Thursday, January 13, 2011

When the Supply Side Crisis Hits the Bernanke Inspired Increasing Demand for Goods

Okay class, see if you can come up with a different answer to this question than Ben Bernanke.

On the demand side, we have Fed Chairman Bernanke currently flooding the economy with money to the tune of $100 billion plus per month.  This, of course, means that there are tons of new dollars available to bid for goods and services.

On the supply side, at the basic food level, we have this situation as described by FT:
The world has moved a step closer to a food price shock after the US government surprised traders by cutting stock forecasts for key crops, sending corn and soyabean prices to their highest level in 30 months....

While officials are drawing comfort from stable rice prices, key for feeding Asia, they warn that a sustained period of high prices, especially in grains such as wheat, would hit poorer countries. Food price hikes have already led to riots in Algeria and Mozambique.

“Stocks of corn and soyabean are at incredibly tight levels ... and the markets are surging to incredibly strong prices,” Chad Hart, agricultural economist at Iowa State University, said.

Dan Basse, president of AgResource, a Chicago-based forecaster, added: “There’s just no room for error any more. With any kind of weather problem in the upcoming growing season we will make new all-time highs in corn and soy, and to a lesser degree wheat futures.”
So here is the big question, Chairman Bernanke sees no meaningful inflation threat over the next 6 months, do you agree or disagree with his assessment?

You will receive your grade on July 1.

2 comments:

  1. Disagree. A growing money supply + prices already on an upward trend = prices going even higher at a faster rate.

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  2. As money is debt and and debt gets written down that is deflationary since we have less money in the economy. But, the Fed can't dictate quantity just price of debt/money. Thus certain pockets of the economy will boom (commodities) and bust (real estate) that the Fed can't control.. As the only way to increase money supply is with more debt that means we need to continue pulling forward demand. Which then asks the question will we get to a point where we can not take on more debt thus removing future demand which results in a deflation death (rebirth) cycle?

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