Blowing Bubbles

Column for week of April 7, 2014

     Bubbles grow in the economy when government
interferes with freedom in the marketplace.  The housing bubble
is the most famous of the great bubbles.  When it burst it reeked
havoc in the housing market leaving in its wake unstable banks
and millions of mortgage foreclosures.

     The housing bubble grew because government
manipulated interest rates and mortgage lending practices. 
Artificially low interest rates along with government support and
encouragement of high risk, low down payment loans
encouraged buyers to bid housing prices up to unsustainable
levels.  Builders responded by building more houses than people
could afford to buy and keep at the artificially inflated prices.

     Many appeared to prosper from the housing bubble.  It
wasn't until the bubble burst that those profits were exposed as
an illusion.  Some got to keep their profits, only at the expense
of others who suffered great losses.

     Government still interferes with freedom in the
marketplace.  The interference inflates economic bubbles by
diverting investment and spending from the things people want
most to things promoted by government.  Eventually these
bubbles will burst causing the loss of investment and jobs.

     I can't possibly cover all the bubbles in one column.  No
one person is capable of even identifying all the bubbles.  When
government actions create a bubble, that bubble creates
secondary bubbles that spread disruption across the economy.

     The rest of this column will be devoted to consideration
of a couple bubbles involving corn.  One bubble directly affects
corn.  Secondary effects of the other bubble flow into the corn
market.

     The biggest bubble affecting corn production is the
ethanol bubble.  About 40 percent of corn grown in the US is
used to make ethanol that contains barely, if any, more energy
than was used to produce it.  The ethanol industry in the US
wouldn't exist without government forcing and subsidizing
ethanol production.  Most consumers wouldn't, of their own free
will, buy a costly, wasteful, inefficient fuel.

     The ethanol bubble has altered the face of US agriculture. 
Millions of acres of otherwise unneeded corn is grown.  This
reduces the planting of other crops and affects the prices of all
farm products.  High meat prices are part of the ripple effect of
the ethanol bubble.  It also artificially inflates the price of
farmland and distorts production and prices of almost everything
involved in agriculture.

     The bursting of the ethanol bubble, beside rendering
billions of dollars of ethanol investment worthless, will rip the
farm economy apart and send destructive waves through the
entire economy.  Most likely the entire economy will be plunged
into recession as was the case with the housing bubble.

     Long before the ethanol bubble government created the
sugar bubble.  Government restricts sugar imports with tariffs
and quotas.  As a result sugar costs about twice as much in the
US as in the rest of the world.  This has driven most hard candy
makers and their jobs out of the US.

     The sugar producers don't mind the loss of sales as long
as it doubles the prices they can charge.  Those who buy
sweeteners seek alternatives to sugar.  One of the main
alternatives is corn syrup.  Those train loads of corn syrup
traveling across the country are mainly a product of the sugar
bubble created by government restrictions on sugar.

     The sugar bubble created the corn syrup bubble, which
contributed to the corn bubble, which contributes to the farmland
price bubble, and all the other bubbles in and around the farm
economy.  Kids blowing bubbles may be cute.  Government
blowing bubbles in the economy is anything but cute.

     You can be certain that government will do its best to
sustain and further inflate the bubbles.  For anyone who hasn't
noticed, inflating bubbles isn't a great way to keep them from
bursting.

aldmccallum@gmail.com
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Copyright 2014
Albert D. McCallum