Monetary Policy

Commodify Your Zero Percent

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For the third straight year, Ben Bernanke brings you a lean Christmas, this time with inflation.

Proving that Ben Bernanke can even screw up the economics of Christmas, the price of a lump of coal has increased more than 63 percent in the last year and a half.

Commodity specialists Hossein Askari and Noureddine Krichene designate a new, Euro-style intellectual movement—"Bernankeism"—to try and make some sense of the chaotic set of principles guiding the Federal Reserve Bank chairman's decisions. You need to understand the scale of the Ben Bernanke project to appreciate how completely it has failed:

In the past decade, US policymaking has been dominated by fallacies built on excessive monetary expansion, near-zero interest rates, and sizeable fiscal deficits. These have turned out to be very costly for the US economy. Presidential advisor Larry Summers, who has claimed that the US economy would suffer from a lack of demand for a number of years to come, has recently echoed these same fallacies. He was oblivious to the excessive size of the budget and current account (external) deficits, both indicating excessive demand in relation to output that is financed by external borrowing. US policymaking has emphasized demand and has neglected structural and sectoral policies and policies to generally promote productivity and in turn growth and employment.

The question that matters is how much durable growth and permanent employment creation can be achieved in such a lax monetary environment? Even if one believes in Bernankeism as a way to achieve full-employment, it clearly necessitates a reversal of such expansionary monetary policy to pre-empt a renewed wave of financial failures. The economy will gyrate from booms to busts.

It would be more desirable to achieve employment in the context of sound monetary policy that would preclude such gyrations. Three years into the crisis, the economies in Europe and the US remain stagnant with renewed debt crises, indicating the inability of Bernankeism to bring about the instantaneous recovery it has long promised.

Askari and Krichene, writing in the Asia Times, focus on their own specialty—commodity prices, which give a pretty good measure of the results the dark prince of unwanted outcomes manages to perverse-engineer. Commodity prices don't show up in the Personal Consumption Expenditures data the Fed uses, but they have been going kerblangbusters:

Ben Bernanke eats children.

Since the Fed pushed interest rates to near zero in December 2008, commodity price inflation has resumed at rates rarely seen in the past. Over the last two years, under the effects of near-zero interest rates and ample dollar liquidity, gold prices have jumped from $756 an ounce in December 2008 to $1,430 in December 2010 (up 89%); crude oil from $44 per barrel to $91 (up 107%); copper from $1.29 per pound to $4.2 (up 230%); sugar from $308 a ton to $738 (up 154%), soybeans from $786 a bushel to $1,300 (up 65%); wheat from $457 a bushel to $730 (up 60%); corn from $294 a bushel to $595 (up 102%); and coffee from $1.02 a pound to $2.17 (up 113%)…

Rarely have economic growth and full-employment in the US or in other major industrial countries been associated with two-digit commodity price inflation. Durable economic growth and sustained employment creation have generally been associated with stable or declining commodity prices.

One problem with considering this broad range of commodities is that they are sourced from all over the world, and their prices do not all depend on U.S. monetary policy.  There are central banks all over the planet following The Ben Bernank's recipe for prosperity through currency devaluation. Right now, the world's greatest deliberative body is waging a long campaign against China's "unlawful practice of currency manipulation." That is, Sens. Sherrod Brown (D-Ohio) and Olympia Snowe (R-Maine), along with Treasury Secretary Tim Geithner, would like to impose sanctions on China for following the same fiscal policy as the United States.

In fact, if anybody out there claims expertise on how China actually prevents appreciation of its currency – and how this differs from the printing/bond-buying/interest-rate-finagling mechanisms available to any central bank – please pipe up in the comments. Does the People's Bank of China have access to some inscrutable currency tools not known to the Fed? Is it an ancient Chinese secret? 

The sad truth is that Bernankeism is not specifically or even primarily confined to the Fed. Bernanke may be distinguished by a certain joyless and compulsive quality in his money-printing. But he's not alone.

Which raises some interesting questions. If every currency collapsed at the same time, would that be a push? Why does less actual currency gets created when the money supply is expanding? And—as I asked exactly one year ago, when economic conditions were pretty much exactly the same as they are now—why haven't Bernanke and Krampus ever been seen together?