For proof, just look at one statistic - world foreign exchange reserves have increased by nearly 17%
annually over the past 10 years
, double the growth rate of global GDP. That
liquidity causes prices to rise, especially in energy and commodities markets,
where a freely fluctuating market exists.
- Third, low interest rates encourage the creation and expansion of
speculative funds (such as hedge funds), which seek to capitalize on escalating
commodity prices, which has the effect of sending overall prices even higher
Bail Out Homeowners (or) Feed the Poor
While Americans consume only moderate quantities of raw commodities as a
percentage of total consumption (there is little, if any, iron ore in an Apple
Inc. (AAPL) iPod, for instance), for poor people in the Third World
commodities still account for the bulk of their budget. While increases in
energy and metals prices simply raise the cost of living, food-price spikes are
much more serious, since they directly and significantly erode the living
standards of the world’s poor.
Still more disturbing is the fact that the recent surge in food prices (which has been extreme, rice
alone having trebled in price in the last year) has caused the beginnings of a
breakdown in the world’s free trading system in food. Rice exporters such as
Egypt, Indonesia and Vietnam are restricting, or even prohibiting, the export of
certain kinds of rice, moves they’ve made to try and keep prices of that
commodity down in their home markets.
Since many poor countries such as India also subsidize basic food prices to
limit urban unrest, national budgets are being thrown out of kilter.
At the margin, for the very poorest people in the least competently run
countries, the result of this food-price surge is likely to be starvation.
New crop plantings will alleviate the problem within a year, but for many,
that will be too late: You can defer an automobile purchase until next year, but
you can’t stop eating.
Bernanke no doubt hopes that he can keep interest rates low and thereby
stimulate the U.S. economy and solve the housing problem, wringing out any
inflationary results by pushing rates higher once housing has stabilized and the
U.S. market has moved back onto a growth track. That appears excessively
optimistic. A prolonged period of low interest rates will perpetuate the bubbles
in energy and commodities, which will have two effects.
In the United States, it will firmly establish an inflation level of 10% or
more, which will require a wrenchingly difficult recession to emerge from, as it
did in 1979-82, thanks to a managerial miracle by then-Fed Chairman Paul
But in poorer countries, a long run of low interest rates will not only cause
inflation and hardship, it will bring starvation as food prices soar well beyond
the means of the poor. Hoarding will result, until finally all the world’s
food-market mechanisms end up collapsing.
So if the central bank does cut interest rates tomorrow afternoon, think
twice before you cheer.