I have been putting off my reply to David R. Henderson for when I can “do it justice.” Well that’s not going to happen anytime soon, so let me fire off some quick thoughts…
Let’s refresh our memories as to David’s objections:
On Judge Napolitano’s “Freedom Watch” on March 25, Austrian economist Bob Murphy claimed that the unrest in the Middle East was due to rising food prices which in turn are due to the Fed printing money. I’m not sure about the rising food price/political unrest issue–that could well be true. But I’m pretty sure that the Fed printing money/rising food prices link is weak. When the Fed prints money, that raises the dollar prices of goods. But why would it raise the prices to people in the Middle East. All other things equal, the dollar would adjust downward and the prices of food to people in the Middle East would stay the same.
And I’m especially surprised to see an Austrian economist make this argument because isn’t one of the main things they offer to business cycle theory their insight that where the money enters the system matters? In other words, there are Cantillon effects from printing money. If the Fed increases the money supply by buying bonds, then you would expect bond prices to rise. It’s a long stretch to get from that to food prices.
If you want to account for changes in food prices, you should look to the demand and supply of food. So Bob would need to explain why printing U.S. dollars causes the demand for food to rise. I can see some spillover, but why would food prices rise more than other prices that closer in the chain to bond prices? Bob?
OK I have two main lines of response. First–and perhaps this will seem like cheating–I think a lot of countries either have an explicit peg to the dollar, or don’t want to let their currencies appreciate too quickly against it. So when Bernanke floods the world with dollars, this leads many other central banks to rev up their printing presses too. (I don’t know the exact countries off the top of my head, but here’s a discussion from 2010.)
Incidentally, this isn’t just my view. One of my favorite non-Austrian economists just wrote something very similar about price inflation generally, not just food:
Inflation is now a big and growing problem in emerging economies. Why? It’s the combination of the liquidity trap in advanced economies and the unwillingness of emerging nations to let their currencies rise.
The story runs like this: in advanced economies, the collapse of housing bubbles and the overhang of debt run up during the Great Moderation is leading to persistently depressed demand, even with very low policy interest rates. The result is low returns to investment; not much point in adding to capacity when you’re not using the capacity you have.
Meanwhile, emerging economies have plenty of demand, in part because they’re emerging, in part because they didn’t share in the big debt runup. So what the world economy “wants” to do is have large capital flows from North to South, and, correspondingly, large current account deficits in the emerging world — which would, of course, help the advanced economies recover.
But since the doctrine of immaculate transfer is false, the transmission mechanism by which capital flows get translated into trade balances has to involve a rise in the relative prices of goods and services produced in the emerging nations. The natural and easy way to get that would be via currency appreciation; but governments don’t want to see that happen. So the invisible hand is in effect getting the same result — gradually — by pushing up nominal prices in these countries.
Now as to the question, “Why would this be hitting food prices first, and not prices in general?” I think it’s because agricultural products are internationally traded. So they will be hit by currency changes first, with the prices of (say) haircuts rising much more slowly. That’s why exporters favor a weak currency, after all: if all prices adjusted at the same rate, then exporters wouldn’t benefit from a devaluation. (I explain all that here.)
So to recap my first line of defense: I am saying that the Fed and other countries who do not want to let their currencies appreciate against the dollar, have all partaken in a devaluation of their own currencies against the rest of the world. This has boosted the nominal prices of internationally traded goods in their economies, which includes oil and food.
Now on to my second line of defense: I think the Fed’s activities are fueling speculative hedging (not sure if “bubble” is appropriate, since it may very well be vindicated shortly) in various asset classes. Investors aren’t going to pour their money into dot-com stocks or real estate, and in this bleak environment it seems like a pretty safe bet are basic commodities and foodstuffs.
Let me put it this way: Does David at least acknowledge the possibility that the Fed’s activities have a decent fraction of investors worried about a crashing dollar, and that they have loaded up on gold as a defensive maneuver? Further, couldn’t this lead to a relative increase in the gold price against other goods and services, even in non-dollar currencies?
So if we can all understand how that might work, I don’t think it’s a huge stretch to say investors are bulking up not just on gold ETFs, but also wheat futures and the like. Sure, they’re not going to take physical delivery, but they wouldn’t take physical delivery of oil either. Sophisticated derivatives markets allow you to profit from price movements even if you have no interest in the underlying asset or commodity. (Note that in the comments of David’s original post, the quintessential von Pepe makes a similar argument.)