Friday, February 4, 2011

Why Foreigner Hate The Fed

The BBC is reporting this morning that the inflation situation in India is dire.
India's prime minister has warned that the country's rapid economic growth is under "serious threat" from inflation.
Manmohan Singh said getting inflation under control was a matter of urgency, raising the prospect of an eighth interest rate rise in under 12 months.
Emerging markets like India, where GDP growth is running at 8.5%, are helping to drive global economic recovery.
But Mr Singh said India's inflation rate of 8.4% - and food price inflation of 17% - was unsustainable.
"Inflation poses a serious threat to the growth momentum. Whatever be the cause, the fact remains that inflation is something which needs to be tackled with great urgency," he said.
The highlighted line is worth noting. 

As discussed in the previous hour’s post, the rest of the world is coming to the conclusion that the U.S. Federal Reserve’s policies of loose money, ZIRP, and the various iterations of Quantitative Easing are responsible for the run-up in commodity prices—and therefore, the run-up in the price of foodstuffs. 

Politically, for a lot of countries—including India—it is awkward to point out the obvious, except through elliptical phrases like “Whatever be the cause [of the shithole we find ourselves in]”. They can’t say, “You stupid Americans! You’re flooding the world with dollars! Driving up the price of basic foods! Causing riots! Causing political upheaval! Stop printing dollars!” 

They can’t say that—but other countries can. Countries and groups with marginal or antagonistic relationships with the U.S.—such as Iran, Venezuela, maybe Russia—can say out loud what most of the world is thinking. 

And they can take advantage of the situation, at the U.S.’s expense. 

Furthermore, if what is happening in Egypt—severe political destabilization brought about by food price inflation—starts happening in the rest of the world, then more and more countries will start taking steps on a path that hurts everyone: Food price controls, aggressive capital controls, government crackdowns on dissenters, trade barriers. 

It’s obvious: If a lightly-to-mildly repressive regime sees food prices rise which brings about social discontent, what are they going to do? Stand by idly? Let what happened to Mubarek happen to them? 

Of course not! They’ll subsidize food, and put trade barriers to make it stick. They’ll install more aggressive capital controls, to prevent capital flight. And if the food situation gets bad, they’ll round up the dissidents before they’ve had a chance to organize—so it’ll be in the interest of these lightly-to-mildly repressive regime to become aggressively repressive regimes. 

These are the unintended consequences of the Federal Reserve’s policies. 



  1. Please explain (no snark here), how us printing dollars causes inflation in a country with their own currency. I know the RBI tries to manage the exchange rate, but isn't it their own fault then if they "import" our inflation? I'm not defending our central bank policies, but it seems to me there is a lot more to current food inflation than fed policy.

  2. Jeff Burton:

    The problem of exporting inflation will be explained in tonight's Ten PM Tutorial.


  3. In a July 2010 report in Harper’s Magazine titled “The Food Bubble: How Wall Street Starved Millions and Got Away with It,” Frederick Kaufman wrote:

    "The history of food took an ominous turn in 1991, at a time when no one was paying much attention. That was the year Goldman Sachs decided our daily bread might make an excellent investment. . . ."

    The global banking cartel had long dreamed of controlling all of something everybody needed or desired, then holding back the supply as demand drove up prices.

    As Kaufman explained this financial innovation in a July 16 interview on Democracy Now:

    "Goldman . . . came up with this idea of the commodity index fund, which really was a way for them to accumulate huge piles of cash for themselves. . . . Instead of a buy-and-sell order, like everybody does in these markets, they just started buying. It’s called "going long." They started going long on wheat futures. . . . And every time one of these contracts came due, they would do something called "rolling it over" into the next contract. . . . And they kept on buying and buying and buying and buying and accumulating this historically unprecedented pile of long-only wheat futures. And this accumulation created a very odd phenomenon in the market. It’s called a "demand shock." Usually prices go up because supply is low . . . . In this case, Goldman and the other banks had introduced this completely unnatural and artificial demand to buy wheat, and that then set the price up. . . . [H]ard red wheat generally trades between $3 and $6 per sixty-pound bushel. It went up to $12, then $15, then $18. Then it broke $20. And on February 25th, 2008, hard red spring futures settled at $25 per bushel. . . . [T]he irony here is that in 2008, it was the greatest wheat-producing year in world history.

