10.01.2008 0

The Creature is on the Loose Yet Again

  • On: 10/14/2008 17:18:14
  • In: Monetary Policy
  • “Over the past five years the greenback has lost 40 percent of its value. Oil is close to $140 a barrel. And gold, now trading above $900 an ounce, is warning that if the Fed fails to stop creating excess dollars, inflation could rise to 6 or 7 percent.”—Larry Kudlow, “Where’s Bernanke’s Inner Volcker?”, June 27th, 2008.

    The Creature is at it again. No, the Fed didn’t cut interest rates again or bail out another investment bank—this time their crime was a bit more subtle, yet just as harmful. They lied.

    A few weeks ago, ALG News was very pleased to report that it appeared that Fed Chairman Ben Bernanke was ready to combat inflation, bring the soaring prices of food, oil, and other commodities under control and helping working Americans struggling to make ends meet. On June 9th, he said:

    “[T]he latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations. The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation [emphasis added].”

    As a result of that speech, the dollar rallied and oil came down for a few days, until news started leaking that the Fed had no intention of hiking interest rates and actually engaging in dollar defense. Then the dollar started to tank again, and commodities rekindled their upward climb in anticipation of a weak response by the nation’s central bank to the biggest crisis facing the global economy since the stagflation and gas lines of the 1970’s.

    Unfortunately, those news leaks were right on. When the Fed finally met last week, as ALG News reported, they did nothing. That was actually a bit of a relief, insofar as the central bank had already done so much damage through its weak dollar policies. And under certain circumstances—oh, say, back in March—doing nothing would have been a splendid idea.

    But this time, that was not good enough by half.

    As G. Edward Griffin noted in his masterpiece on the Federal Reserve, The Creature from Jekyll Island, since its inception, the Fed has undermined the purchasing power of Americans, causing the very inflation it is tasked by law to control. Over its history, it has responded to banking crises, such as the 2007 subprime mess, with easing (i.e. cheap credit) that always—read that, always—eventually and sometimes immediately results in inflation by boosting the money supply.

    And now that Creature is on the loose—yet again. Mr. Bernanke created false hope that the central bank was ready to do its job and focus on price stability. Markets began predicting that the Fed might hike rates as soon as last week’s meeting. By failing meet up with the market’s expectations, Mr. Bernanke severely undermined Fed credibility.

    As a result, since the meeting, commodities have predictably spiked yet again, increasing the economic pains all Americans face. Last week, ALG News predicted that the commodities bubble would eventually pop—and it will.

    But it will happen later rather than sooner unless and until the Fed backs up its words with real action coordinated with the Treasury, and the G7 to defend the dollar. Right now—the Creature is all talk.

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