Effects of quantitative easing on food prices Research Paper - 1

Effects of quantitative easing on food prices - Research Paper Example Instead of that food prices now depend on global demand and supply. Dependence on global market leads to speculation which makes food price volatile. Volatility is a characteristic of the market but irresponsible monitory policies generate the market more volatile and drive prices up. Generally weather, speculation and a number of other faults would have been considered as responsible but here monetary policy and quantitative easing (QE) or printing new money are the main reasons. This policy can be done by the central bank only because everyone accepts this money as a payment. People use this money to buy government and corporate bonds, equity and houses. In addition central bank sometimes lowers the interest rate on new bonds and loans and this will make additional pressure on money market. It encourages greater spending. On the other hand bank can also improve their position and show their interest in money lending (Fry). Effects: There is also a negative impact. Firstly, the prin ting of new money raises the purchasing power of the consumer and the demand of products increase. For that people demand more money but the central bank fails to supply that amount of money. This leads to inflation in economy. Then to control the situation central bank decides to increase interest rate on both credit and deposit. For that central bank loss money on its purchase and suggest the government to impose higher tax rate on goods and services. Secondly, creating and spending money lowers the value of currency and it causes inflation or hyper inflation. This exploits the purchasing power due to instable price level. Last of all, QE demolishes the confidence of an economy. Thus we can say that QE is counterproductive for an economy and central bank cannot impose QE anyhow (The Financial Times Lexicon). According to some economist QE is not main responsible for rising of food prices. Poor people have to understand that they should maintain their food habits basis on supply of those goods in world market. If there is seen a shortage of that good people should adjust their food habit according to the situation. This can make a stable situation in the food market which directly affects the prices of foods (Lagi et al). Gradual increase of basic food prices has severe impacts on huge population across the world. There is a lack of confusion about the factors which are responsible for this situation. The main cause of price increase of food is investor speculation. In recent years it is clearly seen that the supply and demand are not consistent with the actual price dynamics. The exploitation of food prices in 2007-08 and 2010-11 were mainly happened due to the investor speculation (Lagi et al). Along with that the consumption of ethanol is another reason. The excessive consumption of ethanol in US gave a huge negative impact in the global market. It increased the price of ethanol sharply. More over these adverse results are not only seen in the commodity ma rket but also seen in the asset market. It increased the expected returns from equities and bonds. Though some economists have claimed speculators cannot affect the food market directly. According to them food prices are set up through the market mechanism and deregulation of the price system. Price system is generally controlled by the practitioners of the market. Therefore, there is a huge chance of making disingenuous price system. They generally set the price level with respect to their profit maximization