I am not convinced of your supply and demand reasoning ( How We Can Have Both Inflation and Deflation (October 17, 2007).

Firstly people in China and India were eating BEFORE the recent radical increase in wheat prices, the difference is that they are eating "better" now.

Why are they eating better? They have more "money" to buy wheat. There cannot be an increase in demand unless there is more money available to spend. It was the export of capital "money" to Asia which fueled the growth and therefore created surplus cash to live better.

Take a look at the bimetallic system of the US in the 19th century. The farmers complained that the eastern bankers restricted the supply of silver so that people would have less money to buy food therefore prices would stay low and farmers would suffer no matter how hard they worked. The farmers claimed this was done to keep them politically and economically powerless against the bankers. Thus the rise of the Progressive Movement.

Prices cannot rise unless there is additional money available to purchase goods. If money supply is static (or equal to growth) prices cannot rise even tough the economy can expand.

The reason why prices have spiked is that the increase in the money supply (by the Central Banks) has outstripped normal organic growth capacity.

I am using wheat of course as a proxy for the general commodity inflation we are experiencing globally which I believe is the result of excess money supply to reflate after the stock market crash of 2000. This resulting inflation is a form of "malinvestment" where money is created to prevent a depression, but it doesn't necessarily go where intended.

I take your point about Chinese possibly reallocating savings or income to "wheat" to cause a price rise. But look at the larger picture of an economic system. If enough people change their purchasing preferences say to wheat to the detriment of say corn, there will be a spike in the price of wheat, but that would be remedied in the next growing season when farmers switch to plant more wheat. So the system would balance out quickly. But remember even in the initial event the poorer corn farmer would have less money to buy as much wheat as he usually might! The point being in a "closed" system where money supply is static it is very hard for any prices to get very far out of whack simply because most people have fully allocated their income at all times and even a sudden mass change of preference would just mean less money to spend on other things so those prices would fall and there would be no overall inflation..

In the words of the Classic Economists ...Inflation is always the result of an increase in the money supply. Take a look at the work of Mises and the Austrian school. You might also take a look at an agricultural/ health/political publication called Acres USA a truly remarkable resource with a unique editorial perspective

www.acresusa.com.

This is rather ominous. This gentleman should know of what he speaks as the Japanese have been supporting the dollar's value for many years. And I assume that you've seen the ARM reset chart out there. The ARM resets don't peak for about another six months and the full impact of those resets will not be felt for at least six months after the reset peak, possibly longer with expected foreclousre increases. 2008 will be quite challenging, to say the least.

Sakakibara Says Dollar May `Plunge,' Forcing Response

Thank you for the blog, I enjoy your writing very much! Your article today really hit home. "I'll Just Rent It Out"--Don't Be Too Sure (October 19, 2007).

I live in Georgia and have been investing in distressed real estate through tax sales and foreclosures for the past 11 years. I started turning pessimistic on real estate in 2004, thinking that the crazy things I saw couldn't continue forever. They kept rolling for 2 more years and I missed out on making some money.

Earlier this year I purchased 6 houses at a REO auction, two of which were at 60% discounts off of their prior 2005 sales. I figured I would buy them at a great price that would allow me to replace the stolen HVAC systems, the stolen copper plumbing and do the other necessary repairs and still allow for pricing well below the other homes in the area and make a decent profit. In August I attended another REO auction and watched similar properties get knocked off at prices 15-20% below what I had paid 3 months earlier. That day I felt the falling knife. And I still own all 6 of the properties.

I still feel ok about what I bought because I have no mortgages and I can rent the properties for rents that will cover the costs and leave some left over, but I realize now that I was buying much too early. I thank my lucky stars that I have been successful over the last 11 years and was not in a make or break situation on selling these properties!

Keep on telling it like you see it, you are doing a great job!

The Future Is Drying Up (New York Times Magazine).

The thing that annoys me about this article is they go pages at a time without even mentioning the solution of pricing water at market rates. And then they dismiss it as "too harsh." The whole idea of prices as market signals is just missing. If water were getting more expensive, people would change their landscaping without requiring new government regulation. The farmers would also get the idea that farming in the desert is not profitable long-term.

As the article mentions, in some places, 90% of water goes to agriculture. So this entire problem would just go away if water were priced correctly. Farms would move to the wetter regions and gradually shut down in the drier ones. This process would be well under way if water hadn't been locked up in state-level contracts for decades now. And it's not as if there are no wet regions in the U.S. where the farms could move to. I think the upper midwest has been losing farming for decades, not due to inability to farm, but due to competition from water-subsidized areas elsewhere. Same thing with the northeast, which used to be more agricultural than it is now.

