Saturday, June 21, 2008
Hanke Spanks Bernanke-2
"Rice prices have ratcheted up during the past three years. In the last year alone, they've more than doubled, sparking urban food riots in several countries. Politicians have been quick to blame speculators and hoarders. Their blame is misplaced. ... But the blame for the long-term trend of higher prices should be placed upon those who've delivered a weak U.S. dollar. Not surprisingly, those who reside inside the Beltway, including Donald Kohn, vice-chairman of the [Fed] disagree. ... But determining what's behind the escalation in commodity prices involves a principle to which economists universally pay lip service but in practice often ignore: the distinction between nominal prices and relative (real) prices. ... Accordingly, a weak dollar should signal higher commodity prices. ... Other data also suggest that the effect of the gold price on rice prices is roughly proportionate. ... The rice-price problem is a weak dollar problem. Until the dollar strengthens, the nominal dollar prices of rice and other commodities will remain elevated", my emphasis, Steve Hanke and David Ransom (H&R) at the WSJ, 10 June 2008.
I don't know how often I've seen economists unable to distinguish nominal from real prices. John Maynard Keynes wrote, "Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose", Economic Consequences of the Peace, 1920. That one in a million excludes most economists and virtually all members of Congress. See my 31 May 2008 post on Kohn.