Fed Rate Cuts Kill People, I wrote in February. Silence … BTW: The death toll is much bigger than the Iraq catastrophy we diligently try to follow on this blog.
But finally others catch on. Barry Ritholtz at The Big Picture now asks (and answers positively) Is the Fed Causing a Global Food Crisis?
Yes, the Fed does so by two mechanisms. Unfortunately Barry only points to the first. Low Fed rates lower the comparative value of the dollar and make commodities, which are mostly dealt on a dollar base, more expensive in dollar terms. Many countries have linked their currency to the dollar and their citizens now pay the higher prices.
The other mechanism is the expansion of credit.
The Fed floods the markets with too much money. More money chasing an unchanged amount of rare goods always ends up in higher prices. (Try it: Give a group of kids twenty quarters each and let them bid on a limited amount of sweets. Give them twenty $1 bills each and let them bid on the same limited amount of sweets. Observe the nominal payed price of sweets.)
M3 is a broad measurement of money and money equivalents in circulation. In 2006 the Fed stopped to make this measurement public because "costs of collecting the underlying data and publishing M3 outweigh the benefits". Sure, the Fed must take care of its "costs". Others recreated the M3 statistic for free and as the chart (scroll down) shows, M3 is rising and rising fast.
With lots of money around, institutional and private speculators can borrow very cheap and use ‘leveraged’ deals in commodity future markets. Spiegel International just had a good piece about DEADLY GREED –
The Role of Speculators in the Global Food Crisis. Go read.
Additionally, expectation of rising prices leads to hording. People buy today and store stuff because they expect stuff will be more expensive tomorrow. This leads to rationing which escalates the problem: Wal-Mart’s Sam’s Club chain limits rice purchase. A deadly spiral started: hording -> greater scarcity in the markets -> increasing prices -> increasing price expectations -> more hording.
The Fed argues that inflation is low and it can lift the economy by lowering rates and printing money. It looks at the ‘core inflation rate’ which excludes the ‘volatile’ stuff that gets more pricy day by day: food and energy.
Over the years the inflation measurement has been fudged with in various versions. Hedonic measurements, as now used, factors in ‘quality improvements’ in price measurement. The computer you bought for $1,000 has only cost $100 in the statistics because it is now 10 times faster than your old PC. (With that ‘quality improvement’ argument I would value today’s cost of a single Microsoft operation system license today in the $100,000 range – this stuff is getting worse with each version.)
House prices get measured in ‘owners equivalent rent’. the money that would be paid to the owener if the home were rented out, not the real costs of purchase or accrual. People now find out there is indeed a difference between these. In the inflation statistics, the housing bubble never happened.
Inflation measured today as it was measure in pre-1983 is 11.6%. Measured in the pre-1998 method it would be 7.3%. But the Fed says its only 4%, and the core rate below 2%. No need to hike rates or restrict the money flow.
In Harpers Kevin Phillips looks into the Numbers Racket. Real U.S. unemployment? 9%. Thanks to the Clinton administration the official number is 5%. Real U.S. GDP? Negative for some years already, but the official statistic would never say so. But old Europe has such a bad economy. Just look at their numbers …
Garbage in, garbage out. The fudged statistics lead to false policies. Now these false policies have deadly consequences.
How do we stop them?
Please comment.