This water scarcity is exactly what happens when you run a complex system with politics instead of markets. It reminds me of all the articles I read about NHS or the Australian public hospitals. One thing after another goes wrong, and the only response is "the government should do something about this!" Which simply makes the problem worse.

The Future Is Drying Up (New York Times Magazine).

This article does a wonderful job of showing how our society's thinking has gone bonkers.

An 18 page long article -- probably over 10 thousand words -- and the reporter never stumbles over two large facts, because (I'll bet) NONE of the many experts consulted mentioned them.

1. The west has lots of water in the west. Not enough to grow crops in the desert, something future generations will consider crazy. But enough for many more people than are there now. (The author hints at this, but never grapples with the implications of growing water-intensive crops in the desert -- something possible only with massive govt subsidies).

2. More importantly: the US population is not growing. The massive population growth the SW anticipates results from economic mismanagement of the water-rich NE -- and resulting outmigration. Empty houses, unused infrastructure in water rich areas. Massive govt subsidies to build infrastructure in the desert. That's Logic!

The reporter never asks where all these people are coming from. They're not all -- or even mostly -- from Mexico. States like MI, NY, OH have had outmigration for decades -- as the good liberals in charge have run their economies into the ground. I've lived in three NE cities and seen this firsthand. Starting and running businesses in these areas is a struggle compared to the western states. Look at Michigan, with a bloated public sector, voting to raise taxes as its economy implodes.

So people vote with their feet -- the only meaningful way to vote in America, it seems -- going to new lands.

Gross mismanagement of public affairs leads to ever more crises - but articles like this never even touch on the underlying factors responsible.

I just read your essay today regarding the loaf of bread price index. Housing Declines: Don't Forget About Inflation (October 22, 2007)

I too have often thought that bread would be a good index - but there are others. I thought you might find the Mars Bar index interesting.

There was a chap called Nico Colchester who proposed pricing things in mars bars during the high UK inflation of the 80's. I just love his wording:

"It is now two years since this column, provoked by incessant sterling inflation, first introduced the Mars Bar as an alternative currency. This small ingot of staple commodities, packaged with great consistency since 1932, is the ultimate unit of consumer wealth. When historic prices and incomes are expressed in Mars Bars (MB) they display consistency and reassuring stability, whereas measurement in shrinking pounds leads to disorientation and dissatisfaction. "

"Despite the sterling efforts of the Government, the pound today stands at an all-time low of 17p against the Mars Bar, down from 15p two years ago. It has thus lost value at a real rate of 6 per cent per annum, a figure which tallies with the cost of living statistics concocted by the Government (a misleading concept: the cost of living is a constant, like the Mars Bar, and indeed for addicts the two are synonymous. It is the value of sterling that is wayward)."

Mars Bars revisited

More on the Mars Bar Index

Interesting analysis on "real" value for houses. However, I do believe the same principal also obtains when explaining why the middle and working classes not only "feel" squeezed (don’t they see how well the economy is doing; their pessimism must be irrational) but actually "are" squeezed, to the point where even Wal-mart sales are suffering and paycheck “binge” spending on necessities like milk and bread are driving up 7-Eleven sales. Forget housing in “loaves of bread.” How about actual bread in "loaves of bread"!

Zeus also sent in a comment entitled "Don't Buy Acronyms":

Now they have this tripe called M-LEC, yet another fig leaf investment vehicle which is a cross between flypaper for the gullible, and bailout for the wealthy. I think the best motto these days is to simply don’t buy, invest in, or otherwise get anywhere close to any acronym— SIV, CDO, MBS, or whatever else they throw at you. It just keeps getting to be more and more like Enron with all their "cute" acronyms for off-the-balance-sheet junk and dummy corporations, subsidiaries, etc: "The JEDI LP (The Joint Energy Development Investment LP) was first, in 1993. The possible coincidence "just started a series of Star Wars names," according to Enron spokeswoman Karen Denne. These included Chewco Investments LP, Kenobe Inc and Obi-1 Holdings LLC. Chewco, in particular, is implicated in manoeuvres to obscure the debts of the parent company."

(guardian.co.uk )

Great article on M-LECs the new boondoggle:
counterpunch.org)

Here's an excellent series I happened to come across. As a former university education professor, it is a remarkably clear and lucid explanation of the system of money creation and what might be done about it. It recalls Bernard A. Lietaer’s book ( The Future of Money) and a little-known earlier publication by engineers ('money scientists'), Theodore R. Thoren and Richard F. Warner, called ( The Truth in Money Book).

(Parts One through Five, about 11 minutes for first four and 3:30 for the last (which is mostly just credits):

Part 1
Part 2
Part 3
Part 4
Part 5