If you aren’t reading Mish’s Global Economic Trend Analysis (see IFO’s Blog list page), this should get you started. Very good post – especially on the topic of money and interest rates near the end of the piece.
Inevitably, bad things happen when governments interfere in free markets. Here’s an interesting example regarding cotton stockpiling.
In 2011, China put a floor on the price of cotton and started a stockpiling program.
In general terms, if a floor (on anything) is too high, the result is overproduction and forced stockpiling.
If a ceiling is too low (hoping to stop price inflation), as is the case in Venezuela right now, merchandise disappears from the stores and a black market thrives. (See Venezuela’s Hyperinflation Anatomy; Army Storms Caracas Electronics Stores; Total Economic Collapse Underway; Could This Happen in US?)
With cotton, China set the support price too high, resulting in massive overproduction and huge stockpiles. As an interesting twist, there appeared to be shortages in spite of the huge stockpiles.
How? Because the floor price was set too high, Chinese textile mills could get a better price by importing cotton. Ironically, all Chinese production went into stockpiles instead of textile mills, and the Chinese clothes mills had to import, driving up prices worldwide.
As a result of non-free market intervention China is stuck with half the world’s cotton supply and falling prices as well.
The Financial Times discussed this situation in China abandons failed cotton stockpiling programme. However, the Times failed to mention the free market principles as to why the program was such a disaster.
Lessons Not Learned
Curiously, China still has a soybean reserve program in place. The Financial Times notes “A representative for the Heilongjiang Soybean Industry Association said his group hoped that some sort of improved stockpiling policy would remain in place.”
Of course producers want stockpiling programs. Stockpiling causes artificially high prices.
What About Stockpiling Money?
Central banks around the world have distorted the supply of a commodity far more important than cotton: money. And what applies to cotton and soybeans also applies to money and interest rates on money.
The Fed created massive bubbles in the stock market in 2000 and 2007 via interference in the free market. The results were as every Austrian economist expected. The dotcom and housing bubbles blew sky high.
In both instances, the Fed’s response was more of the same policies that caused the bubbles. Supposedly the cure is the same policy that created the disease: more loose money!
And like the previous two bubbles, the Fed cannot see this one either.
Global Lessons Not Learned
It’s not just the Fed that’s clueless. China soaks up every dollar it can, hoping to keep its export-driven economy churning along at artificially high growth rates. Chinese banks and State Owned Enterprises (SOEs), are in far worse financial shape than US banks.
In Europe, adoption of the Euro is bound to fail. Actually the euro has already failed (it’s just not widely recognized yet).
As I look around, I see central bankers giving themselves a pat on the back for fixing the “great financial crisis”. Yet nothing is fixed. Decades of blowing bubbles of increasing amplitude over time have taught them nothing.
Timing is uncertain, but monetary and interest rate manipulations by central banks will end the same way China’s cotton stockpiling ended: in disaster. A currency crisis awaits.
Mike “Mish” Shedlock