SCM Inflation Watch: U.K. Pork

Yet another example of how inflation unfolds, and further evidence that it is continuing to unfold today (despite falling prices seen in housing and certain financial assets):

British pig husbandry is in crisis. Exploding global grain prices have driven up the cost of animal feed and farmers say they’re now selling every pig they raise at a $50 loss. Many farms could go belly up, they warn.

Global wheat prices have more than doubled since November 2006, as harvests fail in places such as Australia, more agricultural land is diverted to biofuel production, and growing affluence in China and India boosts demand for grains. A British government scientist said earlier this month that global grain stores are currently at their lowest levels ever, just 40 days from running out.

Paulson: Social Security and Medicare

Every stakeholder in the U.S. Social Security and Medicare systems should read the Treasury Secretary’s recent comments on their status, following release of the Trustees’ annual reports to Congress. The outlook for Social Security is not pretty:

Social Security’s unfunded obligation–the difference between the present values of Social Security inflows and outflows less the existing Trust Fund–equals $4.3 trillion over the next 75 years and $13.6 trillion on a permanent basis. To make the system whole on a permanent basis, the combined payroll tax rate would have to be raised immediately by 26 percent (from 12.4 percent to about 15.6 percent), or benefits reduced immediately by 20 percent.

 And the outlook for Medicare is especially dire:

The 2008 Medicare Trustees Report shows that the Medicare program poses a far greater financial challenge than Social Security. Medicare faces the same demographic trends as Social Security, and, in addition, the system must cope with expected large increases in health care costs. Medicare’s annual costs were 3.2 percent of GDP in 2007, or nearly three-quarters of Social Security’s, but are projected to surpass Social Security expenditures in 2028 and reach nearly 11 percent of GDP in 2082, compared to 5.8 percent for Social Security.

Cash flow for the Hospital Insurance (HI) Trust Fund is projected to be negative this year and for all subsequent years. The HI Trust Fund is projected to become insolvent in 2019, the same as projected in last year’s Report.

Barring any truly creative solutions, FICA burdens (payroll taxes) will increase. And because those taxes are regressive, this will only exacerbate the anxieties (and underlying realities) of growing income disparity in the U.S. Lump in the heavier tax burden expected from a Democratic President and Congress, and the outlook becomes that much uglier, even Japan-like.

There are two silver linings to a Democratic economy that we’re currently aware of: (1) an allegation that Senator Clinton would lower corporate tax rates as President, and (2) Rep. Rahm Emmanuel’s recent calls for universal savings accounts. Unfortunately, these two items are far too little to inspire any optimism about U.S. economic policy and performance under full Democratic control.

On a side note, it’s interesting to think about how the current policy threats arose. In 2006, the electorate resoundingly handed Congress to the Democrats, 12 years after the Gingrich-led GOP takeover.  To us, it appears that the relevant factors were dissatisfaction with the state of affairs in iraq, and with corruption and rampant pork in the Republican Congress. The mandate then, at least on a national level, was to (1) address the problems in Iraq and (2) address problems of pork and corruption. However, as it usually happens in electoral politics, the mandate was taken to be whatever any particular interest group wanted it to be. Thus, we’re faced with the prospect of legislation aimed at "tax fairness", wealth and income redistribution, "fair (not free) trade", and costly environmental measures borne of a renewed Malthusian hysteria that has been dormant since the 1970s* (to be fair, some of the Malthusian hysteria may turn out to be valid, but that does not change the fact that looming costs are sure to be imposed upon the economy, whether it’s by climate disasters, risk averse legislators, or both).

*-The 1970s were a period with some important parallels to today, with the following distinctions: China is playing the role filled by Japan in the 1970s; the Bernanke Fed is playing the role of the Burns and Miller Feds, except that its focus is on housing and credit markets, whereas Burns/Miller focused on employment levels; and Congress is playing the role of, well, Congress, blissfully unaware that monetary policy is not the best suited lever to domestic economic turmoil, tossing in some rather meaningless fiscal measures, and saying little about the importance of meaningful, pro-growth tax reform. In the 1970s, it all started to turn around in 1977-1978, although the full effects did not kick in until the early 1980s, and only after a (perhaps excessive) use of draconian monetary policy to ‘break’ inflation expectations. It was a good 10+ years between the start of the crisis in 1971 and the eventual turnaround in 1983. Here’s hoping we don’t have to wait that long this time around, although it is seems possible, given where we are in the political cycle.

Economist: What Went Wrong?

An excellent piece of forensics from The Economist on the credit market meltdown, with some sage advice for regulators:

If altering pay cannot stop manias, can regulation? The criticism that this crisis is the product of the deregulation of finance misses an important point. The worst excesses in the securitisation mess are encrusted precisely where regulation sought to protect banks and investors from the dangers of untrammelled credit growth. That is because regulations offer not just protection, but also clever ways to make money by getting around them…

The financial industry is likely to stagnate or shrink in the next few years. That is partly because the last phase of its growth was founded on unsustainable leverage, and partly because the value of the underlying equities and bonds is unlikely to grow as it did in the 1980s and 1990s. If finance is foolishly reregulated, it will fare even worse.

For an alternative perspective, see former SEC Chairman Arthur Levitt’s op-ed in the Wall Street Journal on March 21st, "Regulatory Underkill" (stop and think about the word "underkill" for a moment). In addition to calling for measures that will increase market transparency for certain securities, he also alludes to structural change of regulatory agencies, although not the the extent that Rep. Barney Frank is calling for. Levitt writes:

Ultimately, those who were so concerned with Wall Street’s competitiveness need to realize that the true competitive advantage of America’s capital markets has long been their high quality…leaders and policy makers need to put their ideological fixations aside and commit themselves to giving investors the levels of transparency and accountability they deserve and expect from the world’s strongest markets.

In our view, we agree wholeheartedly that quality count in attracting capital, and the rules governing the game are a critical determinant of market quality. However, comparative regulatory burdens count too. Levitt, Frank, and others would be wise to heed the insights of The Economist article quoted above, especially if the financial industry is due for an inevitable period of contraction, as heavier regulatory burden may only exacerbate the industry’s downturn.

Associated Press: Car Towing Schemes

How’s this for a sign of commodity inflation? Associated Press reports that people are towing abandoned cars to salvage yards for their scrap metal value:

Authorities say such schemes are becoming more common across the country due to high steel prices. 

Michele Staton, executive director of the Pennsylvania Auto Theft Prevention Agency, says some tow truck drivers have been illegally picking up abandoned vehicles. She says they take them to scrapyards and get money for the parts and metal.

 

Martin Wolf: Banks Undermining Globalization?

Martin Wolf of the Financial Times has pulled no punches in his assessments of the financial industry since the onset of the current credit crisis, and he has expressed concern that reckless banking practices may undermine the political credibility of economic globalization. However, as we point out in our recent Idle Speculator piece, the risks to globalization’s credibility do not just arise in the private sphere. The also emanate, today and historically, from the private sector.