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Source link: http://archive.mises.org/15725/qe2-fuels-a-global-fury/

QE2 Fuels a Global Fury

February 17, 2011 by

Higher food prices set off the revolutions in Tunisia and Egypt and the mass protests in countries like Algeria, Jordan, Yemen, Bahrain, and Iran. People in these countries buy more unprocessed foods and spend a much higher percentage of their income on food, so they have been severely impoverished by Bernanke’s QE2. FULL ARTICLE by Mark Thornton

{ 43 comments }

Stephen MacLean February 17, 2011 at 9:38 am

Lawrence Kudlow provides a complementary analysis: ‘Bernanke and Ethanol Sink Egypt (Creators, 2 February 2011)’:

…that’s why one can argue that the worldwide revolt against soaring food prices is an unintended consequence of U.S. Fed policy. That policy is aimed at reigniting inflation here at home. But unwanted dollars circulating worldwide are hitting foreign inflation rates first. We may well catch this inflation virus before long.

Mike Borcherding February 17, 2011 at 9:42 am

Even though I believe that Bernanke’s QE2 policy is wrong and foolish, it is not causing the current uptick in the price of certain goods. In our economy we depend on the credit/debt system to get money out into the economy. You will not have too much money chasing goods and services until the money actually gets out into people’s hands. In spite of extremely low interest rates the amount of money from credit in this country is shrinking, which is a deflationary factor not inflationary. Bernanke is creating a large pool of money, but it is not in circulation yet. Sometime in the future it will be, but you can’t blame him for the current increase in prices of some goods.

BuckeyeChuck February 17, 2011 at 12:52 pm

That what is causing the price increases?

Mark Thornton February 17, 2011 at 9:54 am

In the report for January housing starts were greater than expected, but still less than half the normal amount. Building permits declined by 10% from the previous month. Mortgage applications fell to a 18 year low.

Mark Thornton February 17, 2011 at 10:03 am

Mike: I agree that there is much more potential monetary and price inflation, but take a look at the “ballpark” figures on the money supply since the beginning to the recession. It would appear that the money supply is grow as fast or faster than in the past:

M1 up 36%
M2 up 19%
MZM up 22%

Mike Borcherding February 17, 2011 at 1:15 pm

Velocity is also very important. In the short or intermediate run if people change their habits and save more and spend less, even with increased money supply, you won,t have high inflation. The big danger is in the long run.

Anon February 18, 2011 at 12:34 am

This is the long run. The gov’t has been printing money for a while now…The current price inflation is caused by previous expansions of the money supply.

Joe February 19, 2011 at 10:05 pm

To begin with, the “velocity of circulation” of money is a misnomer. It is simply a figure of speech, a metaphor — and a misleading one. Strictly speaking, money does not “circulate”; it is exchanged against goods. Money is said to “circulate” because it changes hands, or, more precisely, changes ownership. But when a house, say, frequently changes ownership we do not say that it “circulates.” If we are to apply the metaphor of circulation to money, then we should also logically apply it to goods. For money (except in borrowing or in paying off debts) is always exchanged against goods (or services). Therefore the “velocity of circulation” of money can never be any greater than the “velocity of circulation” of goods.
Good article on mises from Hazlett. This is a small part of that article. “The Velocity Of Circulation.”

Noel M. Soria February 17, 2011 at 10:04 am

I am not a fan of Bernanke’s QE2 either but to link QE2 for the cause of civil unrest in the other part of the world is no-bearing at all. This could not be proven otherwise because if a country like Egypt and the rest countries you mentioned are in firm-financial posture, citizens will not picket and swamp the street to protest. This has nothing to do with QE2 that you alleged. The people-power revolting against their leaders simply mean the governing power is detach from its constituents NOT because of QE2.

The Anti-Gnostic February 17, 2011 at 11:35 am

I think it’s a very sound hypothesis that these countries are experiencing scarcity due to an inflation-induced resource grab and “beggar thy neighbor” monetary policy as other nations try to stay ahead of QE. In countries where government crowds out so much private sector activity, the scarcity is more acute. It’s happening in the US as well: prices are creeping up, quality is creeping down. We just have a whole lot more “ruin” left in us, as Adam Smith would say, thanks to our larger private sector. The end result in a traditional society like Egypt is a bunch of men completely locked out of the marriage market. So they riot.

I predict this hits China big time, and they’ve compounded the problem by aborting millions of female children.

