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Food for revolution


HAROLD JAMES


Weak food security highlights all of the major problems of the modern world non-order. Economic and financial nationalisms threaten. There is talk of currency wars, national management and regulation of banking, and growing demand for greater levels of trade protection. And all of these issues are inter-connected.

The discussion of monetary policy is especially divisive. Because of low interest rates in the United States, major financial institutions can borrow cheaply in dollars and then chase much higher returns in the major emerging-market countries.

The result creates an impossible dilemma for many of the world's most dynamic economies. If they try to clamp down by raising domestic interest rates, they will only attract greater capital inflows. If they let the exchange rate rise, they might deter some capital inflows, but they would also penalise their exporters and push up domestic unemployment. Emerging-market policymakers in big countries such as Brazil, China, and Turkey routinely attack the US and its monetary policy as a source of inflation, social tension, and political instability.

The most obvious and dangerous consequence of low interest rates in the major industrial countries is their impact on commodity prices, which is especially pronounced for food and fuel. As many economists, notably Jeffrey Frankel, have shown, prices on these markets are established by an auction-like process; as a result, commodity markets transmit the effects of monetary expansion particularly quickly. By contrast, branded products, into which producers have sunk major investments in securing the market, have prices that are much stickier and do not reflect the effects of monetary policy as rapidly.

WORLD INFLATION RATE 2010
Higher food prices have had a major impact in expanding the area devoted to cultivation in many countries, and have led to higher output levels worldwide. Brazil, Russia, and China, but also Algeria, Egypt, and South Africa indeed, all African countries that have maintained functioning governments have seen dramatic increases in food production over the past decade.

This should be a happy picture: the world is now better able to feed itself. But the same economic stimuli that underpin higher food output also lead to supply problems, a decline in living standards, and massive social strains, especially in urban centers.

This is important to bear in mind, because rising food prices have historically been the trigger for political revolutions. The three revolutions that made the modern world, in France, Russia, and China, all had their immediate origins in food shortages, fear of hunger, and disputes about food pricing.

The panic about bread that swept France in 1789, and the inability of the government to guarantee supplies, destroyed the ancient regime. Louis XVI was contemptuously called "le boulanger," the baker. Wartime inflation destroyed stability in the Russian empire in 1917, as farmers, worried about the declining value of their money, hoarded their output and let the cities starve. The Bolsheviks came to power on a promise of bread (and peace). China, too, was paralysed by inflation after the Second World War, leaving it vulnerable to food panics.

Food prices are usually not limited in their effects to one country alone. Simultaneous revolutions swept Europe in 1848, in the aftermath of crop failures whose most notorious manifestation was the Irish famine. Price rises have been a major trigger of the discontent this year in the Middle East and North Africa. Though the Egyptian and Tunisian economies were expanding quite satisfactorily, people had to pay much more for food.

Moreover, it would be wrong to view this as a purely regional phenomenon limited to the so-called Arab Spring. The same kind of unrest, in which the countryside is pitted against the town, with both sides demanding more rights, could undermine the political order in China and other big emerging-market economies.

Recent decades have been replete with contagious financial crises that spread disorder from one country to another. The effects of globalised money are now producing a new whirlwind. The coming years or even months are likely to see new forms of these domino effects. As in 1848, the struggle for affordable food is producing discontent that transcends national frontiers, threatens established regimes, and fuels popular demand for a more just political order.

Project Syndicate

Harold James is professor of history and international affairs at Princeton University. He is the author of The Creation and Destruction of Value: The Globalization Cycle.



1. B2B

Some hints about today's Banking System

We can possibly extrapolate a scenario pertaining to the real Banking System now prevalent everywhere where capitalism reigns, no less. To understand its mechanical setup, let us call the bank the Monopoly Bank.

Supposing a person decides to deposit his latest remittance input sent over by his kin from abroad. A sum of $1000 he decides to deposit the same in the aforesaid Monopoly Bank. Moreover, let us put the sum on an account as a Primary Deposit.

