Friday, May 30, 2014


A well-known blogger, Mr. X,  claims food prices are high because mankind eats oil. In fact, he says, "...regardless of what we eat, we're actually eating oil." His beliefs are fraught with fallacy and superstition.

First, Mr. X says "the cost of basic foods keeps rising" when he should have written price instead of cost. Cost is outlay. Cost is the sum of purchases.

However, Mr. X's claim is not true. Prices have been falling for years.

Sure, the denominational price of food has been rising, you know, in dollars. However, stripping out  the effects of inflation of Federal Reserve Bank Units, the bank credit that consists of the dollar, true prices for food have been falling. Food prices have been falling even before massive deflation of bank credit since the Banking Crisis of 2008.

When you stop and then start to think about it, food prices should be falling. Owing to technological advances, food producers have become more efficient. Owing to NAFTA and CAFTA trade agreements, there is more output of crops to markets. Because food producers have become more efficient, food sellers can accept winning bids and still maintain profit margins.

So why does it hurt when spending wages for food in denominational prices? Well, along with food prices, wage rates are prices too. True wages have been falling right along with food prices (to learn why, check out the chart socialists and politicians don't want you to see).

So back to Mr. X. Mr. X claims food prices move "in virtual lockstep with the one master commodity in an industrialized global economy," that is with oil prices. Thus Mr. X  concludes that cost of oil sets the price of food. Mr. X falls for the long discredited fallacy of David Ricardo that the price of something is set by the cost.

There is one, true, infrangible law for the whole of trade and one great axiom — the Law of Prices and the Axiom of Profit. The Law of Prices holds the winning bids of purchase and sale in the face of what is on offer sets the price. The Axiom of Profit holds the sum of sales on extant prices must at least equal the cost of production otherwise the producer goes to ruin.

It's winning bidders for food who set prices. Once prices are set, those farmers whose marginal cost of production exceed winning prices get pushed into loss and ruin. Those farmers who can at least break even on costs stay in the game. So winning farmers take prices that have them break even on their largest cost components — oil-based diesel to run tractors.

Let's let the pictures of reality tell us the truth. First, let's look at food prices versus diesel with expressed in True Dollars™.

Diesel prices (fat black line) rose a whopping 133.21% during the Greenspan-Bernanke Bubble, the greatest inflation of bank credit in the history of mankind. As always bank credit inflation is the only kind of inflation that ever has existed.

As you can see, even in the face of rising diesel prices, food prices fell. Only steak and burgers saw a slight rise in prices during the Greenspan-Bernanke Bubble. Even with those rises, prices were lower during the Greenspan-Bernanke Bubble than compared to the late 1980s.

Now, let's look at food prices versus potash with expressed in True Dollars™. Of course, potash is fertilizer derived from mined potassium salts.

The price of potash (fat green line) for each ton shot up an eye-gouging 163.7% during the crazed Greenspan-Bernanke Bubble!

Mr. X laments over Fed Res central bankers, blaming their policies for fueling oil prices higher. However, what does the picture of reality say about oil prices using West Texas Intermediate as the global oil surrogate?

Like everything else, during the Greenspan-Bernanke Bubble, the greatest inflation of bank credit in the history of mankind, the price of WTI shot up 55%! With the 42% deflation since, prices have fallen. 

As Mr. X sees higher prices for food expressed in current dollars, so too does he see higher oil prices expressed in dollars. Mr. X offers two reasons why.

First he blames evil speculators in futures contracts. Blaming speculators is an ace-in-the-hole move. Next he blames Fed Res bankers for purported credit creation that allegedly has "weakened" the dollar.

If food prices were really rising while wages really falling, there would have been riots on the streets by now. Americans would have experienced their own "Arab Spring."

Mr. X doesn't understand the reality of trade. He sees conspiracy around every corner and thus seeks to lay blame on purported evils.

Mr. X lives by what I call contemporary-age superstition. Mr. X has been educated and thus he believes he is modern, contemporary, in-the-know, not like the peasants of the Middle Ages or even early modern times.

Yet, Mr. X is little different than those of the past likely he would ridicule.

Unless you are willing to accept these facts of reality, you cannot know reality, Instead, you too shall be living like Mr. X by contemporary-age superstition. 

When you believe in things you don't understand ... ♪♫