Monday, February 7, 2011

Two Views of The Role of Speculation In Creating Food Price Inflation

Predictably, Krugman says "nothing to see here; move along."

Dylan Ratigan begs to differ:

You can see the same video at zerohedge along with Tyler Durden's commentary.

At the beginning of the video, Ratigan features Ben Bernanke's response to the accusation that the Fed's QE2 policy is driving food price inflation, which Bernanke scoffs at in response. 

I think Krugman's piece was, in fact, a defense of Bernanke's position.  While I actually agree that QE2 is not the direct cause of the clear and rampant speculation in staple commodities, I cannot agree with Krugman that such speculation is not, in fact, happening, that the increase in food prices is actually due to organic supply and demand. 

QE2 is not the proximate cause of what is currently happening to in the commodity markets.  First, QE2 is really just another way of shoring up the banks' balance sheets (something else Krugman denies).  It just doesn't require the American people to borrow the bailout money from the banks and pay them back interest on the money we give them.  Second, QE2 just isn't large enough to explain what is happening in the commodity markets.

That being said, leveraged speculation IS the proximate cause of what is currently happening in the commodity markets.  The problem with the analyses of both Krugman and Ratigan is that they do not consider the amount of existing money that is pouring into the commodity markets seeking yield.  The equity markets are a total joke.  They're completely simulated by robot traders, who currently account for 50-70% of all trades on a daily basis, and they're exhibiting very low trading volume and no trend whatsoever (a big reason why a lot of hedge funds are getting out of the game).  QE2 intentionally took the bond markets off the table.  The real estate market continues to slide, and we're only at the beginning of what will be an ugly commerical real estate market.

All this leaves the commodity markets as the only game in town, and it is a game easily rigged because it influences the availability of real-world supplies of materials.