US Fed Chair Bernanke’s Hands Are Tied!

``Mr. Bernanke is the epitome of US economic thinking. He is like a navigator in the 16th century who did not believe the earth to be round. There is no such a thing as an “inflation target” except the increase in the annual supply of money, which the Fed does control. The increase in the quantity of money is inflation and not the consumer price index, which in the case of the US is doctored anyway. So, how would the good Dr. Bernanke wish to target inflation? Are rising oil and commodity prices, which are conveniently excluded from the core CPI, not inflation??? Mr. Bernanke “targeting of inflation” centers in my opinion around a flawed theory and is one of economic theory’s greatest sophism.”- Dr. Marc Faber, Good Luck Mr. Bernanke, November 8, 2005

Yes, understandably the FED is in a tight bind.

As we have noted in the previous outlook, US market’s present level appears to be sustained by the MASSIVE expectations for a bailout. One can just look at Fed rate futures and bond markets to see how the financial markets have been SCREAMING for these! And failure to deliver is likely to result to a total rout!

For Mr. Bernanke and their ilk, delivering the therapeutic dosages seems difficult knowing that inflation (relative to consumer/producer goods) still abounds elsewhere as shown in Figure 1.

Figure 1: Economagic.com: CRB Grains Subindex Surges to RECORD HIGH!

Because when global central banks open the monetary taps, they cannot control where the money flows.

As we have previously predicted, a confluence of events…a spike in demand, climate change, demographic trends, water shortages, desertification, environmental hazards, lesser arable lands, market distorting policies (e.g. Biofuel subsidies) and lower dollar value…today conspired to bring CRB Grains Sub-index to a Record high, led by record Wheat prices followed by surging prices of soybean, oat, rice, corn and canola! Yes Anton, Beer prices are likely to go up!

In addition, we see oil prices in another attempt to break its previous high!

Nonetheless, following the bloodbath in the US markets last Friday, as US payroll data dropped to its lowest level in four years, the politicization of the markets appears to have gained momentum. This report from the New York Times (emphasis mine),

``For the first time in four years, economic concerns are rivaling the war in Iraq as a top issue on the political agenda.

``Sensing new political momentum, Democrats in Congress and on the presidential campaign trail are stepping up their criticism of President Bush’s handling of the economy and offering their own proposals.

``And now that the malaise in housing and credit markets appears to be infecting the wider economy, the Federal Reserve could feel more pressure from Democrats and Republicans alike than it has since Alan Greenspan, then the Fed chairman, incurred the wrath of President George H. W. Bush for not cutting rates faster in the early 1990s.”

Some have alluded to Ex-Chair Paul Volcker’s tight money policies as a possible precedent for Mr. Bernanke, to which respond quoting Dr. Marc Faber in his June 23, 2003 GBD report titled, Financial Implications of a Reflation (emphasis mine),

``I would therefore argue that even if Paul Volcker hadn’t pursued an active monetary policy that was designed to curb inflation by pushing up interest rates dramatically in 1980/81, the rate of inflation around the world would have slowed down very considerably in the course of the 1980s, as commodity markets became glutted and highly competitive imports from Asia and Mexico began to put pressure on consumer product prices in the US. So, with or without Paul Volcker’s tight monetary policies, disinflation in the 1980s would have followed the highly inflationary 1970s.

``In fact, one could argue that, without any tight monetary policies (just keeping money supply growth at a steady rate) in the early 1980s, disinflation would have been even more pronounced. Why? The energy investment boom and conservation efforts would probably have lasted somewhat longer and may have led to even more overcapacities and to further reduction in demand. This eventually would have driven energy prices even lower.”

As we have been saying ad nauseum…POLITICIANS and their factotums or affiliates mostly resolve to act on treatment based solutions based on political signification. It is short term issues which delivers the vote, that’s why!

In essence, the scenario of a FED supported economic “soft landing” appears largely premised on oversimplified explanations in support of bullish biases of the analysts.