Saturday, February 5, 2011

QE2 and food prices

While I still think it incorrect to assert that the riots in North Africa and the Middle East are driven by food prices, it is also true that they aren't helping. Governments are turning to bread, rice, and circuses to try to prevent further unrest, for instance. There are one or two quotes on Poverty News Blog (the three above links) citing food price concerns by demonstrators, but in the same breath they are really arguing about a lack of wage increase to meet any kind of inflation.

The surprising thing to me is the notion floating around that America's quantitative easing is causing the high food prices. It is true that a weaker dollar increases the price of food in dollar terms. Countries that tie their currency to the US dollar (e.g. China) will experience that as well. Countries that are not tied to the dollar ... don't (to a first approximation). Their currency appreciates relative to the dollar to the same amount and experience no change in their food prices. We saw some of this in the last food price crisis: the appreciation and depreciation of the dollar moved global, dollar-denominated food prices. However, individual countries experienced food inflation depending on their own monetary policies and price transmission mechanisms.

I am thankful for Bernanke, Beckworth, and Sumner who have also argued and tried to demonstrate that QE2 is not causing the current food price spike. In addition to their arguments, let me note that inflation is a very general phenomenon: meat prices go up the same as grains the same as coal the same as haircuts the same as iPhads, to a first approximation. Instead we see some food commodities skyrocketing (meat, sugar), some others rising rapidly (wheat), and a number of others staying relatively flat. They aren't rising at the same time or in the same degree. So doth not inflation.

The other issue is that QE2, for all the good it really is doing, is not a source of massive inflationary pressure. It nudged inflation expectations up from about 1.25% to something still less than 2%. Is the claim seriously that less than half a percentage point of expected inflation -- not realized inflation, mind you, but expected inflation -- going to be responsible for increases in meat prices exceeding 100%? and food price inflation in Egypt of 20%? Really?

During the last food crisis, rich governments promised to do more about food security. They pledged $20 billion specifically for the purpose and established an organization (GAFSP) to disburse it.
In November, 20 poor countries submitted their requests to GAFSP for projects worth $1 billion. Only three got anything. That was unsurprising. Roger Thurow of the Chicago Council on Global Affairs, a think-tank, notes that GAFSP is “already gasping”. America has handed over only $67m of its promised $475m. Congress has whittled down the president’s budget request for a further $400m to $100m. An accompanying piece of legislation to help switch US-AID’s efforts from emergency aid to long-term investment seems to have been torpedoed. Two dozen aid agencies recently warned Mr Obama of a “strong risk” that GAFSP would cease to exist.
Actually funding their promises would do a lot more towards lowering and stabilizing food prices than slowing inflation from less than 2% to even less than 2%.

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