    . . . [T]he other outrage . . . is that at the time that Goldman and these other banks are completely messing up the structure of this market, they’ve protected themselves outside the market, through this really almost diabolical idea called "replication" . . . . Let’s say, . . . you want me to invest for you in the wheat market. You give me a hundred bucks . . . . [W]hat I should be doing is putting a hundred bucks in the wheat markets. But I don’t have to do that. All I have to do is put $5 in. . . . And with that $5, I can hold your hundred-dollar position. Well, now I’ve got ninety-five of your dollars. . . . [W]hat Goldman did with hundreds of billions of dollars, and what all these banks did with hundreds of billions of dollars, is they put them in the most conservative investments conceivable. They put it in T-bills. . . . [N]ow that you have hundreds of billions of dollars in T-bills, you can leverage that into trillions of dollars. . . . And then they take that trillion dollars, they give it to their day traders, and they say, "Go at it, guys. Do whatever is most lucrative today." And so, as billions of people starve, they use that money to make billions of dollars for themselves.

    In Mr Nanke's neighborhood is the giant magic paper machine which fuels all this activity. QE 2 (and soon 3) goes straight to commodity futures speculators who would slit their grandmother's throats for a free lunch if they could get away with it.

    Are there no union workhouses for the starving orphans, are there not prisons for the indigent? Commodity traders cannot afford to make the idle merry - they support the aforementioned establishments, which cost enough, and those who are badly off must go there. If people are to die because of a little profit, let them do so quietly and reduce the excess population. It's enough for a trader to understand their own business and not to meddle in others. The business of Wall Street occupies traders constantly.
    Good day sir.

  4. Guess I should have read through all your current posts before requesting a 10 PM Tutorial on exporting inflation. Looking forward to it.

  5. It can all be summed up by: There are too many dollars chasing too few goods. Hence everyone wants Gold, Silver, Corn, Oil, Wheat, and Sex.

    And if there is not enough to go around then the price goes up.

    Commodities are considered a safe haven when the dollar is falling. Which is what is happening with QE 1, 2, 3.
    There is also an incentive for producers to seek higher prices to offset the falling value of the dollar.

    QE does boost asset prices, which gives positive wealth effects, think Dow Jones at 12000 and CEO pay higher, but your average Joe is worse off.

    The Fed is implementing more monetary easing to stimulate US recovery, but this is not good for the global economy.

    What most Americans fail to grasp is that the actions of the US Fed ARE going to cause commodities to rise dramatically.

    However, most Americans stop listening when they hear Quantitative Easing, but spark into life when American Idol is mentioned.

  6. Don't forget that a lot of weather events have impacted certain food items in the last year. Still, I believe that QE is the likely culprit in the majority of food price inflation. Take rice, for example. I haven't heard of any rice crop failures. Has the rice hoarding started yet?

    Without knowing what he is doing, I think Ben has launched the "great Molotov cocktail of inflation" at the world. Can the fire be contained before doing too much destruction?

    QE is a total experiment. I think that before long it will be repudiated and Bernanke will go down in history as the worst economist of ALL TIME.

    -Dave in MO

  7. Dave, here's the trick. If Ben Bernanke is the worst economist of ALL TIME, he'd have to beat out Milton Friedman. Generally, the anti-Keynesian, anti-Bernanke types promote Friedman but Bernanke is doing EXACTLY what Friedman proposed that Japan do over a decade ago:


    Defenders of the Bank of Japan will say, "How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?"

    The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.

    There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.


Knock yourself out!

The cult of stability is a culture of death.