Moon of Alabama Brecht quote
April 20, 2008

Monetary Policy and Hunger

A not so popular piece titled Fed Rate Cuts Kill People was published here in February:

[I]nstead of letting the market sort itself out as it should, the Fed cut the rates again and with unprecedented speed. It induced a fresh bubble, this time in the commodity markets.
...
The direct consequence of the ongoing bail-out of irresponsible and greedy people on Wall Street is mass starvation because of exploding wheat, rice and other food prices.

The 'biofuel' madness adds to the Fed induced killing.

In comments I further noted:

[Commodities] have left the explainable landscape of fundamentals and jumped into bubble territory. Three years from now, or whenever the commodity bubble will inevitably burst, everybody will point to the fed.

All that sounded just too nutty and there was little discussion on the issue. But this week, much earlier than I expected, some other lone, know-nothing lefty came to the same conclusion.

Martin Feldstein, Harvard prof and chairman of the Council of Economic Advisers under Reagan, wrote a Wall Street Journal op-ed on the issue. He reasoned:

It's time for the Federal Reserve to stop reducing the federal funds rate, because the likely benefit is small compared to the potential damage.

Lower interest rates could raise the already high prices of energy and food, which are already triggering riots in developing countries.
...
Many factors have contributed to the recent rise in the prices of oil and food, especially the increased demand from China, India and other rapidly growing countries. Lower interest rates also add to the upward pressure on these commodity prices – by making it less costly for commodity investors and commodity speculators to hold larger inventories of oil and food grains.

Lower interest rates induce investors to add commodities to their portfolios. When rates are low, portfolio investors will bid up the prices of oil and other commodities to levels at which the expected future returns are in line with the lower rates.

An interest rate-induced rise in the price of oil also contributes indirectly to higher prices of food grains. It does so by making it profitable for farmers to devote more farm land to growing corn for ethanol.

Feldstein is right in his analysis, but wrong in calling for the Fed to just halt interest rates cut. The Fed should immediately increase interest rates up to the real U.S. inflation rate plus 2%. Even more important, it should reign in the crazy money supply growth. That increase is best measured by the (guess why) no longer officially published (but shadowed) M3 stats. More money in the market -> more speculation -> higher prices in the fad investing scheme, which is for now commodities.

Less money supply and higher Fed interest rates would severly dent, if not implode, the commodity bubble that this year already increased prices in general commodities by over 20%.

People who live on a dollar or less pay day, and there are many of these on this planet, can not afford enough rice, now priced at $1000+ per ton, to survive.

Unless the U.S. government changes its inflationary policy, it will be guilty of creating the most extensive humanitarian crisis this planet has ever seen.

Posted by b on April 20, 2008 at 7:49 UTC | Permalink

Comments

sóþlice

Posted by: Cloud | Apr 20 2008 15:05 utc | 1

Two Myths That Keep the World Poor

Global poverty is a hot topic right now. But anyone serious about ending it needs to understand the true causes, argues Indian environmentalist Vandana Shiva.

Posted by: Uncle $cam | Apr 20 2008 15:11 utc | 2

b,
thanks for those stats you link to. They seem to bear a much closer reality to my everyday experience of the economy than the publicly propagated numbers.

Posted by: citizen | Apr 20 2008 15:32 utc | 3

Another great tradition is to keep pürices for basic foodstuffs subsidized and cheap enough so that the poor have enough to sustain themselves.

Except the cost of bread (with or without circuses) is rising to the point that this system is not sustainable: poor folks are starting to feel poor again.

Posted by: ralphieboy | Apr 20 2008 17:19 utc | 4

Adding to Uncle's link, what we are seeing is the main goal or result of globalization- not the efficient delivery and distribution of goods and services to the world, but the vacuuming up of wealth and resources to the few. While the lowering of interest rates will help speed up the process, it will happen one way or another now that the barriers of local markets have been eliminated.

Posted by: biklett | Apr 20 2008 19:38 utc | 5

Thanks Uncle - I recommend your link. Poor people are poor because we make them poor.

Krugman doubts it is speculation.

I doubt the IMF numbers he cites ...

Posted by: b | Apr 20 2008 19:47 utc | 6

SEC Introduces "Makers-Takers" Regulation of Commodities Futures Speculation

If Krugman is correct, and commodities prices have absolutely nothing to do with
futures speculation (although many market analysts have already demonstrated how oil
futures are manipulated by bidding futures prices 25% higher than they should be,
forcing oil refiners to bid the spot price higher than they would have, fearing that
fake futures price), then the Federal government and SEC should have no technical
issue with banning all commodities future trading by speculators, limiting it
exclusively to SEC-licensed growers/suppliers and manufacturers/distributors.

Only those who can make delivery, and those who can take delivery. "Makers-Takers".
(Something McCain would support, if he hadn't become such a limp dick on the trail,
then he would deserve to be elected President for saving 100,000,000 starving 3W's.)

Then to prevent public gaming by shares purchase diversion into futures speculation,
(or some friendly "uncle" lending his farmer neighbor $500M to buy futures), the SEC
must limit futures trades to a pro-rated share of the maker's/taker's last five years
average production/consumption volume, exactly the same way that fisheries prices
were stabilized successfully by the application of limited entry.

In fewer words, Farmer Frank and Kellogg's Ken get to trade, but not Hampton Harry.

Hampton Harry can go piss up a rope, and go bet on what day NASA lands men on Mars,
or bet the odds on Hillary v Obama 2012, or bet how many petals are in a daisychain.
Corn ethanol is an evil we'll just have to live with, until the SEC grows some balls
and limited-entry's energy futures speculation to only those who make/take delivery.

I'll expect howls of derision, expletive-laced denials of any correlation, and mad
money chasing foods/fuels until the last blade of grass is shorn by the ocean edge,
and we're all reduced to eating flotsam, spindrift and unidentifiable mucilages.

He who dies with the most corn flakes wins!

Posted by: Tiny Tim | Apr 21 2008 4:38 utc | 7

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