Sunday, April 13, 2008

Food Crisis

It seems attention is shifting fairly rapidly from the financial crisis to the food crisis:

Grains Gone Wild
World Bank Leader Urges Action on Food

There are many factors in play here but, as in the financial crisis, complacency and poor judgment are major factors, specifically the allowing of stockpiles to dwindle on the basis that risk was/is spread (financial parallel: allowing of capital cushions to dwindle). This on the basis that if one country's harvests fail then they can simply import from another, or, if one mortgage fails then the impact is diluted by the remaining good mortgages. Umm yeh.

Both systems have exhibited the same flaw which is that risk estimation was based on uncorrelated entities/phenomenon/whatever cancelling each other out, whereas in times of crisis those correlations can break down, and break down in unpredictable ways - often the uncorrelated entities become strongly correlated, why? precisely because they were modelled as being uncorrelated. Such a model, when acted on by governments actually connects the uncorrelated entities - e.g. we need A or B, reduce stockpile of both because we know we will always have one or the other. Both fail, e.g. crops in Oz and continued cheap oil. Now no-one has adequate stockpiles so prices of A and B go up - they become correlated. And when supply is stretched to the limit for a must have resource, then prices can spike dramatically as the poorest people get priced out of the market (or starvation as it's otherwise known when dealing with food supply).

'Clever' mathematical modelling is not a substitute for reserves both in banking, food supply and any other system critical to our security and livelihood.

Ok so Mr. World Bank is calling for funding to lessen tensions in Haiti and elsewhere. Maybe I'm misunderstanding basic economics here but they don't need money, they need food. If we give them money they will buy food on the open market, the price will go up and the next poorest country/purchaser is priced out of the market. There either is enough food for everyone or there isn't, no amount of money is going to change that in the short term. Unlike the financial crisis we cannot just inject new fodo into the system like the Federeal Reserve 'injects' cash. Cash as abstract, food is real.

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