Effects of quantitative easing on food prices

Effects of quantitative easing on food prices






Effects of quantitative easing on food prices

The world is really changing economically adversely making the life of the poor more and more difficult. Commodity prices around the world are rising greatly and the rise on food prices could be associated with quantitative easing. The US GDP growth rate remains stable slightly above 2 percent with suspicious talks of an increased case of quantitative easing. At the same time, it comes out that market makers project another round of quantitative easing that would create a further effect on food prices. The effect on quantitative easing on food prices is first felt or realized in affecting the strength of the local currency. Quantitative easing is a monetary policy that unconventional and used by the central banks in stimulating national economy. The policy is applied in economic conditions where monetary policy has not functioned effectively but its application could have an effect of increasing food prices in the economy.

The central bank implements the policy of quantitative easing through the purchase of financial assets from private institutions and financial institutions. This process leads to money creation and is done to inject a quantity of money that is predetermined into the economy. This means that quantitative easing is an aspect of the expansionary monetary policy. The aim of the policy is to lower the interest rate to fall within a specified value in the economy. Quantitative easing could be applied to help in ensuring that inflation hardly falls below a targeted rate. The policy involves risks that could include the policy being effective to an extent of being in a position of acting against economic deflations. Working to ensure that deflation is minimized can however lead to an increased inflation. The policy could hardly be effective enough given that banks hardly lend out their additional reserves to individuals and organizations in the economy. Quantitative easing is therefore a policy that helps in ensuring that food prices do not increase beyond a predetermined level.

Quantitative easing is said to create money out of undeterminable scope with an economy. This aspect of money creation comes in contrast with the traditional practice of printing new money by central bank with an effort of increasing money supply in the economy. Quantitative easing on the other hand is an economic process that initiates money injection within the shortest time possible. The Federal Reserve purchases assets in order to increase its balance sheet thus making institutions buy the assets from have increased quantities of liquidity (Olen). The process leads to a general increment in money supply in the economy making it difficult to control the general price level of goods especially consumer goods such a food products.

A major problem generated by quantitative easing is that the process hurts almost everyone in the economy starting from producers to consumers. The effect of quantitative easing is an increased investment and increased employment opportunities that comes in with the stimulation of the economy. Once banks and other financial institutions convert their non-liquid asset into liquid assets, they have more money to lend that it is essentially required. This aspect creates an economic force that pushes interest rates down so that borrowing becomes cheaper than before (Buiter). Now that people can access capital at a cheaper interest rate, opt to invest rather than saving more of their income. The immediate effect is an increased production and increased employment.

Given that people have more money to spend than it is economically required, the aggregate demand increases. Those already employed in the economy have their wages remain constant or have a slight increment. The increased aggregate demand is in excess of the aggregate supply implying that producers have to act in a way that they could meet the needs of their customers by offering the quantity of products and services they require. Aggregate supply therefore has to adjust such that it equals the aggregate demand in the economy (Buiter). Since the effect of quantitative easing is immediate, the currently available resources may not be in a position of initiating a production process that would yield quantity of supply to meet the high demand. The adjustment is therefore done on commodity prices. Consumer prices are therefore adjusted to such that the excess demand would be reduced significantly. To cut down the excess demand in the economy, food prices are increased so that people would cut down on their demand for food products and other consumer goods.

Another effect on food prices could be analyzed from the perspective of nominal wages and real wages. In the economy, nominal wages could be seen as high but as the general price level in the economy increase, the number of units that could have been purchased using a certain amount of money would now have reduced as food prices went up (Rightchange.com). The effect of quantitative easing is realized in the short run. The rate of price increments could be higher that the increase in the average nominal wage in the economy. This aspect of economic imbalance causes a fall in economic real wages. Given that real wages are not adjusted to match the increasing price level, people would keep on reducing their demand on food products and other consumer goods making the cost of living higher than ever before.

Quantitative easing is a policy and a process that can lead to high inflation than it is economically desired or planned. This happens if the required amount of easing is overestimated thus leading to the creation of too much money. Too much money in the economy would come in if excessive liquid assets were purchased by the central bank of that economy. Inflation is hardly other effect than an increased general price level in the economy that extends its effect to increased price level on consumer goods and food products. The main target in implementing the quantitative easing policy to create an economy balance between inflation and deflation whose failure can be generated by banks remaining reluctant as far as lending money to businesses or households is concerned (Purnell). The time lag that exists between the growth of money and inflation creates further problems. The issue in this case is that once the policy is implemented, chances are very high that inflationary pressure would build due to the immediate money growth before the central back takes any initiative to handle the inflationary economic problem. This reason creates a case whereby food prices would shoot up leading to a decrease in the real wages in the economy and increased cost of living. Therefore, quantitative easing increases food prices, a situation that could be curbed once the central bank incorporates other policies to deal with inflationary pressure associated with the resulting money growth.

Works Cited

Buiter, Willem. Quantitative easing and qualitative easing: a terminological and taxonomic proposal. 09 Dec 2008. 19 Mar 2013 <blogs.ft.com/maverecon/2008/12/quantitative-easing-and-qualitative-easing-a-terminological-and-taxonomic-proposal/>.

Olen, John. Quantitative Easing is Counterproductive. 1 May 2012. 19 Mar 2013 <http://economyincrisis.org/content/quantitative-easing-hurts-average-workers>.

Purnell, Jim. Quantitative Easing Causing Food Prices to SKYROCKET! 2011. 19 Mar 2013 <http://sgmmetals.com/KnowledgeCenter/LatestNews/tabid/75/entryid/18/Quantitative-Easing-Causing-Food-Prices-to-SKYROCKET.aspx>.

Rightchange.com. Quantitative Easing Adversely Affects The Poor. 01 Oct 2012 . 19 Mar 2013 <http://www.rightchange.com/florida/comments/quantitative_easing_adversely_affects_the_poor>.