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October 15, 2010

The Unintended Consequences of Quantitative Easing

Once again, government intervention into the broader economy is having unintended consequences on important markets (were you ever in doubt?). The big topic to discuss is agriculture. Basically every agricultural commodity has seen a large increase in price since the beginning of the year.

Last Friday, agriculture had one of its biggest price gains as the USDA issued a lower yield forecast. The lower yields are being used as the reason why prices are beginning to spike. Unfortunately for the government, many in the stock market are not drinking the KoolAid.

Even the NASDAQ is stating that quantitative easing is the biggest contributor to the increase in agricultural prices. They directly state:

"Commodities (NYSEArca: GSG) are priced in dollars and with more of them floating around; any piece of negative news can cause food prices to go through the roof."

This not only includes agriculture, but energy. It is important to note that when too much money is chasing too few goods (agriculture), it is defined as inflation. According to the Federal Reserve, we have no inflation. This is overall and not by sector, however. How will your family be impacted cost-wise if these prices continue?

We also need to look at the economy as a system. What do higher food and energy prices mean? Higher transportation costs come to mind. So now, if the product you need/want requires fuel to move, it will become more expensive, too.

Hopefully, you don't eat or drive anywhere.

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