In Mr. Krugman’s recent post, Commodities: This Time It’s Different, he admits Fed actions may be playing some role in spiking commodity prices. Prices which likely played a role in spreading food riots and overall civil unrest.
According to Krugman, though, it’s more important to focus on “fixing” unemployment. Even if his proposals could stimulate employment efficiently, it’s a hard argument to make. From the start:
I’ve been getting a fair bit of correspondence insisting that political unrest, in the Arab world and elsewhere, is being caused by … Ben Bernanke. You see, quantitative easing is responsible for rising food prices, which leads to riots, which — OK, there are a lot of broken links in that chain.
China is primarily to blame, per Nobel Laureate Krugman. It’s their strong(er) economy, surpluses, currency manipulation (glass houses!), and lack of consumer overspending and debt. Those are the real problems. And hoarders! Chinese farmers are hoarding cotton, apparently (though he admits that there’s no real proof of significant hoarding.)
First and foremost, China: it’s clear from news coverage that Chinese demand is driving the markets. As I and others have been pointing out, we’ve got a bifurcated world right now, with advanced economies still depressed but emerging economies in an inflationary boom; commodity prices are reflecting the boom part of the picture.
But Chinese demand isn’t just a matter of fundamentals: all the evidence suggests that there’s a lot of physical hoarding going on. Chinese farmers are apparently hoarding lots of cotton, while China is holding record stockpiles of iron ore.
Now, what about food prices?
Not much evidence of hoarding, as far as I can tell. So this is straightforward supply and demand. Demand may be up to some extent because of that emerging-market boom.Oh, and what about Ben Bernanke? Well, to the extent that emerging markets are insisting on a fixed exchange rate against the dollar in the face of obvious overvaluation, that contributes to the boom and hence to demand.
But I don’t think it’s reasonable to demand that the Fed stop fighting US unemployment in order to keep Chinese currency manipulation from leading to cotton hoarding by Chinese farmers [talk about being confused, and on the wrong side of history... -Adam].
Sure, increased demand is part of the equation. China should let the yuan rise over time, and I suspect they will. The big point is that Krugman and others continue to discount all negative side-effects of loose money, deficit spending, bailouts, etc. These things have consequences, tanstaafl.
To imply that that two factors, currency manipulation and increased demand from emerging markets, are the only causes of price inflation is irresponsible. At the very least, other causes bear investigation.
Earlier, I spent way too much time working on a comment to post on his blog, in reply, and found it somewhat cathartic. Here’s a slightly-more polished, and ridiculous, “Dear Paul” version.
Fed liquidity doesn’t only feed inflation via currencies. First, it supports artificially-high spending levels in America. When the Fed artificially prevents belt-tightening and saving, it disrupts the world economy. Let’s say that without Fed juice, 500k less cheeseburgers would be sold per month. Americans would be a little less fat, and global food prices would drop by a small amount. Scale that globally in your mind.
There’s also the impact of Fed liquidity sloshing into emerging markets, driving up demand and prices. Only among the elite will income/wages keep up with rising costs. This is about allowing the economy to readjust.
You continue to defend old positions, and hedge every new one. If you truly think maintaining the status quo is more important than preventing spiking food prices, moral hazard, violence, and inequity, then… you’re wrong.
Krugman isn’t backing down from his “spend til the end” philosophy. For now, he remains an establishment apologist. And I don’t feel bad saying that, at all. Not after his post-Arizona gunman blame episode. Blaming political rhetoric for the actions of a schizophrenic psychopath is not helpful.