The Consequences Of Easy Money

From the Wall Street Journal:

"As interest rates in the United States fell relative to those abroad, the dollar declined, which could have boosted the prices of commodities commonly priced in dollars by reducing their cost in terms of other currencies," Mr. Kohn explained. "But the prices of commodities have risen substantially in terms of all currencies, not just the dollar. The price of oil has risen far more rapidly in dollars than it has in euros since 2002. Had the Fed merely kept the dollar stable against the euro, the price of oil would be closer to $80 than to $131 a barrel.

No one denies that supply and demand play a role in commodity prices, but oil on global markets is denominated in dollars. As recently as last August, the dollar price of oil was only $70. The current spike in oil and other commodity prices coincides almost exactly with the Fed’s decision to turn the monetary spigots wide open as a response to the credit crunch. They have since taken the fed funds rate down to 2% from 5.25%, while commodity prices have soared.

Oil prices have jumped recently on reports of higher global demand, but this too reveals a Fed miscalculation. As for inflation, this week’s producer price numbers were alarming. That decline won’t continue with $131 oil. With even the Fed’s phony "core inflation" rate well above the 2% fed funds rate, Mr. Kohn and company are running a negative real interest rate policy.

No wonder inflation expectations have been rising. If inflation doesn’t fall, the Fed will have no choice but to start raising rates again, perhaps rapidly and perhaps soon. As the nearby poll question shows, rising prices overall and gas prices specifically are by far the public’s biggest economic worries. The Bush Administration got tax policy right.

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (, he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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