It’s a QE world after all

The Lethargic Universe

In fact when I wrote the day after the first Quantitative Easing that the Fed had just printed a floor under commodity prices, it was not a popular view. I was blasted on TV and in news articles. My concept of the historic impact of quantitative easing on prices was not commonly accepted. Yet now anyone who follows the moves in the markets knows that Fed Policy and EU bank policy does impact price. If that were not true then why did copper soar after weak data out of the US ad China? If not pricing in Fed policy then there is no reason to rally.

"This is nonsense," Dean Baker, co-director of the Center for Economic and Policy Research, wrote in an e-mail. "These prices have been moving largely in response to real conditions of supply and demand (e.g. the Libyan civil war raised oil prices by taking supply off line, the summer drought in the U.S. has raised corn prices) often amplified by speculation."

That is nonsense as well. While prices have indeed been moved by the Libyan conflict and the summer drought in the U.S., to ignore the fact that the rising euro moved markets means you are failing to look at the obvious.

 “Nobel Prize-winning economist Paul Krugman also has repeatedly debunked the claim that the Federal Reserve's asset purchases have caused commodity prices to rise. Instead, he writes, food and oil prices have risen because more people around the world need more food and gas, but the supply of oil remains limited and more extreme weather has hurt food production. What the commodity markets are telling us is that we're living in a finite world," Krugman wrote in the New York Times in December 2010. "As more and more people in formerly poor nations are entering the global middle class, they're beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies. And those supplies aren't keeping pace."

So Mr. Krugman, do you also believe that stimulus does not impact demand? If that is what you are saying then your belief that massive government spending is the answer to our economic crises is wrong as well. If stimulation does not increase demand, or if increased demand does not increase price, then you had better give back your Nobel Prize because you have just debunked your own economic philosophy.

Ms. Kavoussi said that, “Burnett also made misleading claims about the Federal Reserve on her show Aug. 31, when she compared the Federal Reserve's asset purchases to government spending. But the Federal Reserve actually has created new money to buy bonds.”

So Ms. Kavoussi, if what you are saying that the, “Federal Reserve actually has created new money to buy bonds” by creating “new money” don’t you lower the value or purchasing power of the dollar? So if commodities are priced in dollars, it will take more dollars to buy something that is priced in dollars. It is economics 101.

Yes, we have had other reasons for oil and gas to rally, but to dismiss the impact of Fed policy on commodity price, it cannot be denied and Ms. Burnett is absolutely right. It can impact demand and the value of the currency that the commodity priced in. If it does not impact underlying supply and demand for commodities, then why is the Fed doing QE in the first place. If the economy collapses, prices will go down and so will demand. If demand falls, so will prices. We saw that when the world fell apart. The Fed feared deflation so they printed money to stimulate economic activity, aka known as demand, to stop prices from falling. If the cure for deflation is QE, then it stands to reason that Fed policy impacts commodity prices. If not then what was the point?

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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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