Wednesday, September 12, 2012

The Case for More QE


Click to enlarge.

Without higher food prices, the world cannot prosper.

September 12, 2012
Pimco Sees Global Growth Slowing Amid Rising Recession Risks

China’s “easy growth” phase of 8 percent to 12 percent expansion is over, Parikh said.

See Also:
Sarcasm Disclaimer

Source Data:
St. Louis Fed: Export (End Use): Agricultural commodities

12 comments:

Craig M. Brandenburg said...

OK, so your chart has a tiny sample size of three recessions; nevertheless I find it interesting that in the recessions of 1991 and 2001, 'agricultural commodity' prices were stable, whereas in the most recent recession they took a whoppin' deflationary hit. Is this because corn ethanol has tied food prices to energy prices? Or am I fishing for explanations using post hoc ergo propter hoc as bait?

Stagflationary Mark said...

Craig M. Brandenburg,

There is a very high correlation between oil prices vs. agriculture prices (1989 to present).

R-Squared = 0.78

Stagflationary Mark said...

Here's a chart showing just oil prices (as an index) and agriculture prices (as an index).

I would say that oil prices pull agriculture prices.

Stagflationary Mark said...

Oops. I broke the link. Let's try that again.

oil prices (as an index) and agriculture prices (as an index)

Who Struck John said...

Tractors need fuel. Fertilizers, pesticides, and herbicides require petrochemicals. Ethanol subsidies don't cause the correlation, they just make it worse.

Stagflationary Mark said...

Who Struck John,

In addition to your fine list, I would add transportation costs. Hauling $500 of corn on the cob isn't nearly as energy efficient as hauling $500 in iPads.

Craig M. Brandenburg said...

Sure, for a long time agriculture has used a lot of oil. But what made the recession of 2008 different than the recessions of 1991 and 2001? That is: before or during those two previous recessions, oil prices spiked but agriculture commodities remained flat; whereas in the recession of 2008, agriculture prices spiked, too.

Stagflationary Mark said...

Craig M. Brandenburg,

Here's the inflation adjusted oil price.

I'd reserve "oil prices spiked" for 1980 and 2008. The rest was just noise that could, in theory, be properly hedged (especially if the market felt it was just a short-term issue).

Picture the airline industry. They love to hedge fuel prices for short-term noise. Those same hedges can't work long-term though. If oil prices stay high too long then their hedges get increasingly more expensive (as investors no longer with to sell them "cheap oil" insurance at cheap prices).

Further, the move from $10 oil to $20 oil should have had less impact on food prices than a move from $40 to $80. Both are a doubling, but the latter is a doubling after a doubling after a doubling. Oil therefore becomes a more and more dominant force in the price of food each time it happens.

Put another way, even if oil dropped to $0 (Mr. Fusion?) then we still wouldn't expect food to be free. There are other costs that would become the dominant costs.

Craig M. Brandenburg said...

Mark, your point about expensive doublings having more impact on agriculture commodity prices than cheap doublings makes sense. Not, however, that I put a whole lot of stock into economics making sense.

Stagflationary Mark said...

Not, however, that I put a whole lot of stock into economics making sense.

That's a good thing. We can't all teach economics from ivory towers. ;)

Charles Kiting said...

Hauling $500 of corn on the cob isn't nearly as energy efficient as hauling $500 in iPads.

Hauling $500 of apples isn't nearly as energy efficient as hauling $500 in Apples.

Stagflationary Mark said...

Charles Kiting,

"Stock" up.

(This is most definitely not investment advice.)