Bernanke says unfair to blame inflation on QE

It's Not Ben's Fault.

Tunisia's government is overturned, in part, because of a lousy economy and soaring commodity prices. Egypt is in turmoil as violence spreads and wheat prices soar. Algeria an, OPEC member, is getting ready for a clash with angry, hungry people because of soaring food costs and Fed Chairman Ben Bernanke says “Don't blame me.” Is its Ben's fault? Has central bank policy been the catalysts for discontent and set the stage for revolutions around the globe?

Well there is no doubt that QE 2, in my mind, has added to inflation. In fact, as I was on the floor broadcasting at the time of the announcement of what is now quantitative easing one or QE1 and said on the air on The Fox Business Network that the Fed just printed a floor under the commodity markets. The Fed, fighting a deflationary downdraft with falling food and oil prices, took dramatic steps to create inflation. The next day I wrote, ".... do not underestimate the way this Fed can change the marketplace." That the rules of the game have changed.

In the blink of an eye the Fed, with its unlimited power to print money, can change the dollar value of a commodity or its long term {down} trend in an instant. By creating inflation and creating money out of thin air, they can change the entire commodity trend as we know it and drive away the deflation demons of that particular moment. I said that being short commodities has become a more dangerous proposition and the Fed has put us on notice. At anytime they can run the printing press and change the fate of a commodity.

They do this not because they created a global shortage of a commodity or because of sky rocketing demand. It is because the Fed has the ammunition to make it so. And the Fed's policy of quantitative easing is as simulative to the economy as a good old fashioned interest rate cut. But at the same time, it has the potential to be much more inflationary.

Well Ben does not think so. As reported by ABC News, "Federal Reserve Chairman Ben Bernanke said today that it was ‘unfair’ to blame the Federal Reserve's monetary policies for inflation in emerging markets and defended the Fed against accusations that it has contributed to the rise of global food prices, which have fueled political instability in countries like Tunisia and Egypt." Yet at the same time Mr. Bernanke said that QE2 increased stock prices.

And as Kevin Hall, the national economics correspondent at McClatchy Newspapers, and I discussed, it is Mr. Bernanke wanting to have it both ways. Is he saying that QE helps one asset class but at the same time has no impact on another asset class like food and inflation? Come on Ben, who are you trying to fool?

Yet as ABC News goes on to report, "Bernanke was asked about the situation in Egypt during a rare question and answer session following a speech today at the National Press Club in Washington, D.C. He initially rejected the premise of the question, but went on to discuss food prices. ‘The most important development globally is the fact that the world is growing more quickly, particularly in emerging markets,’ he explained. ‘I think it's entirely unfair to attribute excess demand pressures in emerging markets to U.S. monetary policy because emerging markets have all the tools they need to address excess demand in those countries. It really is up to emerging markets to find the appropriate tools to balance their own growth.’"

Ah Ha!! So there you have it! It's not Bens Fault!! It's the Chinese! That's right! The emerging market of all emerging markets is the country that in Ben's mind is causing all the problems. Ben Bernanke in the past has lashed out at China saying they are causing global problems by preventing their currency from strengthening while their economy booms. As far as QE2 goes the Fed felt it had no choice (but to print more money, QE2) as the U.S. government moved slow to attack a rising budget deficit and at the same time face an imbalance as the Chinese continue to manipulate their currency.

As I have written before, Chinese currency manipulation was just as much a factor in the global economic meltdown as were the Fed and the U.S. government's ill fated Fannie and Freddie excesses. China's siphoning of jobs and wealth from other parts of the globe at a rate that was unfettered by moderation by a rising currency helped create imbalances. The huge influx of capital and by default artificially cheap goods, helped create and add to deflationary pressures in the U.S as well as other parts of the globe.

That's not to say of course that cheap goods are not good because they are and they provide good things for the economy, yet at the same time cheap goods on the back of a major budding economic superpower currency manipulation does not allow for an orderly fall in price which exports deflation. China's overprotective currency ways have exported deflation to other parts of the globe.

The Fed has forced the Chinese hand. If they fail to allow their currency to float, then Mr. Bernanke will continue to print money and export inflation to China. The Chinese will have to raise rates, which in a normal free market world would mean their currency can strengthen. I guess there is more than one way to get the Chinese to move to address the economic pain they are exporting to their partners.

So the truth is that Ben is blaming the emerging markets protectionist ways for the inflation pressures that are rocking the globe! If the U.S. government is being forced to print money and export inflation to the rest of the world, well that is their problem not his. Ben's one job and only job is to keep his foot on the accelerator until our jobs market comes back.

The dollar gained ground on comments from Jean Claude Trichet who signaled that EU rates will stay steady. That gave the dollar a boost and a hit to the euro.

The natural gas number did not inspire bulls.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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