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Home Publications Blogs Beat the Press The Washington Post Is Badly Confused About International Trade: Blames Bernanke for Higher Food Prices

The Washington Post Is Badly Confused About International Trade: Blames Bernanke for Higher Food Prices

Tuesday, 08 February 2011 05:26

We have been treated to articles in the Post and elsewhere about how employers can't find qualified workers even though the unemployment rate remains near double-digit levels. The Washington Post editorial page gave us new evidence for this claim in an editorial that said there was at least some truth to claims that the Fed's quantitative easing policy was responsible for higher food prices in Egypt and elsewhere.

The editorial tells readers:

"International commodity prices are set in dollars, so QEII means more dollars chasing the same supply of goods. The Food and Agricultural Organization calls the dollar's post-September 2010 weakening a "leading factor" in commodity inflation."

Both parts of this are wrong. Yes, food commodities, like other commodities, are typically traded in dollars, but this means absolutely zero in terms of food price inflation in other countries unless their governments have made a decision to link their currency to the dollar.

This one is easy to see. Suppose that the Fed's action reduces the value of the dollar by 10 percent so that the price of wheat goes from $5.00 to $5.50 a bushel. That might sound like a 10 percent increase in the price of food. However, if the value of the dollar has fallen by 10 percent measured in wheat, it should also fall by 10 percent measured in Chinese yuan, Indian rupees, and Egyptian pounds. This means that there is no change in the price of wheat for people in these countries. (This is not true if the country has linked its currency to the dollar, but then the blame for higher food prices lies in this decision to link the currency, not the Fed's actions.)

Of course, some food is sold under long-term contracts, which will usually be written in dollar terms. In this case, the people of Egypt or other countries will get cheaper food as a result of a weakening of the dollar.

The second part of  the Post's story is also wrong since there is little evidence of any decline in the dollar associated with QEII. The Fed's data show the dollar falling a bit less than 3.0 percent in the months since QEII was announced. That is about the same decline as we saw the prior four months, so there does not seem to be much case of a plunge in the dollar due to QEII.

In short, the fact that food is priced in dollars does not affect the cost of food in Egypt and the dollar did not fall because of QEII, so there is not much of a case here. In fairness, the Post recognized that QEII was not the main cause of higher food prices, but it was wrong to treat it as any part of the cause, except insofar as it boosted growth in the U.S. In that way, the Fed would be as much to blame for higher food prices as Microsoft and Facebook if they announced a huge new investment plan.

Comments (6)Add Comment
Wheat prices causation
written by AndrewDover, February 08, 2011 7:25
A look at long term wheat prices

Recently, Russia had two high years of wheat production, then a lower one.

Russia 44,900 49,400 63,700 61,700 41,500
years 06-07 07-08 08-09 09-10 10-11

Russia alone accounted for about 1/2 of the drop in world wheat production.

Local Marketing Years, Thousand Metric Tons from
blame global warming?
written by frankenduf, February 08, 2011 8:13
i agree with Andrew Dover- more primary cause is poor harvest due to heat waves due to...
written by skeptonomist, February 08, 2011 8:57
If there are really more dollars this should reduce the purchasing power of those dollars already held by some foreigners and foreign governments - some of them have a lot. On the other hand foreigners will be able to buy more American stuff including food with their own currency. How this works out may be different in different countries - those like China who have been accumulating dollars obviously don't like inflation in the US. How many dollars does Egypt have? Whether QE2 is really inflating is another question, as Dean says. It certainly hasn't reduced interest rates.

But world grain and other food prices are affected far more by weather than by exchange rates and monetary policy, and also by political matters such as internal farm policies and international agreements such as the US-USSR grain-trade deals of past years. Governments often buy up and dispose of surpluses to keep their own farmers happy.

There is nothing new about the influence of the USSR/Russian grain harvest on world price - current real prices still do not exceed those reached in 1973-4 after another series of failures. It is absurd to claim the current shortage is due to global warming.
...due to heat waves due to...
written by diesel, February 08, 2011 8:21
electric toothbrushes.
written by Milton Arbogast, February 09, 2011 1:41
Come again? You say the dollar did not go down on account of QE2. And you say that the price of wheat did go up on account of QE2. By your logic QE2 is responsible for the price increase in wheat.

N'est-ce pas?
QE 2 caused food price appreciation just not how you think
written by James Dollinger, February 14, 2011 1:26
First, I dont think it is appropriate to use the announcement of QE 2.0 as the cutoff date as Bernanke telegraphed additional QE to the Market at his Jackson Hole Speech in August. If you look at the DJUBS returns broken up by that date Commodities were down about 6% pre speech and up about 20% post. Mr Baker's analysis above is correct in so much as the money that is printed gets allocated proportionally. However if a disproportional g;e of the QE found its way into commodity markets than went overseas then you would have local commodity price appreciation in countries that don't use the $. CFTC data and market observables suggest that there has been unprecedented speculative buying of commodities. Whatever the motivation for these purchases, it is clear to me that these purchases are a (potentially unintentional ) consequence of QE2.0. As a caveat weather related supply disruptions, which probably aren't Bernanke's fault, have further exacerbated the impact of investment flow into the asset class

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.