David R. Henderson  

Are High Food Prices Due to the Fed?

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On Judge Napolitano's "Freedom Watch" on March 25, Austrian economist Bob Murphy claimed that the unrest in the Middle East was due to rising food prices which in turn are due to the Fed printing money. I'm not sure about the rising food price/political unrest issue--that could well be true. But I'm pretty sure that the Fed printing money/rising food prices link is weak. When the Fed prints money, that raises the dollar prices of goods. But why would it raise the prices to people in the Middle East. All other things equal, the dollar would adjust downward and the prices of food to people in the Middle East would stay the same.

And I'm especially surprised to see an Austrian economist make this argument because isn't one of the main things they offer to business cycle theory their insight that where the money enters the system matters? In other words, there are Cantillon effects from printing money. If the Fed increases the money supply by buying bonds, then you would expect bond prices to rise. It's a long stretch to get from that to food prices.

If you want to account for changes in food prices, you should look to the demand and supply of food. So Bob would need to explain why printing U.S. dollars causes the demand for food to rise. I can see some spillover, but why would food prices rise more than other prices that closer in the chain to bond prices? Bob?

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CATEGORIES: Monetary Policy

COMMENTS (24 to date)
MikeDC writes:

Perhaps unrest in the Middle East has something to do with the fact those countries are socialist kleptocracies. Just saying...

John Hall writes:

I agree. They were making that argument a few months back on the ThinkMarkets blog.

Apparently the Russian fires that caused corn and wheat inventories to decline and ethanol subsidies and rising oil prices seem to not matter.

Ryan Murphy writes:

I've seen other Austrians make similar claims lately. The idea is that the inflation data is a bunch of crap and people on the street can see genuine price inflation, which is the result of all the money the fed printed.

I think the argument is very myopic, just as pointing to global warming as the cause is.

I guess the connection with prices in the Middle East could be plausible since the dollar is used as the reserve currency, but that would only be relevant if the food price inflation were denominated in dollars, right?

Stewart writes:

I would have thought the distortions from our ethanol policy would be a more likely culprit.

Patrick L writes:
All other things equal
It's not. I think part of it is that when America inflates, it enables other central banks to inflate. Or something. I don't know the whole causal chain, since it's never explained, but it is certainly true that despite a declining value of the dollar there has not been a corresponding rise in the value of the Egyptian Pound. If anything the Egyptian Pound has declined in value against the Dollar.

If the Egyptian Central Bank is outsourcing their monetary policy to the fed, rising prices for dollar denominated goods, such as food, due to a declining value of the dollar means those goods are more expensive in Egyptian Pounds. The fed is exporting our inflation to economies that are more dependent upon buying dollars for their imports. Poorer nations that depend on importing Food and other Commodities are hurt the most.

The whole thing makes more sense for China, where the causal link is obvious due to the peg. If the decline in the Egyptian Pound is due to expansion of their money supply, where is that created Money going, and what previous savings are being wiped out?
Do we even know if Egypt has been expanding their money supply these past few years? Seems like something we could prove.

Alternate Theory: The decline of the value of the dollar, results in some imbalances. A rising price of food, due to the decline of dollar value, may not translate into a 1:1 increase in Egyptian Pound due to the same dollar decline. Why? I don't know. This may be an example of a 1 directional arbitrage opportunity. Sell Food-> Buy Dollars, Sell Dollars-> Buy Egyptian Pounds. Egyptian Pounds can't buy Food, it's not something you can go infinite on, but someone is going to lose money on this trade.

shecky writes:

Cynical answer? Conservative TV shows strive to appeal to conservatives. Have you been listening to the direction conservative thought is headed these days?

Foobarista writes:

A big problem is a severe drought in China's breadbasket, from Sichuan in the west to Zhejiang in the east. China is now a net importer of all manner of staple food crops, driving up prices.

China drought

Patrick writes:

Developing countries are finally developing. They have money and want to eat meat. Getting a calorie of meat to market requires more than a calorie of grain to feed the animal producing the meat. In the past, people in those developing countries just ate the grain.

We're short on arable land, so food prices are rising around the world.

The Fed isn't causing this, but the suspicion of inflation statistics is valid. The assumption behind "core CPI" is that food and fuel prices are volatile but have no trend. That's wrong. The "rise of the rest" is putting the squeeze on our natural resources.

Troy Camplin writes:

Here is an interesting piece on the relationship between the Fed printing money and commodity prices:


and this may be of interest (I make no claims to the accuracy here, just that others more able might consider the data):


and this one has several good graphs:


I bring these up because it seems everyone here agrees that the Fed printing up $2 trillion in a $14 trillion (GDP) economy won't have the effect of creating, eventually, 14% inflation -- much more right away in the sectors the money enters first, of course, then spread, eventually, throughout the economy.

Joe B writes:

I don't have the exact figures, but I'm pretty sure that since Sept 2008, the Fed increased the money base by around $1.4tr. However, excess reserves over the same period increased by around the same amount. IOW, the FED lent the banks a pile of money, and they decided to deposit it with the Fed.

If this is right, then not only is it impossible for the Fed to create inflation in Egypt, it can't create in the US either.

Charles R. Williams writes:

This might be the Austrian argument: Low interest rates in the US are fueling commodity speculation globally. The US is a big player and some kinds of commodity speculation raise real prices. It is not possible for small nations to offset this real price increase by allowing their currencies to appreciate. The evidence for this view is the parallel rise in the prices of all major commodities that trade globally and can somehow be withheld from the market.

One problem with this view is that it assumes the Fed has significant control over interest rates outside of the regulated banking system or alternately that the Fed controls money in some meaningful sense.