Ned Netterville February 17, 2011 at 10:37 am

In the past, when turmoil was roiling governments in foreign lands, and heads of state were being toppled and new ones being installed, it was discovered years later that Uncle Sam had had his hand in the pot up to his elbow stirring the stew and seasoning the mix with spices and money to meet his own hegemonic tastes through the clandestine activities of the CIA, particularly if, like Egypt, the foreign land was a “client” state. What part is the CIA playing today in Egypt and the Middle East? Stay tuned. With the advent of Wikileaks and its imitators we may learn sooner rather than latter. Perhaps Hillary will repent and become a whistle blower.

BioTube February 17, 2011 at 11:56 am

If the CIA is behind this, the reasons will probably be the most interesting part.

Mike Frick February 17, 2011 at 10:43 am

Jefferson warned us about the dangers of central banking. There’s nothing new under the sun. Judging from The Fedreral Reserve’s track record, the dollar’s value, only 3% what it was in 1913, Jefferson was correct. Knowing the power the Fed posesses, we must accept the notion that those in control of the Fed are proportionately corrupt with that power. Isn’t it time we start calling a spade a spade? Honestly, are we still beleiving that the Fed is legitimate?

Rick Weinle February 17, 2011 at 10:49 am

Let us never forget that the #1 reason for QE2 is the monetization of debt.

Jonathan M. F. Catalán February 17, 2011 at 11:05 am

Does Egypt buy its food in U.S. dollars or in the Egyptian pound? It seems to me that there are greater causal factors behind the global uptick in food prices, including natural disasters, but most important the global handicaps placed on food production and on futures speculation. The ability to “spread” the costs by handicapping our ability to supply food where the price is highest seems to be the greatest factor, and this seems especially relevant in Egypt where food production is highly regulated and where government distribution of food is highly subsidized (including by the United States).

Noel, the revolts are mostly a product of rising food prices in the face of a very high rate of poverty. It’s a socioeconomic movement, not political. This is evident by their willingness to surrender momentum to whoever is willing to promise them a rising standard of living.

André February 17, 2011 at 12:00 pm

Jonathan, I think that such price variations in Egypt or Tunisia happen because of some bigger buyer – not because of the retail consumers, which can do little about food prices (except dieting). Futures and other financial products play a rather important role in determining the current price of many agricultural goods. They have always been used by big players in the farming business to hedge their risks – but now, it seems they are traded worldwide by financial institutions, together with small investors. So, there is a connection indeed between US dollars and the prices of food in Egypt – as long as the money from the FED find its way to banks operating around the globe.
Of course, I also think this is not the end of the story. I am puzzled about such increases. As far as I know, they began before the floods of fiat money by Barnake. So, it is more complex probably – BUT it is reasonable to assume the FED is now “exporting” US inflation abroad, in Egypt, China, Europe, and so on.

Jonathan M. F. Catalán February 17, 2011 at 1:38 pm

You have to show how money created by QEII was spent on food speculation. Dr. Thornton, below, suggests that rising food prices comes from the same source as the general rise in commodity prices. But, the change in price did not occur simultaneously; the dramatic rise in food prices came much, much later.

I do think inflationary monetary policy has an impact on food prices, but I think that global trade restrictions have more of an impact, including green program subsidization, food subsidization, and tariffs. Recent agricultural problems have also compounded the problem.

Mark Thornton February 17, 2011 at 11:48 am

Lets be clear. The revolts and uprisings have a very real basis in government. These governments are harsh and have resulted in bad economies and high unemployment. Technology has shined a light on all these problems and increased peoples’ ability to organize and communicate.

Then food inflation come along via monetary pumping and “triggers” the protests and uprisings.

QE2 and other money pumping has led to price inflation of commodities across the board. It is not just wheat and oil that have gone up in price. Its virtually everything.

The Anti-Gnostic February 17, 2011 at 12:05 pm

Mark – any Austrian school outposts or scholarly interaction in the Middle East? They sure need some ideas.

Prakash February 18, 2011 at 12:51 am

The Austrians’ advice to middle-easterners would be an interesting thing to see especially because there are pro-monarchical elements like HH Hoppe in the Austrian school.

sweatervest February 18, 2011 at 1:56 am

Well, pro-monarchical only with respect to democracy.

I imagine Hoppe would say something like, “Well, if you’re given a choice between a king or a parliament, choose the king. But if you can manage it, choose neither.”

Jonathan M. F. Catalán February 17, 2011 at 12:08 pm

Right, my point is that it’s more about “bad economies” and “high unemployment” than about “harsh governments”.

