Treasury Purchases: A Strong Correlation to Commodity and Consumer Inflation

by: Russ Winter

Throughout the history of nations, monetizing the budgetary excesses of governments has proven to be a direct path to economic perdition. Having already peeked inside that door, I feel strongly that we must now shut it, lock it and throw away the key. -Richard Fisher-Fed Governor

Bloomberg's following chart says it all. The Fed's aggressive Treasury monetization has been the causa proxima (90-percent correlation) to the peddle-to-the-metal Minsky Meltup in commodities. I suspected this would be the effect but confess I did not believe the Fed and government could be so irrational and stupid as to attempt it , especially with the blow back evident by year end. Though I am one of the most pervasive critics of Fed rabble, this exceeded even my worst fears and nightmares. This is what Bernanke refers to as "temporary" inflation. Nor did I anticipate the markets ignoring such clear and present danger either. The transmission of this inflation disease to consumers appears to take about a six months lag, which corresponds well to the MIT billion price survey I have been using. That, too, is in full force.

The question now: When does the melt up switch into a full-fledged meltdown of the global economy? In spite of all warning signs, it's transmitting at such a rapid pace that it could happen in either one great shock or in a series of tsunamis. In my view, the 320 level on the CRB was more than enough, and it corresponds with the first riots in Tunisia and then Egypt [High Food Prices Equals Riots and Revolutions]. If the Fed continues its purchases, we can calculate that each new $100 billion of Treasury purchase will add about 5 percent to the commodity index and $7 to oil. It takes five to six weeks to purchase $100 billion in Treasuries. What a game of chicken being played out and right before our eyes! You can sense the collision, flying glass, blood and bones at almost any moment. If the Fed desists or scales down its Treasury buying, a stark trillion dollar question remains. Who will buy them?

(Click chart to enlarge)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.