Thursday, February 3, 2011

Bernanke and Commodity Prices

Bernanke responds today to the accusation that the commodity price boom is being caused by U.S. monetary policy:
Supply and demand abroad for commodities, not U.S. monetary policy, are causing higher food and energy prices rattling much of the world, Federal Reserve Chairman Ben Bernanke said Thursday.  “The most important development globally is that the world is growing more quickly, particularly in emerging markets,” Bernanke said in response to a question after his speech at the National Press Club...“I think it’s entirely unfair to attribute excess demand in emerging markets to U.S. monetary policy,” Bernanke said. Those nations can use their own monetary policy and adjust exchange rates to deal with their inflation problems, he said. “It’s really up to emerging markets to find appropriate tools to balance their own growth.”
Scott Sumner and Paul Krugman would agree with this assessment.  Here is an update figure from an earlier post that shows the year-on-year growth rates of industrial production in emerging economies and the CRB Commodity Spot Index: (Click on figure to enlarge.)

This is strong evidence supporting the Bernanke view.  What evidence do the critics have supporting their view?

Update: Marcus Nunes provides further evidence on the emerging market-commodity price relationship.


  1. David
    The French, always the paladin of emerging markets, suggest "more regulation on commodities markets (against "speculative activities")!!!

  2. The PK link above highlights some of the differences of opinion. As usual, PK blames Chinese demand (just as he did in 2008's "Grains Gone Wild" column). Apparently Chinese people stopped eating meat in the second half of 2008. PK then goes on to attribute current commodity speculation to Chinese individuals--and lays the blame for that on China's foreign exchange policy... not on QE2, but rather the knock-on effect that QE2 has on regimes that are tied to the US dollar.

    Of course, if China allowed the RMB to appreciate, we in the US would see inflation in import prices (as well as commodity prices). This would be hailed by Bernake and PK as a great success...

  3. "Supply and demand abroad for commodities, not U.S. monetary policy, are causing higher food and energy prices rattling much of the world, Federal Reserve Chairman Ben Bernanke said Thursday."

    Most commodity prices are priced in US dollars, so any monetary policy that lowers the value of the USD will by definition increase the price of commodities.

  4. David
    But isn´t there a contradiction between what Bernanke says (and you subscribe) and your recent and not so recent posts on "The Monetary Superpower Status" of the US?

  5. I would ask the question a little differently. The Fed's stated aim is to increase inflation, which it finds intolerably low. The question is, "by what path should we expect Fed policy to increase inflation?" Shelter is 40% of core CPI, and shelter prices are unlikely to rise any time soon (given the level of housing inventory). Further, medical cost inflation has declined in recent years, and one might argue this deceleration is secular (HMO's, expanding Medicare, generic drugs, etc). It is logical, therefore, to expect Fed policy to impact the prices of inelastic goods the most, and especially those inelastic commodities that are also seeing increases in real demand and/or new supply constraints.

    In short, one would expect to happen exactly what has happened: a general increase in inflation expectations on the back of declining house prices and rising commodities prices. My question is, if the Fed did not produce this result, then can we say they were successful in raising inflation expectations? I would take this one step further, and ask, "can the Fed successfully meet its implied mandated inflation target without further increases in commodities prices?"

  6. David
    I did a post broadening the "evidence":

  7. These are all fascinating posts. But it appears to me that everyone is trying to explain something that only requires a little common sense to define or understand. If interest rates weren't being artificially manipulated by a central bank, risk would be priced into this figure much more efficiently. Consequently, the housing bubble would not have been possible.

    On the other hand, if we must insist on artificially manipulating interest rates, maybe accurate inflation figures would help. For example, the basket of items included in our inflation calculations could have also added asset classes like real estate instead of just rents. If that had been done, it would have been quite clear much earlier that something needed to be done about low interest rates.

    When it comes to the GSG theory, that idea is not even debatable—it's dead on delivery as far as I'm concerned. Savings rates in emerging markets have been significant for decades. In the Bank for International Settlements working paper No 312, “China’s high savings rate: myth and reality,” the top savers have been behaving this way since at least the early 1980s. Can Ben Bernanke consequently blame the economic boom-bust cycles in the US on foreign savings all the way back to 1980? That would be a logical next step.

    For Bernanke's theory to hold true, the volumes of savings (I can't prove this mathematically, but someone else probably could), would have to be so great that it would preclude the saving economies from investing in their own development. Clearly, the Chinese and other emerging nations are plowing vast amounts of savings into their own economies. The savings they sent into the US simply helped keep their currency pegged to the dollar so their mercantilist aims could be sustained. And their reserves, in many respects, are made up of our inflation; buttressing the arguments in this blog post.

    To me, it simply appears that the US has been borrowing too much since the turn of the century and has used inflation to mask profligacy and lower the burdensome costs of debt. Since its inception, the unintended consequence of the Federal Reserve has been to create a bubble economy completely disconnected from the real world and predicated on growth incentivized by cheap credit (until our short-lived wakeup call in the early 1980s).

    Boom and bust cycles appear to be tied to inflation. Could it be that inflation is absolute and not relative? If that's the case, the attempt at steady inflation as a monetary tool over time is inevitably doomed to fail, as prices will inevitably move back to the mean by hook or by crook. That's why whatever the central bank does the outcome will most likely require uncontrollable deflation and/or destruction of the currency through inflation—to fight the unwinnable.