Joel February 17, 2011 at 11:59 am

I have a question regarding QE2 that I’m hoping someone can answer, or at least point me in the answer’s general direction: When The Ben Bernank says he will stimulate the economy with $600 Billion, does he mean to start off by introducing $600 Billion? Or will he instead start small, putting something like $60 Billion into the banks/economy, knowing it will eventually grow to $600 Billion as a result of fractional-reserve banking?

Mark Thornton February 17, 2011 at 2:33 pm

I believe that QE2 involves the Fed buying $600 billion in government bonds, plus “renewing” any bonds that come due during the period. So they will buy about $950 billion over the 6 month period. That money goes into the accounts of the money center banks and from there can get “multiplied” or expanded by the banks.

Joel February 17, 2011 at 3:02 pm

Thanks for clearing that up. I was curious about this when it was first anounced last fall and, (sarcasm on) much to my surprise (sarcasm off), my economics professor seemed confused by my question.

Martial Artist February 17, 2011 at 2:19 pm

Some portion of the rise is certainly due to the rise in the price of wheat in 2007, triggered by the Bush administration’s support for corn subsidies (for ethanol production). In response to that change in U.S. government policy, wheat surged from ~$3.50/bushel to over $12.00/bushel by the autumn of 2007, and although it has fallen considerably from that high point, it has never fallen below ~5.00/bushel. The reaction of many farmers in the U.S. was to pull out their winter wheat to replant the land in corn, a response to the guaranteed higher prices for corn.

Keith Töpfer

Martial Artist February 17, 2011 at 2:24 pm

Further to my last, it should also be noted that quite a few meat products in the U.S. are dependent on corn-fed cattle and pigs. So the downstream effect of the rise in corn and wheat prices was passed along as increased costs in meat production. Finally, it occurs to me that while we think of wheat as being involved primarily in bread and baked goods, wheat is also a not insignificant component of a considerable variety of other commercial food items. If you want to see how many, just look at nutrition labels (and don’t forget to note the gluten, most of which is from wheat).

Keith Töpfer

greg February 17, 2011 at 3:06 pm

I want to be clear, if commodity prices fall going into the summer season and home construction/sales pick up this spring, will you still stand by that QE2 is responsible?

The other day I went to a dinner sponsored by a financial planner to get an understanding of what the experts a preaching. First of all, it was the worse 2 hours of my life and the free meal was not worth it. But I did come away with a clear prospective of what is driving the market. It is fear! They hear it every day on the TV, from the politicians and from these guys wanting to take their money. And it is this fear of inflation that is driving people into the commodity markets to capture these huge returns. Also it is this fear that is keeping them out of the real estate market.

You have to understand what makes these commodity prices move, it is more people buying futures than selling. The professional traders lead the buying before the masses enter and they lead the selling after the masses enter. And we are close to that point now as the planting season starts. I believe we will easily see a 20 to 30 percent pullback in most food related commodities by this summer.

As far as the companies that use these commodities, they have locked prices in long ago and none of these increases affect them.

On real estate, I am seeing indications that a recovery is at hand. Building material supply companies such as OC and USG have seen their earnings increase and the stock has shot up the last few weeks. While most of that movement is associated with multifamily units, that is how a housing recovery starts. Interest rates may be moving up, but they are still low and the upward movement makes buyers buy now in order to lock in on the rate.

While I agree that increasing the money supply will cause inflation, it is fear that produces wide price swings in the markets. And what goes up by huge amounts will come down the same.

Mark Thornton February 17, 2011 at 3:47 pm

I do anticipate a big pullback in oil prices this year too. Housing will remain in the doldrums because of the foreclosures. Take a look at a graph of oil prices and recessions.

curio February 17, 2011 at 3:22 pm

Playing devil’s advocate, doesn’t demand from emerging markets come into play when discussing rising commodities “across the board”?

And I mean more than just a dismissive “yeah, there may be some of that”. Couldn’t it in fact be a huge reason for the increases? Inflation in the “hot” emerging markets is actually occuring at a much larger scale than here, but their productivity is also increasing at a much larger scale.

Throw in cheap money to boot and I think it’s a fairly equal combination of the two, at the least. The cheap money hasn’t quite made it into the system yet, as banks are still shoring up their balance sheets and being stingy with the loans. So the obvious answer seems to be plain old demand. Not only from emerging markets, but from speculators betting on inflation (see “gold”). So how much really could be attributed to QE at this point?

Without hard data on demand, it’s all speculation anyways as to what’s specifically causing the rise in prices.

Mark Thornton February 17, 2011 at 3:49 pm

Yes, emerging markets EMs do matter. It is said that we are exporting inflation aboard to the EMs.

