One of the key aspects of Austrian economic analysis is the understanding that whenever new money or credit enters into an economy, it has a disproportionate affect on the prices of different sectors at different times. This is often called the “Cantillon effect.” When newly printed dollars, euros, yen, etc. begin making their way into the economy, certain prices are bid up before others. Often times, commodities, acting as capital goods, see an increase in demand from monetary easing first. Lee Adler of Seeking Alpha explains why:
POMO (permanent open market operations- the conventional method by the Federal Reserve expands the monetary base- JM) goes first through the conduit of Primary Dealer trading accounts. And guess what else it is that they trade. Did you guess commodity futures? Congratulations. It only takes a few billion dollars spread around among the various complexes over time to keep the fires burning under these trends. This is pocket change to the dealer crowd, whose banking arms are also extending the credit to the leveraged speculating community to play this game.Since the wake of the financial crisis, Austrian economists have been reasonably concerned at the rate by which the U.S. monetary stock and monetary base have increased to mitigate the effects of the downturn:
Meanwhile, a recent report from the UN on the World Food Problem shows an increase in food price volatility (ht Chris Martenson):
The United States Department of Agriculture also recently weighed in on the rise of domestic food prices in terms of the consumer price index:
While it’s obvious how the Federal Reserve’s monetary policy affects domestic prices, the question is how much does the Fed affect global food prices outside the U.S. It has been speculated by many financial observers that the continual monetary easing Bernanke and co. are engaging in has incentivized speculation in commodities and thus food. Even former Kansas City Federal Reserve President Tom Hoenig asserted as much last March.
Food Price Outlook, 2011 and 2012With 11 months of data recorded, the outlook for the 2011 Consumer Price Index (CPI) and food price inflation has become clear. The CPI for all food is projected to increase 3.25 to 3.75 percent. Food-at-home (grocery store) prices are forecast to rise 4.25 to 4.75 percent, while food-away-from-home (restaurant) prices are forecast to increase 2 to 2.5 percent. Although food price inflation was relatively weak for most of 2009 and 2010, cost pressures on wholesale and retail food prices due to higher food commodity and energy prices, along with strengthening global food demand, have pushed inflation projections upward for 2011.
Now the observant reader may ask, “since the Fed prints in dollars, why does that effect food prices all over the world?” While that is certainly true in that foreigners bid up the price of food in their respective local currency, the dollar’s role as the world’s reserve currency has an underlying effect on the monetary policy of every central bank on Earth. Countries looking to gain a competitive edge on exports, such as China, purchase dollars on the world market to peg and devalue their currency in order to subsidize their domestic industries. This is known as mercantilism. As the Federal Reserve inflates, those countries looking to maintain their advantage (in actuality, the advantage is only to those industries reliant on exporting, consumers as a whole lose out from inflation) must inflate as well. The economy is temporary stimulated, as taught by the Austrian Business Cycle theory, and more money is bid toward better foodstuffs. This simultaneous money printing by the Fed and central banks around the world causes food prices to go up.
So while not in a purely direct sense, the Federal Reserve does have an effect on global food prices with its easy monetary policy. But like any complex economic phenomena, there are other factors effecting price changes including third world development, the decline of arable land, poor harvest seasons, and natural disasters. Differentiating the effect of rising living standards and bad weather from money printing is difficult as it is always individual transactions that manifest into aggregate statistics. China is a great illustration of this as the once-communist country has seen enormous economic development over the past few decades but is also currently fighting a bitter battle to control inflation and the bursting of a housing bubble that was the inevitable result of its cheap-yuan policies- another textbook case of fiat boom and boost. China’s growth has put upward pressure on food prices but its looming downturn will have the opposite effect.
In short, it’s difficult to know exactly how much of an effect the Federal Reserve has on global food prices. But the erratic monetary policies the world has seen over the past few years did indeed have an effect, albeit an indirect one. Increases in food prices may have leveled off for the time being but as long as central bankers continue to act as mad scientists desperately trying to wield direction over economic growth, don’t expect stability to be a lasting effect.