Step Aside Dollar, Is Rice the New Global Currency?

The global food crisis is a monetary phenomenon, an unintended consequence of America's attempt to inflate its way out of a market failure. There are long-term reasons for food prices to rise, but the unprecedented spike in grain prices during the past year stems from the weakness of the American dollar. Washington's economic misery now threatens to become a geopolitical catastrophe.

Months ago, I offered that China, Russia and other cash-rich nations held the antidote to the incipient credit crisis: "If the US wants to remain the magnet for world capital flows it became during the 1990s, it will have to allow the savers of the world to become partners in the US economy, that is, to buy into its first-rank companies."

No such thing occurred, of course, as Washington has made it clear that it would not allow sovereign funds to own the likes of Citicorp. What are the world's investors doing with the trillion dollars a year they used to invest in American securities, including subprime derivatives and various forms of collateralized obligations that turned out to have more obligation than collateral? They aren't buying American companies because they are not permitted to. They are buying food and other stores of value instead.

Washington has weakened the value of the dollar as a palliative for the credit crisis, so much so that "nobody seems to doubt that the US dollar will lose its status as the world's reserve currency", as journalist Amity Shlaes wrote in an April 9 Bloomberg News column entitled "Monks may hold clue to dollar's future".

"Perhaps the dollar won't surrender its anchor role so soon," Shlaes continued. "And perhaps that loss, if it comes, will happen because of events that take place nowhere near men in suits at a central bank. Maybe the answer to the dollar's riddle can be found in the cellphone photo image of a Tibetan monk in crimson and orange squaring off with a Chinese soldier China might recede into years of ethnic chaos. In any of these cases, the new Chinese government won't be forced to deliver the same growth, and therefore won't spend commensurate energy tending the dollar The flash of orange in the robe of the monk is important enough to change the picture for the greenback."

Misguided is not the word for this sort of thinking. However unlikely it might be, one cannot exclude the possibility that "ethnic chaos" will afflict China at some future point. The one thing that can be stated with certainty is that long before chaos reaches China, it will have shattered a great deal of the rest of the world.

China is exchanging its depreciating reserves of US dollars for things of value, notably rice, with frightening consequences for dependent countries, and deadly consequences for American foreign policy.

The chart below shows the price of 100 pounds of rice against the euro's parity against the US dollar during the past 12 months. The regression fit is 90%. There is an even tighter relationship between the price of rice and the price of oil, another store of value against dollar depreciation.

Rice price vs Euro/US$ rate, April 15, 2007 to April 15, 2008

As the chart makes clear, the ascent of the cost of rice to $24 from $10 per hundredweight over the past year tracks the declining value of the American dollar. The link between the declining parity of the US unit and the rising price of commodities, including oil as well as rice and other wares, is indisputable. China has bid aggressively for rice all year, and last week banned rice exports, along with Vietnam and several other producers.

Euro/US$ rate vs rice and oil, April 16, 2007 to April 16, 2008

For developing countries whose currencies track the American dollar and whose purchasing power declines along with the American unit, this is a catastrophe, as World Bank president Robert Zoellick warned the Group of Seven industrial nations in Washington last week. Food security suddenly has become the top item on the strategic agenda.