Blame the Fed for high food prices
By Noureddine Krichene
The Wall Street Journal and the Financial Times (FT) have recently reported frightening food-price inflation. Prices for staples like coffee, oats, milk, meat, vegetables and fruits have increased so far in 2014 by rates as high as 70%. The FT noted that a breakfast now costs at least 25% more than it did in 2013.
As expected, media attributed the food-price inflation to droughts and to fast-growing demand in Southeast Asia. For fish, for which prices tripled in recent years, the drought factor does not apply, leaving us with high demand. This explanation fits best with what the US Federal Reserve and the administration of US President Barack Obama want us to believe. But it is false, and disguises the failure of the policies of both.
If drought and Southeast Asian demand explained food inflation, then the puzzle remains as to why stock prices have risen 30% per year and housing prices by 15% per year in the past four years. Media, academics, and international financial institutions
have never related inflation to the Fed's quantitative easing and near-zero interest rates, or to Obama's record monetized deficits. At a time mother nature held back rainfall, Bernanke's helicopter rained down rivers of money, adding US$3.6 trillion from 2009-2014, or five times the quantity of money the US created from 1776 to the financial crisis of 2008.
In fact, by keeping interest rates at close to zero and raining down trillions of dollars, the Fed is firmly controlling all prices in the economy, including exchange rates, and can inflate them to any level its wishes. Compare this to 1981, when the Ronald Reagan administration freed interest rates to shoot up to 25-30%, and food prices crumbled by 70% - along with crude-oil prices dropping from $42 per barrel to $8 per barrel.
The new wave of food inflation is no surprise; food riots erupted in 2007-2008 in many countries. An outcome of Fed disorder, the recent spiral is only an aggravation of a strong trend of food and energy price inflation that started in 2002 with the Fed's ultra-cheap money. Most food prices are at least four or five times their level in 2002. The rise has been driven by crude oil spiraling from $18 per barrel to $100 per barrel, a similar increase of about five times. Vulnerable people have had to dramatically cut their food intake, and buy less of things like oranges and meat, and they will endure more as the Fed's deliberate inflation policy continues.
The doctrine that denies any effect on prices of ultra-low interest rates is called Bernankeism. It is named after former Fed chairman Ben Bernanke, who was the first economist in the history of the discipline to explicitly deny any relationship between interest rates and housing prices, discarding the capitalization theory that asset prices are inversely related to interest rates. He wanted to expunge himself and the Fed from any role in the 2008 financial crisis, which cost the US government over $12 trillion in bailouts and devastated the industrial economies of the world.
The crisis was attributed to greed and regulatory loopholes, never to the Fed's interest rates and rivers of money. Teaching Bernanke's theory in graduate schools necessitates the demolition of classical economics, replacing it with madness. Paying a tuition fee of $60,000 a year for your child to learn Bernankeism at a leading US university may turn out a complete waste of money.
Despite explosive stock, housing and food prices, a falling dollar and the injection of trillions of dollars into the economy, the Fed maintains that inflation is below its target of 2%. But the Fed monitors only core inflation, which includes prices of toys, plastic shoes, and video games, but ignores housing, stocks, fuel, and food prices.
This is in keeping with the Fed's nature as an interest group and a political institution. It similarly ignored stock-price speculation from 1926 to 1929, and caused the Great Depression. It ignored housing, commodities and stock price inflation in 2002-2008, and caused the recent financial crisis and its nightmares, and a costly bailout.
Recently, a high Fed official asserted that it should keep interest rates at near-zero levels and inject trillions more dollars, until inflation reaches 2% or unemployment falls to 5.5%. This official rejects any market mechanism and has an absolute faith in the Fed's mandate of full employment, despite the ravages caused by the Fed's arbitrary power.
It is a sheer falsehood that the private sector needs government stimulus to create jobs. The doctrine that fictitious paper money creates full employment goes back to John Law in 1708. John Maynard Keynes developed it as a full-fledged policy in 1936, and it became deeply rooted in US thinking. This doctrine was long ago rejected by Jean-Baptiste Say, whose 1803 law of markets stated that only the production of commodities like food and clothing created employment.
A government should prevent the injury caused by inflation, as shown by the United Kingdom from 1797 to1821. Its Bullion Committee, along with economist David Ricardo, determined that the high price of gold bullion and a significant depreciation in exchange rates stemmed from excessive Bank of England notes. It called upon Parliament to reinstate the convertibility of pounds into gold, thus restraining the money supply.
Food-price inflation is most dangerous kind. It has already had a deep impact on the US budget, with food-stamp beneficiaries rising from less than 10 million in 2002 to over 50 million in 2013. The higher food-price inflation, the higher the number of food-stamp recipients, and the more the Fed has to print money for the budget, leading to even higher food prices. This will go on and on.
Food-price inflation is a form of injustice inflicted on workers and the poor. It is deliberately engineered by Keynesian central bankers to drastically cut real wages and entice labor recruitment. Thus we see contradictory government policies, with Obama increasing wages by 50%, and the Fed cutting them by 70%.
The classical economists considered food supply the working capital of a country, without which it could not invest and grow. Food-price inflation is an indication that food supplies, and therefore real working capital, are highly deficient. Such an economy cannot function: high food-price inflation forces consumers to cut spending on accessories, and causes unemployment in many industries.
Yet food, stock, and housing-price inflation are purely monetary phenomena, caused by the injection of trillions of dollars and very low interest rates. With a negligible interest rate, at 0.1% per year, speculators build large positions in the futures markets, bid up prices and gain immense wealth.
And with debt accelerating beyond 130% of gross domestic product, Obama has locked the US into fiscal insolvency. The US cannot pay its debt, so it has to ruin creditors who hold bonds and savings. The dollar has lost considerably in real value, and trillions of dollars have yet to find their way into the economy. Therefore, food-price inflation will worsen for many years to come. Like a cancer, it will not stop its attack until the body is dead.
The Fed's demagogues will never renounce money destruction; similarly, Obama will never renounce socialism. Both find in paper-money creation the only means for achieving their objectives. Politically, it is an attractive taxation method, with far more beneficiaries than losers.
At the helm of the Fed, Bernanke forced a redistribution of wealth from one group of people to another. The Fed has twice penalized creditors, by wiping out their real wealth and their interest income. And it favors debtors twice, by wiping out their loan burden and the interest on it.
Likewise, Obama has achieved nothing except building an incredible debt that has financed pure waste. It has consumed capital, but has no capital basis from which to service the debt. In such an unstable environment of high inflation, unsustainable debt and the injection of trillions of dollars, no investment will take place. It is like a hurricane during which all movement is impossible. But this environment is a propitious one for immense speculation and legal plundering, which will see creditors lose their property and their savings.
The US had no Fed prior to 1914. Its economic miracles and technological advances were built on sound money and capitalism. They were never built on socialism. The latter destroyed very advanced nations like pre-communist China and Eastern Europe. The US will have to endure three more years of Obama's socialism, and of the Fed's anarchy. Together they will sap the foundation of the US economy. Speculators, debtors, and profiteers will thrive; productive forces will be destroyed.
Noureddine Krichene is an economist with a PhD from UCLA.