Note: EM stock markets have pulled back. China’s stock market is, I believe, a leading indicator for the US stock market.

Jimmy s February 17, 2011 at 4:34 pm

Even though I don’t believe money velocity right now warrants this uptick, you can’t just lay money pumping at the U.S.’s / Bernanke’s feet the E.U. has done much as well, not to mention China’s stimulus money and credit expansion. Right now it appears to be a race to the bottom currency war.
Every body wants to sell China a Dollar now and pay back 70 cents later.

El Tonno February 17, 2011 at 5:55 pm

Related:

“Evil grain-speculating OVERLORDS will starve us ALL –
Sarkozy, food charities need to look at Adam Smith and DRAM”

http://www.theregister.co.uk/2011/02/11/food_futures_are_a_bad_business/

“Leave aside food for a moment and think of the regular cycles we’ve had in the memory market: this has been going on since I first thrilled to tech support coming around to upgrade me to a whole 640kb of RAM. Any of us who has been playing with hardware over the years knows the dreary repetition of the story. Someone builds a new silicon fab pumping out umpteen pieces of giggity sized memory and the market goes into a tailspin pricewise.

You can even afford enough RAM to run a Microsoft operating system without a second mortgage. Then there are more people in the market – all using more RAM – and chips become more scarce. Clever people spot this and start hoarding the chips, thus making a fortune as prices soar. At some point the price is high enough that someone out Far East can persuade the bankers to let him have $5 billion to build another new fab and when it comes online prices collapse again and off we go.

Now we could say that those hoarders are profit-gouging bastards: or we could say that they’re actually, by the price rises they induce, doing us all a favour. High prices make us all consider our use of RAM, meaning that we’ll perhaps not upgrade that operating system: it also leads the would be fab owner to think more about building another and the banks to lend him the money. Prices thus act as a signal of scarcity, making us economise on consumption and others increase production, thus actually solving, over time, that very scarcity the prices are signalling.”

Bruce Koerber February 17, 2011 at 9:19 pm

Trace Worldwide Unrest Back To The Federal Reserve!

The Federal Reserve benefits a select few immediately!

The Federal Reserve epitomizes bad economics. It does not track the effects beyond its closest links and it does not track the effects of its interventions over the long run. It is the embodiment of Keynes – immoral and pompous and a closet socialist!

Paul February 17, 2011 at 10:05 pm

I think there’s a definite correlation between the Fed’s policies and the inflation going on across many of the emerging markets in the world, but I’ve yet to see a detailed account if exactly how that effect is occurring. My best guess at a high level is that many of these markets have effectively pegged their currency to the US dollar, and that somehow the money printing and inflation hits them while it hasn’t yet hit the US. Perhaps it is just the real and natural deflationary processes going on in the US (and there’s nothing wrong with that…) keeping inflation something in check there? I’d be really interested in seeing a detailed and robust analysis of exactly how this phenomenon is occurring.

Bruce Barron February 17, 2011 at 11:06 pm

Neither the Fed nor Bernake is ever to be trusted.
Of course the riots are the intended results of QE2
In the news today it was stated that there was an increase in building starts and left it there leaving the man on the street to conclude the economy is improving.
Precisely why is the stock market rising if the Fed isn’t feeding it and its banking cartel.
The Fed knew what the QE2 would do to mortgage rates.
Why are interest rates so low on saving accounts when inflation is rampant and covered up by the Fed?
And its obvious that inflation is rampant even though the Fed is faking it.
The price of oil is up even though there is a massive surplus because the profits are not going to be lost at any expense which is a kind of malignant usury–selling us our own need natural resources that the oil companies have been allowed to claim as theirs alone.
Rick Weinle is absolutely right along with fractional banking and the printing of worthless paper money.
If the next President is a Republican then he needs to issue an executive order and audit the Fed immediately arrest the members in NY and DC.
In 1917 there was the rapid and rabid creation of communism.
In the US they can’t do it as quickly so as I said the plans have been in the works for some time.
We all know the organizations,IMF,WB,Bank of England,the Fed and world wide banking cartel,particularly the Freemasons who created the ACLU as everyone know as well as its world wide creation of global havoc.
These people are murderers causing the deaths of millions by wars and continual conflicts.Wars are the greatest cause of inflation.
Enough said.They will enjoy their intentional evil only for a very short period of time.
Saving accounts should at least get as much as the stock holder of the bank stock if any is being given.
Louis McFadden had it right and the Fed and international banking have all the power they need to effect their agenda.They are now nearing their “worsest and most evil” they can be
Bernake,like Obama,is a thug and both know at every moment what is going on because they either cause or make use of any and every disaster,financial or international with their one world order assinations.They are both liars of infinite proportations and are NEVER to be TRUSTED or BELIEVED.
Bernake’s policies like Greenspans are ruinous. He has no authority to float this money into the economy.This has been a well, patiently awaited long drawn out plan being brought to fruition for many decades.This kind of disaster doesn’t occur by accident. That’s impossible.It must occur by degrees over a long period of time in order to draw no attention.
I’m pissed at the state of affairs caused by the gross theft and fraud caused intentionally by Congress and the Fed acting in concert.
These two men are no damn good.
That’s a bird’s eye view from a man on the street who can’t compete with the above comments.
Not a single thing should be bought from China and the heck with what we owe them.
The states shouldn’t send one cent to the treasury except what is necessary for our military.
How much blood do you think the Fed,guys like FDR and Churchill,and Congress has spilled which is actually murder-cold blooded and premeditated.Think of the wars the Banking Cartel have created and continuously create and the powers that be.And they are known.
You can smell their evil if you are so blind you cannot see it.

