How the heatwave will tighten up the money supply

The record drought in the US will have one other victim, other than farmers and livestock producers: fans of quantitative easing.

Robert Kuttner, writing for the Huffington Post, says the devastating drought will make food stuffs more expensive, the same core items that the US Federal Reserve uses for calculating inflation. Kuttner believes that the Fed will mis-read rising inflation and will be goaded to tighten up, the last thing the US economy needs:

If you think the Fed would not be so crazy as to tighten money because of a drought, think again. In the 1970s, inflation was the result of price spikes in key sectors — energy, food, health care, and housing. It was emphatically not the result of macroeconomic overheating, the classic reason for the Fed to damp down the economy with higher interest rates.

The last thing the economy needs now is tighter money. But watch for op-eds and speeches by the inflation hawks pointing to rising food prices and calling for higher interest rates.

Read more>>