Fed rate cuts cause global starvation

Posted on 01 May 2008 with no comments from readers

Low interest rate policy is how the US defends its economy from an economic downturn. But this is also the cause of all recent major economic bubbles, or inflations. First came the dot-com stock market bubble; then the US and global house price bubble; now food and energy.

 

The Asian Development Bank says one billion people are going hungry because of recent food price inflation. That is the 600 million who live on less than one dollar a day, and 400 million who have only a little more. When you live on that budget, food is your main expense, and if food prices go up then you starve.

 

So the rich in the US are offloading their housing crisis on to the poorest of the world. Preventing a US recession is more important than the estimated 24,000 people who die of starvation every week.

 

More are going to die as a direct result of the Fed’s 0.5% cut in US discount rates to 2% last night. This is what feeds food inflation, lax monetary policy.

 

Inflation is, and always will be a monetary phenomenon. You can certainly point at underinvestment in global agriculture – mainly due to the subsidies given to farmers in rich countries – as a contributory factor to food shortages and food price inflation.

 

But it is not the core reason. We have had bad harvests and poor weather many times in the past without the price of staples like rice and wheat doubling in a year. It is the Fed’s policy of loose money to save the US economy from its overspending and over borrowing that is to blame.

 

Hedge funds and other speculators are siphoning this cheap cash into investments in food and energy and forcing prices up, and when they get on a trend they stick with it.

 

Would it now be better to raise interest rates and let the US economy collapse? No but something radical needs to be done to solve the world food crisis.

 

How about rebuilding Russian agriculture as a new bread basket for the world? It lags the US in productivity by 80 per cent and a massive investment in modern technology would produce a second green revolution. Arab investors should be looking at redirecting oil revenues into agricultural production, which will prove an excellent investment as well as a humanitarian act.

 

In the meantime, expect to see more social unrest as a result of food price rises. People just refuse to take starvation lying down, but few will understand the Fed is to blame.