Supply and Prices Rise!

Ok, I was taking some liberties with the header. I meant that the International Energy Agency (IEA)  – through its member countries – decided to release more crude oil (or products) into the market and the Indian government finally raised the price of kerosene, diesel and cooking gas slightly. But, the Government of India did not release the price of diesel and cooking gas from its discretionary control. That is disappointing. Although it is not that surprising that the Opposition parties cried foul, knowing the history of Opposition reactions to such moves no matter which party or coalition was in power, it is still disappointing not to see some display of political maturity at least somewhere. We are far removed still from having a mature and intellectual discourse on our formidable economic problems.

In the meantime, the decision of the IEA to release crude oil and/or petroleum products was a smart tactical move. It is a tacit admission by the Federal Reserve (or, the US administration) that further monetary stimulus could actually achieve the opposite result. That is, it might push commodities prices higher. In other words, the Federal Reserve has finally admitted that easy monetary policy and liquidity could be aiding speculative demand and boost to the prices of commodities. You will also be excused if you interpreted the move as a show of empty hands by policymakers. They realize that they cannot do more. Let us rephrase it. They can do more. The Federal Reserve can always print dollars to buy up all assets – shares and what else – but they appear to realize that such measures have unforeseen consequences or that the costs of such measures might exceed the benefits.

There is a lively debate going on in the blogsphere on Raghuram Rajan’s piece, ‘Money Magic’. I have blogged on it here. Raghuram Rajan has followed up with a clarification. The key points he makes are these and I broadly agree with him:

I would be wary of pushing any policy too hard, especially if there is little evidence that it is working — the unintended consequences could outweigh the meager benefits, if any.

More generally, risk management in policy making might suggest not going to extremes when policy makers are faced with high levels of uncertainty about policy effectiveness (this is common sense, I don’t have a model here).

I will have more to say on this and on the notion of ‘expansionary austerity’ in a separate post.

This post originally appeared at The Gold Standard and is reproduced here with permission.