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The Daily Reckoning

Rising food prices and the Fed's shady alibi

The Fed says it's not to blame for rising food costs. But could its money printing be a cause?

By Guest blogger / February 8, 2011

An employee works at the fruit and vegetable isle at a grocery store in Dubai February 1, 2011. Guest blogger Bill Bonner writes that rising food costs around the world could be related to all the new money that the US Federal Reserve has recently put into circulation.

Jumana El Heloueh / Reuters / File

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The Dow rose another 29 points on Friday. Gold lost $4.

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Which is to say, nothing much happened one way or the other. Unemployment data came out, moving the unemployment rate down to 9%. But there were suspicious adjustments in the numbers. From the reports we read, nobody really knew if the numbers were good or bad.

The more interesting news continues to come from America’s central planners. At least, they are entertaining…in roughly the same way that TV shows such as 1000 Ways to Die or Jackass are entertaining.

Maybe it’s just human nature. But it’s fun to watch people do stupid things – sometimes, even when they’re fatal.

And now comes Ben Bernanke, chairman of the US Federal Reserve, former chairman of the Princeton Economics Department, with a claim so dumb that we don’t what to think. What’s the matter with Princeton? What’s the matter with economics? What’s the matter with the Fed? What’s the matter with Ben Bernanke?

The Telegraph has the report:

Ben Bernanke…has dismissed the idea that the central bank’s policies are to blame for the rise in global food prices to a record high…

Now, let’s see. The Fed adds $2 trillion to the world’s supply of “hot money.” Maybe that has no effect? What do you think? The Telegraph continues:

Mr. Bernanke said that the rapid growth of developing economies was behind the increase in food prices, rather than the Fed’s decision to embark on a second, $600bn (£371bn) round of printing money. “Clearly what’s happening is not a dollar effect, it’s a growth effect,” Mr. Bernanke said in a rare question and answer session with journalists at the National Press Club in Washington on Thursday

The United Nations Food and Agriculture Organization (UN FAO) has warned that high prices, already above levels in 2008 which sparked riots, were likely to rise further.

The FAO measures food prices from an index made up of a basket of key commodities such as wheat, milk, oil and sugar, and is widely watched by economists and politicians around the world as the first indicator of whether prices will end up higher on shop shelves.

The index hit averaged 230.7 points in January, up from 223.1 points in December and 206 in November. The index highlights how food prices, which throughout most of the last two decades have been stable, have taken off in alarming fashion in the past three years. In 2000, the index stood at 90 and did not break through 100 until 2004.

Well, how do you like that? It’s growth that it driving food prices to records. Not money printing.

But wait…hold on…is the emerging world growing faster now than it was two or three years ago? Nope. Hmmm… Is the growth a big surprise? Did something happen to make investors and traders suddenly realize that…well…hey…the world is growing!

Nope.

Then, how come prices are shooting up now? Why didn’t they shoot up 4 years ago? Or 2 years ago? Or last year? What has changed?

Well… How about the $1.5 trillion of brand spanking new money that the Fed put into the world’s money supply in 2009-2010? And how about the $600 billion more it’s pumping in now?

That’s new, isn’t it? So, here’s a wild and crazy idea. Maybe…just maybe…the fundamentals of supply and demand really do work. Maybe…just maybe…if you increase the world’s hot money supply (hot money does not come from an increase in real wealth or consumer demand…but from central banks’ low interest rates and money printing)…well, maybe prices on global, auction-priced goods – such as food – go up.

Just look at what is happening to other global, auction-priced goods. Oil, for example, soared above $100 over the weekend. And look at gold. Put oil and food in terms of gold and what do you find? That they haven’t gone up at all! What does that tell you? That the “growth” hypothesis is nonsense.