Assets               Liabilities

Cash + 1000       Demand Deposit + 1000

Primary Deposit    (Increase in Money Supply)

                                        (MS)

At this stage, there ain't particular change in the situation of the MS (Money Supply)-only the composition of its M1 outside bank to M1 in Demand Deposit.

Again, let the bank do what it best knows to do: a) keep a little portion in reserve to meet eventual cash demands, and b) lend the remaining amount out to those who borrow.

Granted that the bank has a desired Target Reserve Ratio of .15 (15%) to meet customer's cash demands (when you go to the bank and eventually draw cash).

Out of $1000 bank keeps back $150 and lends out the rest $850.

Eventually, when somebody borrows from the bank $850, the same bank may get another deposit of $850 (lest the new borrower-customer hides it underneath his matlass!)

This being an one bank scenario, ie, Monopoly, the said bank now possesses the following data:

Assets                             Liabilities

Cash + 1000                  Demand Deposit + 1000

Loan + 850                     850

Total sum = 1850             1850

At this stage, the total MS (Money Supply) amounts to $1850

Again, bank holds 15% of $1850 in reserve and then lends the remaining amount out. This process goes on repeating indefinitely unless the bank can no longer lend out money. This kind of whole concept defines itself as DEPOSIT CREATION MULTIPLIER.

Let us put them out in comprehensive formula:

New Deposit/ Target Reserve Ratio.

Ex. $1000/ .15 = $6666.67 in new deposit (MS goes on increasing as well.)

In this process, the theoretical maximum amount depends on whether the Target Reserve Ratio is correct or not. What really affects it involves a) number of worthwhile borrowers b) no currency drain c) no precautionary balances d) no clearing drain. Furthermore, let us see some additional items therein that may affect as to how much money the bank can create.

1)Granted that a 5% currency drain = MS (Money Supply) liable to expand to $1000/.15 + .05 = 1000/.20 = $5000.

What is the position of the bank:

Assets                                Liabilities

Cash $750                         Deposits $5000

Loans $4250

In case, the bank decides to holding back another precautionary balances of 5%, hence, MS expands at this point to = $1000/.15 + 0.05 + 0.05 = $4000.

Further, granted that the bank has foreign currency deposits to hold some extra reserves of .02 (2%), MS will in this case expand by $1000/.15 + .05 +.05 + .02 = $3,703.70.

Here above, I tried my best to inform you about how today's Banking System creates wealth using a scenario of a single bank acting as a Monopoly without any competition in the marketplace. It could be quite hard to change this system. Even then, let us be hopeful that some changes might come off it any old how.

When banks loan out 20 times the 'money' (actually the fictive e-money) that they have on hand, they deliberately are practicing fraud. And in a nutshell this is how the modern Banking System functions, albeit all world think tank and cognoscenti are aware of the conundrum encountered by the practitioners who are craving for better regulated and restrictive system.

Let me now pull together the threads of my previous argument.

As always, the Banking System is all pushing and pulling. By the same token, only two things count in economy. That is, offer and demand. For once, why are there oftentimes more and more scholars strenuously busy enough with their higher studies like the MBA? For the evident fact that we haven't come to terms with all those financial and economic branches highlighted by marketing and communication.

Some simple things like what difference has it between the price and value?

What if a price of an object is zero, it means it has no value, albeit value and price are two notions completely different.

Next, price ain't determined by value. Instead, it is determined by the intersection of supply and demand. Value is something that when somebody longs to possess at all costs an object he is ready to pay the price anything inferior to what he has gauged it is worth of that intrinsic value. For instance, an object's value is estimated at $10, then he'll do everything possible to buy that object at a price inferior to $10.

The Western capitalistic market system ain't based on price of products. Instead, it is based on value of products. Which is why, this system doesn't encourage lower prices. Hence, more or less speculation and 'Casino Economy' flourish everywhere.

As Lincoln once coined, " No man is good enough to govern another man without his consent." In the same manner, no terrestrial theory of any sort can permanently overshadow those alert and smart brains that need neither nannying nor paternalizing.







LATEST ISSUE
638
(11 JAN 2013 - 17 JAN 2013)


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