Bernanke, 'core inflation', slammed as commodity bubble cause global chaos
April 30, 2008 (LBO) –
The Federal Reserve money printing that has fired a commodity bubble causing malnutrition and food riots in poor countries is increasingly coming under fire, with mainstream media adding their voice to a growing flood of critics.
After the sub-prime bubble started to unravel last July the Fed has cut rates – the tap through which is money is printed for the banking system – from 5.25 percent to 2.25 percent.
The Fed has individually poured money into banks like Bear Stearns and has also started to lend cash to Wall Street against worse-than-junk-bonds violating time honoured central banking principle of lending against good collateral.
"Eight months into the Fed's most recent rate-cutting spree, the evidence is overwhelming that it has been a major policy mistake," the Wall Street Journal said this week ahead of a meeting of the Federal Open Market Committee which decides rates.
"Meanwhile, the Fed's decision to open the general monetary spigots has inspired a global commodity boom unlike any since the 1970s."
"Oil has climbed to nearly 119 dollar a barrel today from 70 dollars in late August, a 70 percent increase.
"Farm and other commodities have seen a similar surge, with corresponding increases in food prices leading to shortages and riots in Egypt and other places, and to rice hoarding even in Southern California."
The 1970's bubble was caused when the United States defaulted on its obligations under the Bretton Woods agreement, broke the dollar's link to gold and went on a fully fiat paper currency amidst heavy money printing.
Until the broadside from the Wall Street Journal, mainstream media has been muted in its criticism of the Federal Reserve and central banking in general.
The mainstream media is driven by comments of 'analysts' at large investment banks who have the most to gain from 'rate cuts', and statements by central bankers themselves, which tend to be taken at face value and actually believed by credulous members of the public.
Blame 'Supply Shocks'
Commentators who talk of a 'food crisis' have found bogeys in bio-fuel to climate change despite overwhelming evidence that the food inflation seen in recent months is monetary phenomenon caused by Fed rate cuts in particular and lack of firmly anchored monetary policy especially in developing countries.
Central bankers have been quick to blame 'supply shocks' while politicians from Philippines to Sri Lanka have blamed 'hoarders' and 'unscrupulous traders' for grain price rises without fixing their monetary systems or trade and fiscal policies.
"The popular media explanation is that this price surge is a result of rising global demand, greedy speculators and human profligacy," the Wall Street Journal commented.
"All of a sudden, without warning, the world is said to be running out of food.
"After 30 years in intellectual hibernation, Thomas Malthus and the Age of Scarcity are back in style."
The Journal said the European Central Bank (ECB) has had comparatively better monetary policy than the Fed. Since 2003 the price of oil has climbed 146 percent in Euros against 273 percent in dollars.
"This reflects the European Central Bank's sounder monetary management," the newspaper said.
"And it means that had the dollar merely retained the same purchasing power as the euro, today's price of oil would be below 70 dollars a barrel."
However even the and also the Bank of England has pumped billions in liquidity to the banking system and house prices in many European countries have also been bubbling, much like the US.
The Journal also slammed the Federal Reserve's practice of quoting a 'core' inflation index which strips out food and energy which are the very types of goods that has a deadly response to monetary policy action in the first place.
"…the Fed and much of Wall Street convinced themselves that the only inflation measure that matters is "core inflation," which excludes food and energy," the Journal said.
"The Fed's monks devised that measure to avoid an overreaction to commodity price movements, but instead they have used it to pretend that food and energy prices don't matter.
"Throughout this decade, they pointed to core inflation to argue that "inflationary expectations remain well anchored," even as the dollar and commodity price signals were telling us that the opposite was true.
'Americans don't buy gas and groceries with "core" dollars."
In criticizing 'core inflation' the Journal is joining other mainstream media.
The Economist last year called the US core inflation "the cold and hungry index" and asked whether the typical American was "on a permanent fast, walks everywhere and survives without heating or air conditioning."
Core inflation has also come under fire from Bank of England governor Mervyn King who said it was "highly misleading", because rising energy and food prices which affected aggregate demand, tended to depress the prices of all other goods.
Many central banks in developing countries have also found comfort in 'core' inflation to escape public criticism for printing money and driving inflation up.
In addition to hurting the world's poor through high food prices, the Journal said Fed rate cuts also punished the savers of the United States and also hurt consumer spending by reducing the purchasing power of ordinary Americans.
"This is a direct tax on both the world's poor and America's middle class," the Journal said.
"Just when the U.S. economy needs a resilient consumer given the fall in housing prices, these price increases have eviscerated consumer pocketbooks.
"In its attempt to help Wall Street and the financial system, Fed policy is punishing average Americans. The public is frustrated and angry with these price increases, and it has a right to be.
"Inflation is the thief of the thrifty middle class."
People on the street find it difficult to grasp the dangers of unrestrained central banking and that inflation is caused by the loss of value of paper currency.
Bernanke's rapid rate cuts is believed to be partly caused by his academic study of the great depression in the 1930's which some economists claimed was worsened by a reluctance of the Fed to cut rates early enough due to a "strong dollar policy".
He has been credited with raising 'deflation' fears after the dotcom bubble burst and spurring the Fed to cut rates as low as one percent, which then worsened a housing bubble, resulting in the current sub-prime crash.
Bernanke has also come under sever pressure in the US Congressional hearings from Texas representative Ron Paul.
The Journal said the world needed a "revival of American monetary leadership."
"It wants the Bernanke Fed to stop the global run on the dollar, and that means declaring an end to its rate-cutting mistake."