Is US monetary policy to blame for food crisis?

Scathing editorial in today’s WSJ: The Fed’s Blunder

Eight months into the Fed’s most recent rate-cutting spree, the evidence is overwhelming that it has been a major policy mistake. Aggressive rate cutting – taking the fed funds rate to 2.25% from 5.25% last September – has had little effect on the banking crisis it was supposed to ease.

Meanwhile, the Fed’s decision to open the general monetary spigots has inspired a global commodity boom unlike any since the 1970s. Oil has climbed to nearly $119 a barrel today from $70 in late August, a 70% increase. Farm and other commodities have seen a similar surge, with corresponding increases in food prices leading to shortages and riots in Egypt and other places, and to rice hoarding even in Southern California.

The popular media explanation is that this price surge is a result of rising global demand, greedy speculators and human profligacy. All of a sudden, without warning, the world is said to be running out of food. After 30 years in intellectual hibernation, Thomas Malthus and the Age of Scarcity are back in style.

As for food prices, it’s true that government policies supporting biofuels have created new demand for corn and other grains. This and price controls in some countries have contributed to the food panic. But the price surge has been so rapid and so broad across nearly all commodities that it can’t merely be a function of supply glitches or new demand for specific grains.

I agree with almost everything here except the editors’ certainty that rising prices are caused by monetary policy alone. As with all inflationary periods, the current one is caused by some combination of two factors: rising demand and monetary policy.

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2 Responses to Is US monetary policy to blame for food crisis?

  1. Dave says:

    $200 / barrel oil!!!

    Yes I’m rooting for it. Not only do I live in an economy that’s health is almost 100% correlated to the price of Oil, but as an earth lover I know that the only way people will pay attention is if you make them pay for it. The rising cost of food an energy are the greatest things to save the environment.

    Mildly related…but not that related. Just read this editorial and the question asked at the end I couldn’t find the answer to…any ideas? http://www.cnn.com/2008/US/04/24/beck.oil.prices/index.html?iref=mpstoryview

  2. willrwright says:

    Thanks for the link. I have no idea what “synthetic oil” is but we should look into it.

    I agree with you — oil should be A LOT more expensive. The “real” cost of the stuff is way higher than even $120 a barrel. When you consider the environmental cost, and the cost of all the wars that have been fought over it, it should be $1,000 a barrel+

    Rising oil/gas prices cause severe political and economic problems in the US (and everywhere else, too), because our way of life is totally dependent on cheap oil. But I agree, cheap oil has been a curse. When/if oil becomes much more expensive, we will develop substitutes, I have no doubt.

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