The Federal Reserve has been busy pumping up the money supply by $300 billion in three months, with much more promised in the months ahead. Some of the results have been painfully predictable, others less so.
One predictable outcome of a flood of new money is higher prices. Higher food prices helped set off the revolutions in Tunisia and Egypt and the recent mass protests in countries including Algeria, Bahrain, Iran, Jordan, and Yemen.
Most people in those countries buy more unprocessed foods and spend a much higher percentage of their income on food than do people in wealthier nations, so they have been severely impoverished by Fed Chairman Ben Bernanke’s QE2, the term given to his second round of “quantitative easing” otherwise known as money creation.
Of course, it would be incorrect to credit Bernanke for freeing the Tunisian and Egyptian people, because food prices were only the trigger, not the true cause of all this social unrest. However, it is surely correct to label Bernanke and his fellow central bankers for worldwide commodity inflation.
The price of everything seems to have skyrocketed. Only housing, the dollar and inflation-adjusted income are negative. World food and commodity prices are up 28 percent over the last six months. The “Billion Prices Project” at the MIT Sloan School of Management confirms that prices have been surging higher than indicated by the government’s consumer price index.
Entrepreneurs tell me that big price increases are already planned for everything from vegetables to blue jeans.
Bernanke said he’s doing this to stimulate housing and employment. The unemployment rate has fallen in recent months, but most market analysts are skeptical that the statistical improvement is real or lasting.
The headline numbers on housing also appear good with building permits increasing 16.7 percent in December. However, actual housing starts decreased in December by 4 percent, and starts of single-family homes were down by 9 percent.
Even the improvement in building permits activity indicates continuing trouble. The increase in permits occurred mostly in the Northeast and West, and the bulk of the increase was for multi-unit structures (i.e. apartments and duplexes). This makes sense given that people are losing their homes or are downsizing into apartments due to budget constraints.
Also, the number of permits issued in December was 7 percent less than in December of 2009. Likewise, housing starts were 8 percent lower in December than in the previous year.
One factor weighing on the housing market was interest rates. Mortgage rates have started to increase along with bond yields. Presumably, Bernanke thought QE2 would have reduced mortgage rates, but he recently testified to Congress that the new higher rates are actually a sign of “green shoots” in the economy.
Higher rates could be a sign of economic confidence, but other signs indicate lenders are concerned about inflation and are raising interest rates to account for the falling value of the dollar.
Mark Thornton ([email protected]) is an economist and senior fellow at the Mises Institute in Auburn, Alabama.