Etjon Basha February 18, 2011 at 4:09 am

It’s unjust to blame the Fed for high food prices in the Arab world. If the Arabs could wrap their head around letting their currencies fluctuate freely against the dollar (and stop trying to ‘stabilize’ the rate), all the QE’s of the world would only have been translated into a higher exchange rate of their currencies and no higher food prices. Its all their fault really.

P.M.Lawrence February 18, 2011 at 7:04 am

Higher food prices set off the revolutions in Tunisia and Egypt and the mass protests in countries like Algeria, Jordan, Yemen, Bahrain, and Iran. People in these countries buy more unprocessed foods and spend a much higher percentage of their income on food…

Er… no, it is almost certainly not the case that most people in the Yemen, and quite a few people in Iran – and even some in some of the other countries mentioned – “buy more unprocessed foods and spend a much higher percentage of their income on food”. That is because those particular people, like most people in the world even today, do not get their food by working for an income and then buying it using that income. Most people in the world get much or all of their food from their own subsistence resources; the ones who get all of it that way are insulated from that, and it is only the poor without enough subsistence resources who suffer because they have to buy top up food (but that is why they are able to live “on” $2 per day or similar – they don’t actually live on what that buys, but on what they have separately plus what that buys as a top up). Those poor people do indeed suffer from rising prices, but having some of their own subsistence resources means that even for them the mechanism isn’t as simplistic as that.

adi February 18, 2011 at 10:51 am

There is a saying amongst the price index compilers:

“In times of famine it is the urban poor who substitute a bread for starvation”

Ned Netterville February 18, 2011 at 3:52 pm

Higher food prices are sure felt by me in this third-world, bananaXXXX, whoops, make that corn republic. I am primed for a revolution against the repressive (US) government for a lot more reasons than just food prices (e.g., BEA, BIA, BLM, CDC, CIA, CENTCOM, COPS, CPSC, DOD, USDA, DOD, ED, DOE, HHS, DHS, HUD, DEA, FRB,…I’ll desist here, but that’s only about 3% of .gov’s freaking agencies http://www.usa.gov/Agencies/Federal/All_Agencies/D.shtml )

Three years ago I switched to buffalo because it tastes so much better than beef. In early 2008 I paid $4.20 per pound for ground buffalo. I checked the website today and the current price is $7.30. That’s a 58% increase! Bernanke must be fibbing. I think I’ll head for Wisconsin to join the beleaguered taxpayers’ counter demonstration against those teachers and other government workersXXX, whoops, make that employees (workers work) who are out in the streets like a bunch of Greeks rioting because of proposed budget cuts. (If WI taxpayers aren’t out there demonstrating to keep the publicks from forcing the governor to raise taxes they should be.)

adi February 19, 2011 at 5:17 am

According to Boskins Commission it is not problem that various agricultural subsidies or inflationary money flowing in the commodities market raise prices. Consumers can always subsitute to some other lesser costing article!

So when beef is expensive you can substitute it to for example shoe-leather! :) :)

Ned Netterville February 22, 2011 at 10:26 pm

adl, Eat the hide instead of the tenderloin? Kentucky Bison Co., Tenderloin filets @ $27.90 per pound, Excellent hides @ $30.00 per square foot. Hell’s fire, at that priceI can hardly afford to eat leather.

Douglas Chalmers February 24, 2011 at 9:30 am

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