Sunday, December 5, 2010

Big Banks, Bernanke and QE2 and Commodities

In his November 5, 2010 lecture at Jacksonville University the Chairman downplayed the then recent spike in commodity prices. Here's the video via C-Span:

Specifically, during the Q&A at the 15:31 mark he is asked:
Unidentified speaker:

Thank you for coming. You have mentioned that the Federal reserve sees an extended time of low inflation that could threaten the economy. I see commodity...
"You're absolutely right that the one exception to the general observation that inflation has been coming down is that globally traded commodities like energy and food and other commodities have been going up pretty sharply, and the reason for that basically is because the supply and demand is determined on a global level and emerging markets are growing quite quickly and the demand for those commodities is pretty strong. So that is going to be a contributor to inflation in the U.S. because it will affect for example gas prices and so on.

Our research and our experience though suggests that generally speaking when you have a situation like we have today where there's a lot of slack in the economy, a lot of excess supply, that it's very very difficult as you were saying for producers to push through those costs to the final consumer. In addition, most of the costs that producers have are labor costs, and wages have been growing relatively slowly. Productivity has been growing relatively strongly which means that overall the cost of labor per unit of production is in some cases actually falling. So although you have higher materials costs or higher energy costs you have lower labor costs. So you put that all together and you don't expect to see very much inflation, or... commodity prices being passed through to final goods and services with a few obvious exceptions like gasoline of course".
Here's a different take on things from Economic Forecasts and Opinions:

Big Banks Are Stifling Economic Growth & Taxing Consumers
Have you noticed the price of oil lately? It’s $90 a barrel in a dismal economy with unemployment hovering around 10%. The problem with Fed chairman Bernanke`s latest QE 2 initiative is that he has just given more access of cheap money to the big banks.

Non-Productive Use of QE Money

And what are they doing with all this cheap money? Nothing productive from an economic standpoint. Instead of lending the money to entrepreneurs, business projects, and venture capital initiatives which actually create jobs and foster much needed economic growth, the big banks are just taking this cheap money and pouring it into commodities like crude oil, copper and grains.

Taxing Consumers by Bidding Up Commodities

So not only are the big banks doing nothing productive with the latest QE2 capital, but they are in essence dragging down economic growth with a counterproductive tax on consumers when they can least afford it. The last thing the economy needs with 10% unemployment is to be paying a hefty tax on food and energy products, especially given the fact that these markets are well supplied, and are necessity items for consumers.

Actually, Mr. Bernanke would have been better served by taking liquidity out of the system, as commodities would be much cheaper with higher rates, and the economy would be much more inclined to spur economic growth and job creation with lower food and energy prices.

Deflaton Fear - Theory vs. Reality

The entire notion that we have to worry about a Japan-style deflation is completely overblown, and the manifestation of over the top theoretical academic postulating. Sure, the US is just coming out of a recession, and we are growing slowly, but the differences between Japan and the United States in terms of resources, demographics, economic diversity, monetary policy, and how the US handled losses in the banking sector makes any comparison between the two countries a wild stretch by any standard.

This is the problem with having too many academics in the Fed, and absolutely no one with any market experience who understands how markets actually function. Mr. Bernanke even admitted in open proceedings in front of Congress that he didn`t understand the dynamics of the Gold market--a pretty telling inadequacy as the head of our monetary policy.

Exporting Inflation via Commodity Plays

But there is more to the story of how big banks are actually hurting global growth if we analyze the emerging markets and their burgeoning inflation problem. The emerging market economies like China, for example, have gone into tightening mode in order to fight what is starting to appear as a runaway inflation problem with a CPI reading of 4.4%, and talk of a 5% reading on the next CPI report.

Meanwhile, crude oil is up $10 and gasoline prices are up 25 cents per gallon since Bernanke’s QE2 announcement, and this doesn`t even factor in the run-up in commodity prices since QE2 was up for debate starting in August....MORE