Monday, October 11, 2010

Let Them Eat Quantitative Easing

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Grain prices soared on the Chicago futures exchanges on Friday. A report from the USDA stating that there would be lower inventories was cited as the cause. Quantitative easing from the Fed was behind the extent of the move however. Commodities are priced in dollars and with more of them floating around; any piece of negative news can cause food prices to go through the roof.

Food prices were already rising during the summer because Russia had halted wheat exports due to a severe drought. On Friday, the USDA (United States Department of Agriculture) cuts its crop estimates for the U.S. for second month in a row. The corn crop is now expected to be 3.4% lower than last year. The soybean crop is still expected to be good, but will come in 2.2% less than last month's prediction. The USDA now says global wheat inventories will be 1.8% lower than they thought in September.

While these changes seem minor, as would be expected in a market with too much money floating around because of the Fed, the impact on prices was explosive. December corn futures rose 8.5%. Soybeans were up 3.9% on the day. Both are used as animal feeds and this raises prices for producers. Shares of some of the big meat companies fell sharply in response. Consumers should expect higher prices at the store.

Analysts are now concerned about another food crisis, like the one in 2007 and 2008. Food prices got out of control back then and a number of countries stopped grain exports to insure adequate supplies for their domestic markets. This is only one of the many potential downside risks of Ben Bernanke's new quantitative easing program. Bernanke continually insists there is no inflation however, just as he continually insisted that subprime loans wouldn't cause any problem with the economy. Like a modern day Marie Antoinette, if bread prices become too high he is likely to suggest the peasants eat cake. They are already eating his quantitative easing, whether they know it or not.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.


Broken Bob said...

You say Bernanke's prospective QE is causing money to "float around"? Pray tell where is this occurring, so we can all catch some of it with a butterfly net! And you think that people, flush with this imaginary floating Fed money, are suddenly losing faith in these proliferating dollars and deciding their safest alternative is - husks of CORN? I think you must live in a Bizarro economic universe. In mine, the Fed has simply decided to expand their "balance sheet" by issuing slightly fewer cash-absorbing treasury bonds than they otherwise would have issued. The average consumer (and the average commodities trader) is hardly flush with cash from this action. With respect to the corn and soybeans markets which are driven by prospective supply versus demand, the Fed action of which you speak is a non-event.


Money printing will just cause more problems.