QE, but for Commodities

Obviously, this sounds crazy at face value, but Quantitative Easing for bonds was deemed crazy when it first began. But now, QE is basically part of the "new normal," as it seems to be the only thing providing liquidity to the market at the moment.


For well over a decade now, the Federal Reserve has tried to stimulate inflation. While QE increased the monetary base, it never translated to an increase in money supply. There is a big difference between the two, but that is outside the scope of this article.


Frequent readers know that inflation expectations are a major contributor to interest rates. If the Fed controls short-term rates and "helps" long-term rates, then wouldn't low rates mean low inflation? The notion of lower interest rates stimulating demand is totally absurd given that regulations prevent most lending to the public at large. In other words, most of the public doesn't have access to credit that would enable them to even benefit from low interest rates. Yet here we are, 40 years into a secular decline in interest rates, and policymakers still can't figure out how to create inflation.


So, what are the options here? Well, if we look overseas, we see that other central banks have already started to buy stocks. Examples include the Bank of Japan and the Bank of Switzerland, who owns nearly $100 billion worth of U.S. stocks. The Federal Reserve has not bought stocks yet, but don't rule it out at some point. Especially with oil prices going negative recently, we have to accept that anything is possible in financial markets.


The big question we face is what happens if agricultural commodities go negative? There would be no incentive whatsoever for farmers to grow anything if they have to pay someone to take their product. Many have considered the unnatural large yields of modern agriculture to be a "luxury," but is it really? What happens when the storehouses are drawn down, and all the big farmers are bankrupt and out of business?


The economy is suffering from deflation now, but eventually, supply chain disruptions could lead to stagflation. We are already seeing this begin to happen.


This is really turning into a situation of "pick your poison." The inescapable outcome seems to be higher food prices. But could QE for commodities mitigate damage with respect to potential shortages? The Department of Agriculture already provides price supports, but seemingly without limits on production. How would the Department of Agriculture provide support if prices are taken down into negative territory?


Perhaps the Federal Reserve should just buy agriculture/commodity futures, and please, spare me your cries of "muh free market."


For years, the Fed has stated their goal is to create inflation. Granted, the Fed isn't exactly a beacon of transparency, but buying commodities outright could be a way to stimulate inflationary pressures. Of course, maybe they've not told the truth this entire time and deflation really is their ultimate goal.


Desperate times call for desperate measures. It's time to put up, or shut up. Let's see what the policymakers decide.

33 views0 comments

Recent Posts

See All