Indonesia on Food inflation: Let them eat garden food

We know that the Chinese have turned to price controls to stop the rise in food price inflation. Everywhere in the emerging markets, where incomes are lower than in the developed world, the rise in commodity prices is putting huge strains on budgets. Some are talking about social unrest, as we saw in 2008, even after tariffs and price controls.

Indonesia’s President has a different answer: let them grow their own food.

From UBS’ Andy Lees:

The UN says that food prices hit a record level in December, above the 2008 levels that caused rioting in countries such as Egypt. With prices rising so quickly Indonesia’s president has called on households to use their gardens to grow much needed food. With rising prices the fear is of barriers being put up to prevent exports. Rising food prices was seen as some of the cause for Suharto’s overthrow in Indonesia in 1998 (although this was more a consequence of other things) and the farmland purchased by South Korea’s Daewoo was in part blamed for a coup in Madagascar. Indian food price inflation is at 18.32% whilst in China it is up to 11.7%. Alongside the bad weather – (yesterday there were reports that the La Nina would last into the summer causing problems for the US growing season) – Chinese imports of soybeans have doubled over the last 4 years and are expected to be 60% of globally traded soybeans this year. HSBC says “there’s an urgent need to be more pre-emptive in tightening monetary policy to prevent some of these inflation pressures from erupting”.  (Indonesia’s central bank said a strong rupiah could still curb imported inflation as prices rose 6.96% y/y in December to a new 20 month high, whilst Ethiopia announced price caps on several imported and domestic commodities).

These food price inflation numbers are huge. The question is how long this can and will continue. Excess liquidity in the developed economies is not only being pumped into emerging markets but also into other alternative investments like commodities. With the speculative flow increasing and prices higher across the commodity spectrum, animal spirits are certainly a factor in the commodity markets. You can see why Brazil is still talking about a so-called ‘currency war’ and why the Chileans too are now fixing for capital controls.

There are other places this wall of liquidity is re-surfacing. In my view, the IPO fever in the US suggested by the frenzy over Facebook and Twitter, the trading in hot pre-IPO shares and the mergers amongst pre-IPO technology companies all point to mid-cycle excesses driven by accommodative monetary policy aka quantitative easing. If Bernanke thinks QE has been a success because it has revived animal spirits and underpinned the technical recovery, he is probably right – but at what cost down the line?

Judging from this morning’s employment situation summary, QE is not helping the real economy in the US. I will be on BNN at 12:15ET to talk about the US and Canadian employment numbers. Here’s what I will probably say: while the headline unemployment rate in the US went down to 9.4% from 9.7%, the (seasonally-adjusted) broader employment mark is still stuck at 16.7%. Moreover, this benign 9.4% number was achieved through the unemployed dropping out of the labour force, exactly the opposite of what you want to see at this point in the cycle. The non-farm payrolls added 103,000 jobs, nice but short of the 250,000 needed to keep pace with population growth and well short of the 175,000 consensus and 200,000 whisper number.

Can you all tell me in what way quantitative easing is a good policy in the US or elsewhere?