Stocks Vs. Starvation
The Fed minutes were released today from their policy meeting when they made the Quantitative Easing 2 announcement.
From the minutes:
"Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee’s mandate."
The Fed is now openly announcing that their new mandate is to promote higher asset prices (the stock market) by reducing the value of the dollar.
Unfortunately for the Fed, stocks are not the only asset investors can purchase with their newly printed dollars. There is also an asset called agriculture. The following chart shows the world food price index over the last few years. As the Fed continues to pour new money in, the cost of food moves up and people begin to starve around the world.
The circle to the left highlights the level food prices needed to reach to create riots around the world back in the summer of 2008. It also shows that prices have now once again reached that price point. Moving forward the Fed will need to decide between global starvation or allowing the stock market to fall to its free market level.
From the minutes:
"Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee’s mandate."
The Fed is now openly announcing that their new mandate is to promote higher asset prices (the stock market) by reducing the value of the dollar.
Unfortunately for the Fed, stocks are not the only asset investors can purchase with their newly printed dollars. There is also an asset called agriculture. The following chart shows the world food price index over the last few years. As the Fed continues to pour new money in, the cost of food moves up and people begin to starve around the world.
The circle to the left highlights the level food prices needed to reach to create riots around the world back in the summer of 2008. It also shows that prices have now once again reached that price point. Moving forward the Fed will need to decide between global starvation or allowing the stock market to fall to its free market level.
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