Commentary on Political Economy

Thursday 30 June 2011

Si le Grain ne meurt (If the grain does not perish - Andre' Gide) - Corn Prices, Inflation, QE3 and ... Bill Gross

I notice that that “twit”, Bill Gross, has been twitting furiously this morning about the rise in US bond yields – like a churlish child who knows that he has made a disastrous bet and clasps at straws just to get even! But the fact of the matter is that this is a reaction to the end of QE2 and a “relief rally” due to the latest “successful Greek rescue” (which merely postpones the inevitable) as well as jitters about inflation in the US. I have argued at the Gavyn Davies Blog (FT) that mild inflation in the US is due to the J-curve effect with a lower dollar and higher commodity prices caused by cheap money-funded speculation. But speculation will get its come-uppance once the Chinese economy starts to implode, and so does Germany’s, under the weight of the massive amounts of greenbacks that are pushing interest rates and inflation to impossible levels in China, Brazil, India, Indonesia and everywhere else.

This FT story on the collapse of corn prices overnight says it all (the worst plunge in 15 years! – which tells you how much speculative money there is out there!):

The fact of the matter – something Gross and Co. had better drill into their heads – is that bondholders no longer run the show because the US Administration and the Fed cannot destroy the US economy by abandoning it to the vagaries of “the private sector”, which is not invest and will not invest because there is no “demand” on which to invest and – as you can see – the minute there is even the “sniff” of demand… inflation shoots up! The “margin” of capitalist action (capital’s “profitability”) is extremely low – which means that nominal wages remain high, deficits are stubborn, and unemployment cannot recede until the so-called “surplus countries” – from China to Germany and Japan – start behaving like “civilised” governments and expand domestic demand, instead of engaging in “wage suppression and demand repression and export subsidisation”!

The upshot? If this continues and US employment does not recover there will be renewed deflationary pressures – which will induce Bernanke toward QE3… and Bill Gross to sell his shirt.

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