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Bernanke's Box

Written By Brian Hicks

Posted June 23, 2008





In the face of high prices for practically everything these days, the inherent evils of inflation deliver a tough lesson in every trip to the cash register.

Inflation, after all, is a pervasive danger that is hard to stop once it gets started. That’s because high costs destroy the very price stability that markets thrive on.

Without them there is nothing but market chaos, since price rapid price fluctuations in one market inevitably wash over into other areas—-swamping them too.

That’s why the folks of our own Federal Reserve talk tough about inflation once in a while-even if they don’t really mean it.

The problem with this approach, however, is pretty simple: When the Fed chooses to ignore inflation, it opens up a Pandora’s box.

Of course, you may remember the story of Pandora. She was the first woman according to the Greeks.

Zeus sent her down to earth with a box of troubles in her suitcase, to get even with those rotten men. And before she left, he told her one thing, “What ever you do, don’t take the lid off of that box I gave you.” With that he sent her on her way.

Of course, it wasn’t long after that when Pandora opened up the box and the evil that it contained was loosed upon the earth.

Now, fast forward a few of thousand years, and the Federal Reserve has done practically the same thing. Six years of rate cuts and monetary hi-jinks have unleashed a pestilence of their own.

And with food and energy prices going now through the roof, the Fed has now given us a problem that can’t be easily reversed. Price inertia, after all, has a ripple effect.

Here’s a perfect example of what I’m talking about.

It comes from the grocery aisle, where the pain now promises to become much worse.

From AP by Stevenson Jacobs entitled: Record corn prices mean more expensive meat, dairy.

Raging Midwest floodwaters that swallowed crops and sent corn and soybean prices soaring are about to give consumers more grief at the grocery store.

In the latest bout of food inflation, beef, pork, poultry and even eggs, cheese and milk are expected to get more expensive as livestock owners go out of business or are forced to slaughter more cattle, hogs, turkeys and chickens to cope with rocketing costs for corn-based animal feed.

The floods engulfed an estimated 2 million or more acres of corn and soybean fields in Iowa, Indiana, Illinois and other key growing states, sending world grain prices skyward on fears of a substantially smaller corn crop. The government will give a partial idea of how many corn acres were lost before the end of the month, but experts say the trickle-down effect could be more dramatic later this year, affecting everything from Thanksgiving turkeys to Christmas hams.

Rod Brenneman, president and chief executive of Seaboard Foods, a pork supplier in Sawnee Mission, Kan. that produces 4 million hogs a year, said high corn costs were already forcing producers in his industry to cut back on the number of animals they raise.

“There’s definitely liquidation of livestock happening,” and that will cause meat prices to rise later this year and into 2009, said Brenneman, who is also the vice chairman of the American Meat Institute.

Even before the floods, Tyson Foods was complaining that high grain prices would drive up its costs by $600 million this year. The world’s largest poultry company has already raised its prices over the past year, and expects to keep raising them, CEO Dick Bond told analysts at a conference in May.

Higher feed prices will eventually filter through to the cost of milk, cheese and yogurt, too, since 65 to 75 percent of a dairy farmers’ production costs are for feed, said Chris Galen, a spokesman for the National Milk Producers Federation.

“If we all feed less corn and get less production, then the price at the grocery stores are going to go up,” said Rice, who supplies milk to grocery stores in Omaha and around Kansas City.

Without easy ways to cut costs, many livestock producers will have little choice but to slaughter more animals and send them to market.

“We’re in survival mode now,” said Paul Hill, chairman of West Liberty Foods, a turkey processor based in West Liberty, Iowa. He estimated U.S. turkey producers will reduce their flocks by 10 to 15 percent nationwide, a cutback that will send consumer prices dramatically higher.

“The cost of Thanksgiving and Christmas turkeys will go up this year, and maybe even more next year,” said Hill, who is also the chairman of the National Turkey Federation.

If corn were to rise to $10 a bushel, Richard Lobb, spokesman for the National Chicken Council, said recouping costs through higher retail prices may not be possible.

“Can you possibly charge enough for the chicken to recoup that investment?” he said. ‘That’s a question no one can answer yet because it’s never been done.'”


Now that is one scary statement.

But that is the kind of market wrenching unpredictability that you turn loose with inflation.

By the way, in common terms, to open a Pandora’s Box means to unwittingly unleash chaos on yourself and those around you.

The inflation box is one that Bernanke should have never opened.

But even in Pandora’s story there was still Hope left in the box.

Let’s hope the Bernanke gets it right this week—battling inflation has to start somewhere.