Deflation and the Food vs. Fuel Debate

This post first appeared on Minyanville.

Record fuel prices and soaring food costs have intensified the debate over the role of biofuels in U.S. energy policy.

One camp claims dedicating farmland to fuel snatches food from the mouths of the world's hungry in favor of American gas tanks. Ethanol, they argue, is little more than a political mechanism for lining the pockets of farmers and special interest groups with taxpayer money. Its production uses more energy than it saves and only marginally reduces our dependence on foreign oil.

In opposition are those that believe biofuels are just one of many factors contributing to the inflation of food prices. High energy costs and booming demand from China and India are the chief culprits, they argue, because oil touches every aspect of food production and plays a much greater role in determining retail food prices.

Absent from the debate, however, is discussion of why we're in this predicament to begin with.

Let's start with the premise that the so-called mortgage meltdown is a symptom, not the cause of, our current financial crisis. Bad mortgages are indicative of an economy too dependent on credit and lacking enough real cash flow to support the debt service.

Extrapolating this idea to the fuel vs. food debate, reliance on foreign oil is a symptom of an economy whose wants and needs outstrip its ability to produce. We are thus forced to import oil from unstable parts of the globe. True energy independence is only possible if our economy demands less oil.

Taking the analogy a step further, the solution to the credit crisis isn't more regulation or government intervention. Market-driven deleveraging has begun and must continue. It will be a painful -- but necessary -- process for those accustomed to living beyond their means.

Likewise, more subsidies and government programs are not the answer to our energy woes. The widespread deflation of asset prices and a reduction of dependence on material goods is the only long-term solution to our dependence on foreign oil. This is the path to sustainable consumption, one that will eventually bring our propensity to consume back in line with our means to produce.

This readjustment is inevitable. Behind the scenes, beneath the headlines, a much broader and slow-moving migration toward the belief that less is, in fact, more has begun. This concept should be paramount in our pursuit of energy independence. Ironically, the credit crunch has put us well on our way.