Unless a shortage is defined by a 0.1% decrease. Paul Krugman, with whom I often agree, has been crying hither and yon that rising food prices are a result of food shortages and not market speculation. This hasn’t made much sense to me. First of all, we saw similar spikes in agriculture futures prices in 2006 that were clearly the result of financial speculation. First of all, as Alice Cook notes, we’re producing historical high levels of wheat:
Curse those stupid fucking natural history facts! But there is a predicted decrease in supply of about five percent. Cook argues that this will lead to a speculative bubble:
Wheat prices are up about 50 percent in six months. The supply decline during that period was 0.1 percent. However, the anticipated decline in supply for this year is over 5 percent. That sounds a lot like speculation. Buy now on the expectation of higher prices in the future.
Low interest rates facilitates speculation in wheat. Suppose a speculator can take out a loan at 1 percent, buy a few tonnes of wheat at $200, stash them away in a warehouse and sell them six months later at $325. Does that not sound like a familiar wheeze? Here is a clue; think houses, dot.com companies, and currency futures.
Meanwhile, the rest of the world pays more for their food. Moreover, there is a kicker. The greater the amount of inflation, the greater the incentive for commodity dealers to speculate. More speculation means more hoarding, which in turn, creates more inflation. There is only one thing that can stop this cycle – higher interest rates.
I disagree that higher interest rates are the solution. More accurately, we should have never undertaken quantitative easing. The problem is that, faced with two linked problems, idle capacity and idle workers, we are politically unable to engage in the obvious solution, which is deficit spending to prevent workers and industry from sitting idle. Instead, we are left with the option of flooding banks with quantitative easing. Oddly enough, banks, many of which still have questionable balance sheets, instead of loaning to businesses with inadequate demand (go figure), are shunting this flood of dollars into speculative markets, since, as Cook notes, that’s where the (desperately needed) profits are.
As regular readers will know, I have no problems with deficit spending, but how one creates those deficits is really critical. The obvious way to solve the ‘dual idleness problem’ is through various employment programs–and it’s not like our infrastructure isn’t in need of a massive overhaul. The stupid way is quantitative easing: all this
will do has done is fuel another speculative boom.
But, hell, maybe that’s Plan B….