Fueling Fuel Inflation


Jay Hancock blames the Fed for rising gas prices:

Lower interest rates have made things worse. Bernanke and the Federal Reserve have cut short-term rates by more than 2 percentage points since late summer to try to lower business costs and spur growth. That nudges investors to sell dollar-denominated paper and seek higher returns elsewhere.

Once the dollar was an automatic refuge, the first place international investors socked dough in uncertain times. Lately, however, the most popular safe harbor isn't the dollar, the Swiss franc or even the euro. It's energy.

People are piling into oil and gas futures, probably with money they raised by dumping dollar-denominated stocks and bonds. Oil investments are seen as protection against further dollar declines.

Bernanke's lower rates have fueled the trend by furnishing cheap funds for investors to spend on the New York Mercantile Exchange. So he's simultaneously hurting the greenback and driving up gas prices—even though inventories are at a six-year high. That won't help the economy recover.

Energy may be the next bubble investment. Each time the Fed breathes life into the economy with lower rates, the extra money floods into some fad asset—first Internet stocks, then housing, now oil?

The whole argument is here.