As Fed Policy Sinks the Dollar, Prices of Essentials Soar

Food price inflationIntended or not, the Federal Reserve's policy of quantitative easing has crushed the U.S. dollar. (The second round announced Nov. 3 is called "QE2" because it's the second round of easing since the financial crisis of late 2008.)

Intended or not, the Fed's destruction of the dollar's value has pushed prices of commodities that Americans need -- such as instance food, cotton and oil -- higher.

Whether the Fed's QE2 policy will actually spark renewed growth in the economy is not yet known, but what is known is that the producer costs for essential commodities such as grain and cotton are skyrocketing, and those increased costs will soon appear on store shelves.

Tragic Irony

Just as pernicious for the stock market, higher commodity prices mean manufacturers' profit margins will contract as companies seek to limit the cost increases passed on to recession-battered consumers.

It may be the ultimate -- and ultimately tragic -- irony: While the Fed's policy is supposed to help the economy by encouraging more borrowing, the actual effect is to raise prices for companies and consumers alike, and to squeeze the very corporate profits that have been driving stocks higher.

These charts of the dollar, the S&P 500 (reflecting U.S. stocks) and three commodity ETFs (exchange traded funds) show the dramatic effect of the weakening dollar. While stocks have risen as overseas earnings for U.S. global corporations are boosted by the weaker dollar, commodities that end up in consumer goods have exploded higher.

The pass-through of higher input costs to consumers isn't theoretical -- it's real. For example UPS just raised its shipping prices by 4.9%. Since shipping-box dimension charges are also being changed, the effective rate increase for lighter, larger boxes could be as high as 16%. This is significant in an economy that's officially currently experiencing near-zero inflation. (Officially, the annualized inflation rates is 1.1%, according to the Bureau of Labor Statistics.)

According to the BLS, the cost of finished goods is rising at an annualized rate of about 4.8%. Since some low-demand commodities such as lumber (demand fell along with housing construction) and electronics (prices of TVs have been dropping) are declining, the price increases for essential goods may well be masked by a lower rate calculated for all finished goods.

For instance, wheat has jumped from $158 per ton in June, when the dollar began falling in response to the Fed's QE2 chatter, to $271 per ton in September. That's a 71% increase. You may not need a load of 2x4s or another flat-screen TV soon, but you certainly will be consuming wheat in bread, pasta and other foods.

Creating "Hot Money"

Many economists and market watchers think QE2 is bad policy: It's unlikely to work as intended and could further damage the economy. How? By funneling a new flood of cheap credit into speculative bets in emerging markets and commodities while the Main Street economy withers under the onslaught of higher prices unleashed by the same Fed-powered speculative binge.

As I reported last month, the Fed's "trickle down" policy of creating wealth for the top 10% who own most of the nation's financial assets has been a failure. The rise in emerging markets like Brazil and in commodities like wheat suggest that speculative "hot money" is the result when the Fed opens the floodgates of liquidity. Brazil's stock market, the Bovespa, has more than doubled since early 2009.

The semi-official reasoning behind weakening the dollar is that a lower greenback will boost exports. But since exports are a mere 7% of the U.S. economy ($1 trillion, compared to a GDP of $14.14 trillion), it's difficult to see how a modest improvement in exports could offset the dramatic price increases that are occurring across the board in the rest of the economy.

Maybe all the financial speculation enabled by the Fed's easy money, zero-interest rate policy (ZIRP) easing will enrich a few trading desks and hedge funds, but the price increases triggered by the Fed's policy will certainly reduce the net income of every American household as prices for essentials climb.

If you have any doubts about that, just take another look at those charts of cotton, sugar and grain.

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The funny thing is that quantitative easing has not occurred yet. Bernanke has announced his plans for it in 2011 and it's a modest amount and I've heard it will be done gradually. Speculation is what's driving commodity prices up.

November 11 2010 at 9:49 AM Report abuse rate up rate down Reply

Actually, it's not failing. As usual, this blog told only half of the story. The inflation rate right now is essentially zero, which means deflation is a greater threat than inflation. Stay tuned.

November 10 2010 at 1:34 PM Report abuse rate up rate down Reply

If the Fed's economic policy is appearing to fail, why is it being allowed to continue? HALT. The rest of us are already halted: hungry, angry, (growing) lonely, and tired. This economic experiment just might cost us the Union.

November 09 2010 at 5:00 PM Report abuse -1 rate up rate down Reply
1 reply to Wendy's comment

This article was only half right. My neighbor who follows the market says that the Dow will race northward until next summer at the earliest. In other words, stop whining and start buying.

