The Federal Reserve just doesn’t seem to get it.
Monetary ease can cause bubbles and not just in the United States. Bubble Ben at the Fed still denies that the Federal Reserve had anything to do with the bubbles in asset prices in the early 2000s in housing and the stock market. Bubble Ben, in 2005, placed blame on the Chinese and other countries for the “Global Savings Glut” that helped to finance the budget deficits of the United States government, thereby allowing the interest rates in America and other countries to be excessively low, and causing substantial concern about world inflation and international resource misallocation.
Bubble Ben continues to see price moderation as a problem, just as in 2006 and 2007 he saw inflation as a problem far beyond the period when inflation was a problem. When it comes to price movements and asset bubbles, Ben Bernanke is a lagging indicator.
But what's happening in the real world, Ben?
Investors are holding their biggest positions on record in the commodities markets as prices surge …. Hedge funds, pension funds and mutual funds dramatically ramped up their holdings in everything from oil and natural gas to silver, corn and wheat this year. In many cases, the number of contracts held for individual commodities now far exceeds the amount outstanding in mid-2008, the last time commodity markets were soaring to records and debate raged about whether excessive speculation was driving up prices.
We read in the Financial Times
(subscription required): “For the first time in two years, oil bulls are starting to outnumber bears.” Have you
noticed that the price of gas has jumped $0.30 or so over the past month or two? And the price of gasoline at the pump is going to continue to rise.
And the same picture arises for worldwide commodity prices, according to an FT
piece entitled “Material Difference": “World prices for cotton have risen by 73% since the start of June.” This is just one item; one can go to other commodities and see substantial increases. This is going to help the economic recovery?
“In other words," the FT continues, "a generation that has grown up with food and clothing deflation must now get used to paying more for the shirts on their backs and the bread on their table. The options: less breakfast cereal in the carton and hair-raisingly static-inducing nylon shirts, or pummeled profit margins for the global food and clothing industry.” That is, world commodity inflation is causing cost pressures that must surface somewhere. And this is going to help the recovery?
In the meantime, we are seeing China, Brazil, and India, among other countries, raising interest rates and restricting bank lending so as to combat increasing levels of inflation. Governments are very concerned.
Last week, the Federal Reserve released information about the financial and non-financial institutions that it assisted throughout the world during the recent financial crisis. Commentators responded by referring to the Federal Reserve System as the “world’s central banker.”
The Federal Reserve System has instead become the “world’s inflator”!
International financial markets have become so interlinked, and flows of funds have become so fluid, that pumping up the world’s reserve currency can affect almost every corner of that world. If the Federal Reserve creates an environment in which investors can borrow at 25 to 50 basis points and lend elsewhere at much higher rates, money is going to flow from the United States into these other opportunities.
And bubbles result -- worldwide.
What the Federal Reserve fails to understand is that industry and finance in the United States is in need of a massive re-structuring. Efforts to pump funds into the U. S. economy in a short-run attempt to put people back to work is just resulting in the money going “off-shore." These efforts are not helping people and businesses de-leverage and modernize; it is not helping them re-structure.
In addition, these efforts are not helping America compete in the 21st century when its educational system is just producing students that are average or just-above average in science, math, and reading when compared with other children throughout the world.
Also, the Federal Reserve does not understand the role it has played in exacerbating the increasing gap in incomes between the highest earners and the rest of the income spectrum. As a consequence, the Federal Reserve is just producing bubbles everywhere -- and it is hard to see how this is really going to help us.