Eric Fry

If only the world’s poor, starving masses understood the benefits of Quantitative Easing, they probably would not be rioting in the streets over rising food prices. We simply need to educate these people. Sure, the prices of wheat and corn are soaring, but so are the profits at Goldman Sachs.

These poor people just need to understand that debasing the world’s reserve currency serves a greater good. It’s not just about whether they can eat; it’s also about whether we Americans can weasel out of our massive debts.

The momentary food problems of the poor people over there –wherever they are – are a small price to pay for our resurgent economic activity over here. And remember, if we don’t make lots of money over here, we can’t send any handouts over there.

Such is the logic that seems to inspire Chairman Bernanke’s QE campaigns.

During this week’s Congressional hearings, the Chairman abided no connection whatsoever between Quantitative Easing and soaring food prices. Blame the weather, Bernanke suggested, or credit the economic recovery…or both.

Bernanke’s remarks before Congress echoed his defense of QE2 two weeks ago at the National Press Club in Washington. “Clearly what’s happening [to food prices] is not a dollar effect, it’s a growth effect,” Mr. Bernanke explained.

During that high-profile Q&A session, Bernanke completely rejected any connection between his dollar-debasing policies and the subsequent “re-pricing” of foodstuffs and other commodities. “It is entirely unfair to attribute excess demand pressures [in the emerging markets] to US monetary policy,” he insisted. “In some cases, some of the emerging markets are facing inflationary pressure because their own economies are growing faster than their own capacity.” Furthermore, the Chairman pointed out, “As people’s diets become more sophisticated, their demand for food and energy grows.”

Translation: It’s their problem; don’t blame me.

To be fair, Bernanke is at least half right; it is their problem…and it is a serious one. As to where the blame should fall, that’s open to dispute. Bernanke has already presented his defense, pro se, before the court of public opinion. On the other hand, the nifty little chart below testifies persuasively for the prosecution.

The Rogers Agricultural Commodities Index in the context of QE

Agricultural commodity prices, as represented by the Rogers Agricultural Commodity ETF, seem to catch a stronger tailwind with each successive “QE” announcement.

Bernanke initially entered the bond-market-manipulation business back in March of 2009. The stock market was on its back, economic conditions were deflationary and fear was palpable. He announced that the Fed would buy $750 billion of mortgage-backed bonds, $100 billion of Fannie Mae and Freddie Mac securities, and $300 billion of long-term Treasury securities.

A handful of academics and a few fringy financial writers criticized this Zimbabwe-esque rescue effort. But most folks were happy to know that the Chairman was “doing something.” At the time, the something that he was doing seemed to most folks to be a necessary one-off. So they did not trouble themselves with the potential inflationary implications of this rescue effort.

Since Bernanke’s initial QE campaign seemed to go off without a hitch, he decided that more must be better. Thus, the initial QE campaign begat QE-lite in August of last year, which then begat QE2 in November.

With every step down this slippery slope toward dollar debasement, the commodity markets reacted ever more violently.

Eric Fry

for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

  • Ross

    Did Bernanke really make this statement?

    “In some cases, some of the emerging markets are facing inflationary pressure because their own economies are growing faster than their own capacity.”

    So a professor of ecconomics thinks that if an ecconomy grows faster than its own capacity it is not a sign of something seriously fishy?

  • JMR Alan Greenspan

    I have to laugh at the sheer stupidity of the expression “growing faster than its own capacity”. How exactly is it happening, Mr. Bernanke? And since commodities are bid in an open INTERNATIONAL market, priced in DOLLARS, how exactly could that possibly happen? We are so freaking doomed…

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