I got in a cab yesterday and somehow struck up a conversation with the cabbie about quote-unquote rice shortages, rising food prices, and rising energy prices. He seemed to believe it had to do with the government cutting interest rates. For those of you who aren't economists, cutting interest rates creates more lending, thus creating more money, thus creating inflation therefore higher commodities prices. He thought the government was conspiring to debase China's foreign currency reserves (I'm assured he heard this nonsense on NPR) by lowering the rates that would affect the rates they paid on these gov. securities.
I've been saying for too long, much too long, that prices in commodities have been rising for two reasons:
1. The Decline in the value of the US Dollar
Commodities are based in US Dollars and traded globally under our currency. As the dollar continues to decline (as it has been for the last few years) relative to other currencies, commodities that are bought, sold, and consumed all over the world also become relatively more expensive compared to the dollar. While cutting interest rates would create inflation, the dollar's decline is attributable to much deeper issues than simply the change in interest rates, which I assure the FED only exercises to maintain economic growth. This leads me to a reason of much greater importance.
2. Global developing market growth is creating demand...pushing prices up
GDP growth in huge developing economies such as China, India, Eastern Europe, and South East Asia is the main reason for higher prices in commodities, and also helps explain the Dollar's decline. I've been saying it forever, and it's not a new ideology in financial circles. In response to the cabbie, I present this chart, which shows global growth in fertilizer. Notice a trend? After the Jump for a bigger more legible picture.
