The Denomination Fallacy, Coffee Edition

The denomination fallacy normally rears its economically-illiterate head with respect to oil prices. But in the Washington Post today, Anthony Faiola manages to apply it to coffee:

For untold millions worldwide, the weak dollar has emerged as a troubling dark spot. Take Ngengi Mungai, a Nairobi coffee exporter trapped between the weaker dollar and the rapidly appreciating Kenyan shilling — which gained as much as 12 percent against the dollar this year amid an export-driven economic surge across much of Africa. His coffee sales overseas, as with the bulk of global commodities, are priced in weaker dollars. But he must then convert them into stronger shillings to cover his local costs for local labor, materials, even the clothes on his back. It has cut sharply into his annual income.

Dean Baker fisks this kind of thing much more efficiently than I ever could:

Coffee is priced on a world market. Its price fluctuates by the hour. If the dollar lost 90 percent of its value, then coffee would simply sell for ten times as much, measured in dollars, unless coffee was also declining in value. If coffee is declining in value, then the farmer’s problem is the decline in the value of coffee, not the decline in the value of the dollar.

One doesn’t, necessarily, expect Kenyan coffee exporters to understand the economics of fiat money. But as Baker says, it would be nice if a professional writing about currency markets had a clue.

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