It has become a distressingly familiar question. With the price of agricultural staples such as corn, soyabeans and wheat soaring for the third summer in five years, the prospect of another price shock is once again becoming a prominent concern for investors and politicians alike.
Essentially, what the Financial Times is warning us about is that the recent heat wave and drought conditions across much of America’s breadbasket threatens to bring us sharply higher food prices. Already we have seen the price of corn rise 44%, wheat 45% and soybeans 17%. This is similar to the type of price spikes which occurred in 2007-2008 when there were food riots in some 30 countries.
The food crisis in those days contributed to the economic crisis which touched off the worst bear market in stocks in a generation. It should be noted that the price of gold rose in both 2007 and 2008. This suggests that gold investments could provide a safe haven from any crisis that is touched off by this sudden development.
But the food crisis is certainly not the only crisis on the horizon and, while we all know about the tenuous situation in Europe, what many people do not realize is that America has severe debt problems of its own that could conceivably touch off a crisis not unlike what Europe is going through now. One key difference however is, if the US debt situation reaches crisis proportions, who will bail the US out???
Per capita debt in the United States is higher than in all — or at least some, depending on how it’s calculated — the European nations that have accepted bailouts to date.
It’s all too easy to dismiss warning signs such as this by assuming that the US is different or that our economy is too big and diversified for the debt situation to derail it.
Perhaps. But perhaps not. And even short of crisis, the US still needs to service its debt obligations, which are growing all the time. And one possible outcome would be a decision by Washington policymakers to service that huge debt burden with dollars cheapened by inflation. In such a scenario, gold would be absolutely vital to investors since the dollar would plunge in value and periods of high inflation have historically been bad for stocks and bonds.