Oh no

We all know about the financial crisis and the recession here in the U.S., but flying under the radar is what might be the most important economic story of all - spiraling grain prices all over the world. Suddenly, corn, rice, and wheat are a lot more expensive - in many case more than double what they were a couple years ago. There have been food riots in Egypt, Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan, and Yemen, stampedes in China, government raids on grain warehouses in the Philippines, and whole supermarkets stripped bare across Asia, the Middle East, and Latin America.

Why? Two reasons. Reason 1: the price of oil has increased by a factor of 5 this decade, which makes it much more expensive to grow and distribute crops. Reason 2: the world economy has been growing at a breakneck pace, and most of that growth has been in poor countries where people spend a lot of their money on food and want to spend even more. (As for why grain prices jumped so suddenly and recently, it's partly because prices depend on expectations about future prices, an expectations tend to break in one direction very abruptly.)

That has left governments scrambling to increase stockpiles, shut off exports, and freeze prices. Shutting off exports may stabilize a country's prices in the short run, but it also makes more countries vulnerable to big shocks (e.g. if there's a crop failure in Indonesia, China could buy rice from Thailand...but not if Thailand's shut off its exports). Increasing stockpiles drives up prices in the short run, obviously, by increasing demand, and also by increasing people's expectations of future price rises; in the long run, it just turns the reserves into a political football. And price freezes are typically the worst approach of all, since they lead to A) long angry lines of desperate consumers, and B) producers cutting back on production because they can't make a profit.

Nor will the developing world be able to help (see Dani Rodrik for why not). Remember all those people who always told you that "there's plenty of food in the world to feed everyone, if we could just get it to the hungry people"? Well, they were right when they said it.

I think of the world economy as a big donkey, on which countries ride. As the donkey keeps walking, it gets stronger and stronger (technological progress), provided it has enough to eat (energy). So more and more countries and people can climb on the donkey's back, and be rich. But if a ton of people jump on the donkey's back all at once, the donkey will just collapse. And that's what's happening now - instead of Japan and Korea getting rich, we have China, whose population is bigger than that of all the rich countries in the world combined, pole-vaulting right onto the donkey's back just as the donkey's food is running low.

In other words, the donkey is in trouble.

It seems to me that the places who got rich quick and limited their populations (Europe, Japan, Korea, America) will be able to ride this thing out. Places like China and Latin America and Southeast Asia that more recently transitioned to lower fertility and higher productivity growth will do OK, after some crises and stagnation. But places like Pakistan, Bangladesh, and Sub-Saharan Africa, which are still poor, and where people are still having 4, 5, 6, or 7 kids - I look at those people and I just think "You kids are all dead ducks."

In any case, look for the big growth explosion in the developing world to end. Sooner than later.