Originally published elsewhere by me on 1/21/2011
Is Federal Reserve policy having unintended consequences around the world?
As you know, civil unrest in Tunisia has brought down the government. You are probably aware that Egypt is also teetering on the brink. President Mubarak’s son, Gamal Mubarak, and his son family have fled to London. Today I read a rumor that President Mubarak’s wife, Suzanne Mubarak, has also fled to London. Our Secretary of State, Hillary Clinton, said Tuesday:
Our assessment is that the Egyptian government is stable and is looking for ways to respond to the legitimate needs and interests of the Egyptian people.
I’m not seeing the stability.
There is a tendency for those in the western press to explain civil unrest elsewhere by talking about people chaffing under the rule of repressive governments. What they don’t talk about so much is the role of food inflation. People in developing nations dedicate a much larger portion of their incomes paying for food than do those in industrial nations, so it is perhaps easy for us to overlook this factor.
The blog, Geofinancial uses share prices of International Commodity Agriculture ETN as a proxy for food prices. They have published a graph showing that these prices jumped when Ben Bernanke announced QE2. Contrariwise, the IMF argues that poor grain harvests are to blame, not QE2. There’s also been quite a lot of talk about how re-purposing grains and sugar as biofuels has contributed to global hunger. Recently the Chairman of Nestle. Peter Brabeck, stated that reducing the amount of food that’s being diverted to biofuel would fix the food crisis all by itself. So you can see there’s quite a bit of controversy about food inflation and its remedies.
However I have just learned that some analysts began speculating as early as last November that a key objective in QE2 was to cause food inflation. Why on earth would the Fed pursue a policy of food inflation? The idea is that food inflation hits emerging economies much harder than us. And the particular market that we wanted to hit with food inflation was the Chinese market. Apparently the idea is to force the Chinese to appreciate their currency, the yuan, relative to our dollar. It’s believed that the Chinese government will be forced to do so in response to hunger-driven civil unrest. For instance 28% inflation was the economic context in which the Tiananmen Square protests happened in 1989. If the Chinese appreciate the yuan, this would make Chinese goods more expensive here, perhaps so expensive that our own manufacturers could compete with them. In addition it would be easier for us to find a market for our exports in China.
I find this whole angle on strategic food inflation to be stunning… maybe hard to believe. Talk about playing hard ball. So who is it that’s interpreting the Federal Reserve’s monetary policy in this light? Apparently Albert Edwards of the French financial services group, Société Générale. According to Zero Hedge in its November 2010 article, Albert Edwards Explains Why Bernanke And China Are Engaged In A Game Of Global Chicken Whose Downside Is A Hungry Revolution:
In essence Bernanke has orchestrated a massive gamble, akin to a game of chicken… If China blinks first, the Fed wins; if the US does, and food riots break out in D.C. before Beijing, it is game over.
David Waddell also believes that the real objective of QE2 was to pressure China to appreciate the yuan through food inflation. Last November he wrote in an article entitled Fed’s Gambit Aimed at Chinese Currency:
The virus that QE2 exacerbates in the Chinese economic system is inflation. Chinese authorities recently reported a 4.4 percent annual increase in general price levels. Food prices, in particular, spiked 10 percent. Escalating food costs’ create significant anxiety for Chinese citizens who allocate 30-40 percent of their budgets to food. In fact, beyond food, the inflation rate equals 1.6 percent. Want to limit inflation? Limit food inflation. Want to limit food inflation? Appreciate your currency.
In a Wall Street Journal blog, Bernanke Vs. China on Inflation: It’s the Food, Stupid, Matt Phillips also makes the case that QE2’s real purpose is to engender food inflation in China which will pressure the Chinese to appreciate the yuan.
If this is truly the purpose of QE2, I shudder at the unintended consequences. The government of Tunisia has fallen. The government of Egypt seems as if it is on the brink of collapse. What if these, and other countries in the Middle East, are taken over by radical Islamists? What if food inflation destabilizes the democratic nation of India? If China is the real target, how many other governments will fall as collateral damage? Has the Fed rushed in where angels fear to tread?
I can only hope that the analysts cited above are wrong.
- Hot Air: Egypt in flames: Ruling party’s headquarters burning in Cairo after massive protests;
- The Other McCain: Egyptian Regime Unraveling?
- Michelle Malkin: Uprising in Egypt
- Wizbang: Ill Winds From The East
- The Other McCain: Whose Bright Idea Was It to Send Joe Biden Out to Talk About Egypt?