Ralph Shell @ 12:35 PM, Wednesday February 09 2011
This morning Fed Chairman Bernanke gives the new House Budget Committee an update on the Fed's activities and their assessment of the current status of the economy. Since some of the Congressmen think the Fed's decision to increase the balance sheet of the Fed, buying $600B of bonds, thereby increasing the money supply is causing problems, the meeting may be insightful.
The QEII naysayers contend the increase in the banking systems reserves has caused the dollar to depreciate, and inflation to increase. Further, this ample supply of money finds it way into the hands of those with unbridled animal spirits, who search the globe for assets that will appreciate, causing more inflation.. Higher energy prices, and the explosion of some food prices have been blamed on the Fed's policies. During the period from August 2010 until now the price of crude has worked higher, trading above $90 for West Texas Crude and over $100/barrel for Brent.
The explosion of basis food prices has been even more dramatic. Here is a price comparison from August 10, 2010
until now:
US Hard Winter Wheat FOB US Gulf $246.25/mt $350.35/mt
US 2 yellow Soy Beans FOB US Gulf $379.46/mt $546.19/mt
US 2 yellow Corn FOB US Gulf $175.60/mt $282.58/mt
Source:
International
Monetary Fund
To blame Bernanke and his policies for the bull market in the grains is a real stretch. But for Bernanke to claim that inflation is not a problem is disingenuous. Thanks to President Nixon's economic adviser, Arther Burns, Bernanke does have some cover. Confronted with run away food and energy costs during the 1970's, he decided they would be removed from the calculation of the inflation rates. So the deceptive core inflation measurement was conceived, designed by Washington to fool Main St.
The Fed Chairman has truly been the bankers best buddy. The Washington inspired construction boom left them holding too many bad loans. And they still do. While the Government and the Fed would like to re-inflate real estate values to bail out banks and home owners, with the glut of empty houses, this is not happening. If there is something in short supply, like wheat, the price will appreciate, but when there is a glut, forget it. Funny how supply and demand always works. So the Fed is stuck with keeping the lending rate to the banks, near nothing, and the banks can lend as far down the yield curve as they dare. Perhaps the power of compound interest will bail the banks out, if they can clean up the current mess and avoid future calamities.
Another part of the Feds rational for the easy money policies is the nagging unemployment rate. Causes for the paltry increase in employment, are probably beyond the Feds ability to fix. Small business is the engine of economic recovery, not the oligarchs at General Electric or General Motors. Burdened by taxes, over regulation, and uncertainty caused by Obamacare, any growth in small business will be subdued.
The euro sold off briefly this morning when the story emerged Axel Weber, current German Bundesbank president would not longer be a contender for the head of the European Central Bank. While regarded as an inflation hawk, his blunt Teutonic style may not have been an ideal match. The imposition of the German will on the euro would likely have been an irritant to some members.
The USD has weakened after the Bernanke testimony, even though there was nothing new in the presentation. We are inclined to step back and take a look at the markets from the sidelines.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.