Fed can end a recession by injecting liquidity, we will never free ourselves from the booms and busts of the business cycle. 

The problem with Ponzi finance is that companies become so dependent on short term credit, that without it they can’t do business. It’s just like becoming dependent on credit cards to pay your bills. A good example is shipping companies which routinely finance their very next shipment by selling short term bonds.  

In a non-Ponzi finance economy, the shipping company would use its prior profits to ship food from, say, Los Angeles to Russia. The free market would set a rate allowing the company to earn a profit, and the people in Russia would eat.

In our Ponzi finance economy, they load the boat first, and then sell short term bonds to finance the shipment. The company makes a profit and repays the loan with interest from the profits. Crazy, you say, because in addition to the shipping expenses the company now has to pay finance charges out of the same profit. Sure, it’s crazy, but only if you are sane.  

Here’s where we wave the magic wand of Ponzi finance: management at the shipping company says to itself “let’s pay back the bonds by issuing new bonds.”  Ouch, that’s stupid!

Management might think it’s cool, but this is just like you using MasterCard to pay Visa. It works, but only for while. And it doesn’t just stop working. It crashes.

Agricultural companies in a Ponzi finance economy play the same game, but it’s you who will be caught in the food riots.

This is why it is so crucial to understand that up till now the Obama administration has done everything right to create food shortages. There’s no doubt about it; unless the government gets out of the way and lets the free market do its job, there will be food shortages. The only question is where and how hungry will you be.

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