My view is that Americans want to save and there are few investment opportunities in the US. The value of all assets in the healthy parts of the global economy are rising and this includes commodities that are traded globally and can be withheld from the market.

Shayne Cook writes:

'Joe B.' has it right. The vast majority of the new money the Fed has printed recently is "locked" in the reserve accounts of the financial system. Additionally, the Fed is paying the financial system interest (for the first time ever) on those excess reserves to make certain the financial system holds them in reserve, i.e., to NOT let the excess money find its way into the general economy to create a general inflation.

Buzzcut writes:

What about "Shadowstats" type arguments? That the way we measure inflation is different now than it was in the '70s, and that if we measured inflation the way we did in the '70s, the inflation rate would be as high as it was in the '70s. Does that change David's mind?

david (not henderson) writes:

I don't buy the notion that world food prices are going up because of US monetary policy. Food prices expressed in US$ may (and I stress may because we don't have good measures of price inflation) be going up because of US monetary policy but prices in other currencies are going up either because of foreign countries' decision (misguided in my view) to use monetary policy to target their exchange rate (rather than domestic price inflation) or because of real factors (e.g., poor harvests in China and Russia, IIRC, ethanol subsidies and the growing wealth of emerging nations and its implications for changing diets). My view is that food price increases are largely a real phenomenon, i.e., a relative price increase. I can see that the relative price effects would be exacerbated by poor foreign monetary policy though.

david (not henderson) writes:

Another thought to add to my comment above.

I think it is likely that the responses by global policy makers to the financial crisis have caused many investors to have lost a degree of confidence in fiat currencies or, at a minimum, to want to hedge against the possibility of a massive loss in confidence in the future. The primary risk here is not monetary policy per se but mammoth budgetary deficits caused by various bailouts and failed fiscal stimulus and the possibility either of default or monetization. The shift away from the US$ as the reserve currency that is now in its earliest stages is part of this.

Given the lack of an immediate substitute for the US$ as a reserve currency and a desire to hedge against the major fiat currencies in general, these investor concerns may well have caused a (real) portfolio shift towards storable commodities. The monetary metals are obvious candidates, as are oil, copper, land, etc. I don't see food as being one of these, although, in this environment, and given the real price impetus I noted above, authoritarian governments seeking to protect themselves against civil unrest may have shifted assets into the stockpiling of certain foodstuffs.

Matt writes:

Maybe ask Kansas Fed president Thomas Hoenig to explain, he seems to agree:

Hoenig Blames Fed for Higher Commodity Prices.

David R. Henderson writes:

Thanks for the link. I agree that it would be nice if Thomas Hoenig explained why.

J writes:

Isn't it because most of these Middle Eastern countries either have an exchange rate peg with the dollar, or maintain a narrow float? So if the dollar inflates, the domestic currency inflates in tandem (or there about)? Or am I missing something?

And of course, what MikeDC said. Inflating in a socialist kleptocracy can't possibly be good.

ivan writes:

Non-Austrian economist Milton Friedman once fameously argued and proved that inflation is "always and everywhere a monetary phenomenom". Supply and demand forces simply aren't powerfull enough to result in a rising price level if monetary policy isn't easing. And coincidence or not, the last two major "inflations" in food and oil prices occured at the same time with big moves by the FED to ease monetary policy: right after the financial crisis (see John Taylor for this - http://www.amazon.com/Getting-Off-Track-Interventions-PUBLICATION/dp/0817949712) and at this moment with QE2. When money is being created by the central bank, inflation has to show up somewhere: in housing prices in the past (see Vernon Smith - if you include housing prices in the index prices rose with 12% per year during 2002-2006), in the price of gold, or now in food prices.

von Pepe writes:

"...offer to business cycle theory their insight that where the money enters the system matters? In other words, there are Cantillon effects from printing money."

I have been working on this for a while now. I am pretty sure it has gone:

The Fed bought tons of treasuries and drove interest rates down. Those that used to live on 4-7% treasuries moved into investment grade corporates (munis, whatever), the I-Grade people moved into high yield (junk bonds!). So, people could not get yield so they went into riskier assets still. Equities, commodities, etc. Also, there was a flight to hard assets (commodities) becasue people thought this would preserve their purchasing power in the face of all the government money printing (inflation expectations). So, for me, the mechanism was through the treasury market all the way through riskier assets.

And, then Bernanke finally starts making speaches about how proud he is that he 'forced' people to take more risk and how the stock market is way up and now people are going to feel wealthy and the circular flow can start again.

Is that the Fed's legal role, mandate? To increase risk taking!?

To me the money entered through the treasury market and the Cantillon Effects are infinite. I believe Jerry O'Driscoll has traced their effects rather logically.

David R. Henderson writes:

@von Pepe,
Commodities I get. But food commodities? Not a great store of value.

von Pepe writes:

Dr. Henderson - I agree with your reply.

Still, in order to salvage my chain of thought, how about poor people seeing food prices going up and buying to store (shorter than gold but if you are worried about food for the next month or six months?)

Or, food commodities traders finding money coming into their markets becasue it had to leave the safer markets?

I am describing bubble behaviour which I can live with...

Justin Rietz writes:

Today's USDA forecasts for food supplies and acreage came in low, causing prices to jump (http://bloom.bg/hnHabQ).

Analyzing commodity data, I found that stocks of many commodities are near all-time lows. (disclaimer: I am invested in an agricultural ETF).

Vangel writes:

There is a link. Most currencies are in one way or another linked to the USD so when the USD price of corn, wheat, or any other commodity increases due to Fed printing prices go up for everyone who has a currency that is linked to the USD.

The Austrians can't be dismissed because they saw the crisis coming and explained why and how it would play out once it began even as the mainstream analysts were asleep at their terminals and typewriters.

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