November 10 2010 at 1:39 PM Report abuse rate up rate down Reply

I have a 40 acre family farm just north of Dallas. Should I sell it now???

November 09 2010 at 12:26 PM Report abuse rate up rate down Reply
1 reply to Rita's comment

no rita. you can feed yourself with that farm

November 16 2010 at 8:40 AM Report abuse rate up rate down Reply

The government, most any government, is only partially to blame in respect to the current economic disparity of America and the world. Shady deals of the wealthy tied to dishonest politicians have not helped of course, but any time business runs the world, and capitalism is seen as the savior of mankind, there are and will be problems. Citizens therefore are also responsible; instant gratification and perceived need drives economics and continues to hold citizens hostage; with the promise of freedom if business is allowed to pick the pockets of individuals everywhere: people not only expect this they embrace it. One must understand that many politicians represent money and receive support from unscrupulous individuals and organizations through mass media, misconception, outright lies, and disinformation. Democracy comes in many forms: Democratic Socialism, Democratic Capitalism, even Democratic Communism; each representing a different economic system. The United States, driven by economics and untapped wealth, made a choice to end the cold war, as did many other counties; the lessons learned about fair trade and Capitalism was learned well by what had been opponents on the world stage, and now are opponents of a different type: competitors. There are choices; one of which involves self-dependence of Nations, but with fair and equitable understanding through trade when dealing with each other: always through mutual respect. Business should not be allowed to change allegiance to nations, since this creates power for the business and takes power from the nation. Another choice of course would be to continue to rely on business to solve the world's problems; problems which many in the business world and various political arenas created.

November 07 2010 at 1:54 PM Report abuse +1 rate up rate down Reply
hi cat

They (lawmakers)act like gentry, VOTE THEMSELVES PAY RAISES, they get benefits(health care, pensions, discounts on underwear, free haircuts free parking free housing free stamps...etc. etc.) like gentry, they do not live by the rules they make for the rest of us... what are we stupid or just freakin' nuts!! to let them get away with it.#@#@ De-frock, de-ball, de-fund, and let's get ALL of these bloodsuckers out and put in some real citizens who have to balance their checkbooks every month and live within theirs and OUR means!! Start at the Federal( not a gov agency )Reserve. Their puppet detractors of the REPUBLIC will say the constitutional requirement that ONLY THE CONGRESS CAN COIN MONEY is foolish because we the people are really INCAPABLE (that is dumb, not smart like them) of self direction and THEY know how to manage OUR money better than we. The lower OUR US dollar goes the HAPPIER AND RICHER THESE WORLD CITIZENS ARE. Hey buddy can you spare me (dime) $5 dollars, I wanna buy a box of processed wheat cereal for my hungry kids.

November 05 2010 at 4:20 PM Report abuse +1 rate up rate down Reply

Since "vulgarity and abusive language are subject to deletion, and offenders will be blocked" I had to resist the impulse to post a comment about what I think of the "FED" and the US Government.

November 05 2010 at 10:43 AM Report abuse rate up rate down Reply

I was surprised when I did a search on who ran up the National debt the most and when I did research on the House and Senate vote on NAFTA, I was equally surprised, I guess you can't judge a book by its' cover (story). Funny how he who blames is sometimes the most lame.

November 05 2010 at 10:33 AM Report abuse rate up rate down Reply

Let's see increase in wheat prices couldn't be failure of Russian wheat crop due to drought and fires..must be the Fed....Euro had been pushed down due to the Greek crisis and now rebounding since it's been resolved...Nope, must be the Fed...Fan belt split in my Toyota..musta been the Fed..

November 05 2010 at 8:02 AM Report abuse +1 rate up rate down Reply
1 reply to Lawrence's comment

Yeah, the blame game again. Maybe we should all look in the mirror .... some of us will not see our reflection, though.

November 09 2010 at 5:05 PM Report abuse rate up rate down Reply

United States National Debt Under President Clinton the growth in debt ceased, but note the radical change in direction since George W. Bush entered office. There is no question and a lot of mathematical proof that the steepest upward rises in debt since the end of World War II, started with President Reagan and continued with other so called Neo-Conservatives. (See red in Figure 1 below.) From: United States National Debt, An Analysis of the Presidents Who Are Responsible for the Borrowing, By Steve McGourty

November 05 2010 at 6:02 AM Report abuse -3 rate up rate down Reply