Tuesday, April 22, 2008

The Fed and Food

"It's time for the [Fed] to stop reducing the federal funds rate, because the likely benefit is small compared to the potential damage. Lower interest rates could raise the already high prices of energy and food, which is already triggering riots in developing countries. In order to offset the inflationary impact of higher imported commodity prices, central banks in those developing countries may raise interest rates. Such contractionary policies would reduce real incomes and exacerbate political instability. ... But high unemployment and low capacity utilization would not prevent lower interest rates from driving up commodity prices. ... Lower interest rates induce investors to add commodities to their portfolios. ... An interest-rate induced rise in the price of oil also contributes indirectly to higher prices of food grains. It does so by making it more profitable for farmers to devote more farm land to growing corn for ethanol. ... Commodity price inflation is of particular concern now that the CPI has increased 4% in the past 12 months. ... In lower-income, emerging-market countries, food and energy are generally a larger part of consumer spending. A rise in these commodity prices can therefore add proportionately more to the cost of living in those countries, and therefore depress real incomes to a greater extent than in the U.S.", Martin Feldstein (MF) at the WSJ, 15 April 2008.

"With a dramtic rise in the prices of foodstuffs, riots have flared up in dozens of hotspots around the world. Panicky politicians are responding with precisely the wrong policies, including production subsidies and trade controls. ... What is going on? We can discern four forces at work today pushing up food prices. ... Monetary policy in overdrive. ... The last time the real fed funds rate was negative for a prolonged period was in the mid-1970s. ... Exchange-rate agreements in disarray. ... Unsound market interventions. .. This time round, our government has been force-feeding the inefficient production of ethanol. The result: Corn prices have more than doubled over the past three years. ... Oil prices on the rise. ... The good news is that producers respond to relative prices, although it can take some time", Vincent Reinhart (VR) at the WSJ, 18 April 2008.

Welcome aboard MF. You should have said this months ago. I think the recent world-wide riots scare MF. I wonder what Thais, Egyptians, Vietnamese, etc., "marginal propensity" with respect to the price of rice is to hang Fed chairmen ?

VR, one producer which does not "respond to relative prices" is the Fed. With the Euro at $1.59 as I write, what prices does the Fed look at in setting monetary policy? VR was a Fed employee in the past.

1 comment:

Buzz Saw said...

They should just go ahead and kill us all. That's what they want to do anyway.