In 1906, Alfred Henry Lewis stated, “There are
only nine meals between mankind and anarchy.” Since then, his observation has
been echoed by people as disparate as Robert Heinlein and Leon Trotsky.
The key here is that, unlike all other
commodities, food is the one essential that cannot be postponed. If there
were a shortage of, say, shoes, we could make do for months or even years. A
shortage of gasoline would be worse, but we could survive it, through mass
transport, or even walking, if necessary.
But food is different. If there were an
interruption in the supply of food, fear would set in immediately. And, if
the resumption of the food supply were uncertain, the fear would
become pronounced. After only nine missed meals, it’s not unlikely that we’d
panic and be prepared to commit a crime to acquire food. If we were to see
our neighbour with a loaf of bread, and we owned a gun, we might well say,
“I’m sorry, you’re a good neighbour and we’ve been friends for years, but my
children haven’t eaten today – I have to have that bread – even if I have to
shoot you.”
But surely, there’s no need to speculate on this
concern. There’s nothing on the evening news to suggest that such a problem
even might be on the horizon. So, let’s have a closer look at the
actual food distribution industry, compare it to the present direction of the
economy and see whether there might be reason for concern.
The food industry typically operates on very small
margins – often below 2%. Traditionally wholesalers and retailers have relied
on a two-week turnaround of supply and anywhere up to a 30-day payment plan.
But an increasing tightening of the economic system for the last eight years
has resulted in a turnaround time of just three days for both supply and
payment for many in the industry. This a system that’s still fully operative,
but with no further wiggle room, should it take a significant further hit.
If there were a month where significant inflation
took place (say, 3%), all profits would be lost for the month, for both
suppliers and retailers, but goods could still be replaced and sold for a
higher price next month. But, if there were three or more consecutive months
of inflation, the industry would be unable to bridge the gap, even if better
conditions were expected to develop in future months. A failure to pay in
full for several months would mean smaller orders by those who could not pay.
That would mean fewer goods on the shelves. The longer the inflationary trend
continued, the more quickly prices would rise to hopefully offset the
inflation. And ever-fewer items on the shelves.
From Germany in 1922, to Argentina in 2000, to
Venezuela in 2016, this has been the pattern, whenever inflation has become
systemic, rather than sporadic. Each month, some stores close, beginning with
those that are the most poorly-capitalised.
In good economic times, this would mean more
business for those stores that were still solvent, but, in an inflationary
situation, they would be in no position to take on more unprofitable
business. The result is that the volume of food on offer at retailers would
decrease at a pace with the severity of the inflation.
However, the demand for food would not
decrease by a single loaf of bread. Store closings would be felt most
immediately in inner cities, when one closing would send customers to the
next neighbourhood, seeking food. The real danger would come when that store
had also closed and both neighbour hoods descended on a third store in yet
another neighbourhood. That’s when one loaf of bread for every three
potential purchasers would become worth killing over. Virtually no one
would long tolerate seeing his children go without food because others had
“invaded” his local supermarket.
In addition to retailers, the entire industry
would be impacted and, as retailers disappeared, so would suppliers, and so
on, up the food chain. This would not occur in an orderly fashion, or in one
specific area. The problem would be a national one. Closures would be all
over the map, seemingly at random, affecting all areas. Food riots would take
place, first in the inner cities, then spread to other communities. Buyers,
fearful of shortages, would clean out the shelves.
Importantly, it’s the very unpredictability
of food delivery that increases fear, creating panic and violence. And,
again, none of the above is speculation; it’s an historical pattern – a
reaction based upon human nature whenever systemic inflation occurs.
Then…unfortunately… the cavalry arrives
At that point it would be very likely that the
central government would step in and issue controls to the food industry that
served political needs, rather than business needs, greatly exacerbating the
problem. Suppliers would be ordered to deliver to those neighbourhoods where
the riots were the worst, even if those retailers were unable to pay. This
would increase the number of closings of suppliers.
Along the way, truckers would begin to refuse to
enter troubled neighbourhoods and the military might well be brought in to
force deliveries to take place.
But, why worry about the above? After all,
inflation is contained at present and, although governments fudge the
numbers, the present level of inflation is not sufficient to create the above
scenario, as it has in so many other countries.
So what would it take for the above to occur?
Well, historically, it has always begun with excessive debt. We know that the
debt level is now the highest it has ever been in world history. In addition,
the stock and bond markets are in bubbles of historic proportions. They will
most certainly pop, but will that happen in a year? Six months? Next week?
With a crash in the markets, deflation always
follows, as people try to unload assets to cover for their losses. The
Federal Reserve (and other central banks) has stated that it will
unquestionably print as much money as it takes to counter deflation.
Unfortunately, inflation has a far greater effect on the price of commodities
than assets. Therefore, the prices of commodities will rise dramatically,
further squeezing the purchasing power of the consumer, thereby decreasing
the likelihood that he will buy assets, even if they’re bargain-priced.
Therefore, asset-holders will drop their prices repeatedly, as they become
more desperate. The Fed then prints more to counter the deeper deflation and
we enter a period when deflation and inflation are increasing concurrently.
Historically, when this point has been reached, no
government has ever done the right thing. They have, instead, done the
very opposite – keep printing. A bi-product of this conundrum is reflected in
the photo above. Food still exists, but retailers shut down because they
cannot pay for goods. Suppliers shut down because they’re not receiving
payments from retailers. Producers cut production because sales are
plummeting.
In every country that has passed through such a
period, the government has eventually gotten out of the way, and the free
market has prevailed, re-energizing the industry and creating a return to normal.
The question is not whether civilization will come to an end. (It will not.)
The question is the liveability of a society that is experiencing a food
crisis, as even the best of people are likely to panic and become a potential
threat to anyone who is known to store a case of soup in his cellar.
Fear of starvation is fundamentally different
from other fears of shortages. Even good
people panic. In such times, it’s advantageous to be living in a rural
setting, as far from the centre of panic as possible. It’s also advantageous
to store food in advance that will last for several months, if necessary.
However, even these measures are no guarantee, as, today, modern highways and
efficient cars make it easy for anyone to travel quickly to where the goods are.
The ideal is to be prepared to sit out the crisis in a country that will be
less likely to be impacted by dramatic inflation – where the likelihood of a
food crisis is low and basic safety is more assured.
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Jeff Thomas is British and resides in the Caribbean. The son of an
economist and historian, he learned early to be distrustful of governments
as a general principle. Although he spent his career creating and
developing businesses, for eight years, he penned a weekly newspaper column
on the theme of limiting government. He began his study of economics around
1990, learning initially from Sir John Templeton, then Harry Schulz and
Doug Casey and later others of an Austrian persuasion. He is now a regular
feature writer for Casey Research’s International Man and Strategic Wealth
Preservation in the Cayman Islands.
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