usury is the problem so all this analysis is unnecessary but here it is anyway:
Central Bankers Fueling Global Commodity Inflation
posted on: February 15, 2008
Central bankers and finance ministers from
the world’s top-10 economic powers huddled behind closed doors in Tokyo last weekend, trying
to work out a joint strategy to rescue the global stock markets from another
possible meltdown. Roughly $6-trillion was lost on global stock markets in the
month of January, triggered by the biggest financial crisis since the Great
Depression, and a US housing
slide, that could topple the giant US economy into recession.
Central bankers from the United States, Japan,
Germany, France, Canada,
Britain, Italy, China,
South Korea, and Russia,
collectively control the money spigots in three-quarters of the world’s $65
trillion economy. “We are not yet at the end of the market crisis,” warned Euro-group
finance chief Jean-Claude Juncker. “The corrections will drag on for a few
weeks, or months. We have agreed in Tokyo
that if there are irrational price movements in the markets, we will
collectively take suitable measures to calm the financial markets,” he said.
Asked what type of collective action the
G-7 might take during another stock market meltdown, Juncker said, “Whoever has
a strategy should not lay it out. Otherwise it will lose its effect, if it is
explained.” Russian Finance Minister Alexei Kudrin hinted at a coordinated
round of G-7 rate cuts. “Coordination of efforts between central banks on their
refinancing rates may soften the consequences of the global credit crisis, because
this is the key factor supporting financial systems,” he explained.
Other weapons in the G-7’s arsenal to counter a bear market for equities include
brainwashing investors through the media, fudging economic and inflation data, inflating
the money supply, managing the “yen carry” trade, and outright intervention in
stock index futures, championed by the US “Plunge Protection Team.”
After surveying the global landscape, the
G-7 warned, “Downside risks still persist, including further deterioration of
residential housing markets and tighter credit conditions.” Bank of Italy chief
Mario Draghi added, “Risks are further shocks may lead to a prolonged
recurrence of the acute liquidity pressures experienced last year. We face a
prolonged adjustment, which could be difficult,” he warned.
Banks and brokerage firms around the world
face $400 billion in write-offs of toxic sub-prime US mortgages, said German Finance
Minister Peer Steinbrueck on Feb 11th. “The crisis that spread
from the US
property market to global financial markets may continue well into 2008,” he
warned. The US
credit crisis is no longer just a sub-prime mortgage problem. Many prime loans made in recent years also allowed borrowers to pay less
initially, but with higher adjustable payments in later years.
With US home prices falling and lenders
clamping down, homeowners with solid credit are also under the same financial
stress as those with sub-prime credit. Over 40% of all mortgages issued
from late 2005 to early 2007 are based on adjustable rates, so about $45
billion would reset each month this year. The expected tax rebates from Washington
will cover less than two months of home payments.
Wall Street fueled the growth of sub-prime
lending by packaging $1.8 trillion of risky home loans into bundled securities,
and then marketing them as high-grade investments. But with US mortgage
foreclosures set to top 1 million this year and home prices falling at the
fastest pace since the Great Depression, the same Wall Street investment banks
who profited by putting buyers into properties they couldn’t afford, are begging
central banks and governments to manage the bust.
futures contracts for the Case-Shiller Home Price Index in the 20-biggest US cities are
9.4% lower from a year ago, and the slide might get worse as $550 billion of sub-prime adjustable rate mortgages
adjust upwards this year. The Fed’s rate cutting spree
since September, slashing the fed funds rate by 2.25%, might help by reducing
the reset rate for many adjustable-rate loans.
But US consumers are hobbled by falling
stock prices, tighter credit conditions, high gasoline prices, and a soft labor
market. Sliding home values are also
eroding the equity US households can tap for cash at the same time banks are
tightening credit, threatening the consumer spending that the economy needs to
dodge recession. “Going forward, we will continue to watch developments closely
and take appropriate actions, individually and collectively, in order to secure
stability and growth in our economies,” the G-7 said after their secret
The big threat to US household spending is primarily
focused on the slumping housing market, but a double-barreled assault can be
disastrous, so if the US stock markets keeps sliding, it would probably tip the
economy into recession. And a US
recession could undermine the global economy, like tumbling dominoes, since the
consumer buys about 20% of the world’s $14.5 trillion of exports.
The Federal Reserve has been the most
hyper-active G-10 central bank in pumping liquidity into the global markets,
slashing the fed funds rate to a negative 1%, in inflation adjusted terms. The
Fed “will be carefully evaluating incoming information bearing on the economic
outlook and will act in a timely manner as needed to support growth and to
provide adequate insurance against downside risks,” Fed chief Ben “B-52” Bernanke
told the Senate Banking Committee on Feb 14th.
The G-10 central banks will tolerate an upward creep in global inflation,
because the pain required to kick the money printing habit is deemed too high. “Downside risks to
economy are the most important factor for Federal Reserve interest rate policy
for the time being,” said Chicago Fed chief Charles Evans on Feb 14th.
“The Fed’s focus needs to be on those risks, even though inflation has been
running a bit higher than we would like,” he said.
G-10 central bankers are ignoring the deleterious
side-effects of their super-easy money policies. The Fed and G-7 central
bankers have injected hundreds of billions of dollars into the global money
markets, fueling the “Commodity Super Cycle,” and intensifying global
inflation. Central bankers in Canada
and the UK
have joined the Fed’s rate cutting spree. But the big surprise for G-7 central
bankers might be how high commodities can fly, even in the face of a global
Since the Fed began lowering rates in
August, the Dow Jones AIG Commodity Index has jumped +22% to a record high of 200-points,
while the MSCI All World Index, measuring the top-43 stock markets, has tumbled
7-percent. Commodities have historically been regarded as wildly volatile and
risky, but since 2006, crude oil, gold, copper, silver, platinum, cocoa, and
grains have soared, hitting record highs, and have trounced returns in the mis-managed
G-7 stock markets.
A remarkable run-up in prices of wheat,
corn, oilseeds, rice, and dairy products, along with sharply higher energy
prices, have been blamed on supply shortfalls, strong demand for bio-fuels, and
an inflow of $150 billion from investment funds. From a year ago, Chicago wheat futures have
soared +120%, corn +20%, and soybeans are +80% higher. Rough rice is up 55%, and
platinum touched $2,000 /oz, up 80% from a year ago, while US cocoa futures hit
a 24-year high.
In agricultural commodities, there are supply
constraints in terms of the amount of arable land available. There are huge
shifts in demand from the emerging economies, where populations are moving to
cities, and incomes are rising, and changing dietary patterns. Entering energy
into the food equation, the surging ethanol industry has put a squeeze on the
corn market, causing prices to be demand driven. Bio-diesel traders are looking
at soybean and vegetable oils.
Fund managers are pouring money into
commodities across the board as a hedge against the explosive growth of the world’s
money supply, and competitive currency devaluations engineered by central banks.
Wheat had climbed nearly 10% since the beginning of the year, hitting an all-time
high of $11.50 /bushel, as investment funds kept buying futures with US wheat
supplies at the lowest level in 60-years.
most global commodities are traded in US dollars, the Federal Reserve has a
special role to play in defending the value of the US dollar in the foreign
exchange markets. On Dec 27th, Hu Xiaolian, director of China’s
Foreign Exchange wrote, “If the US federal funds rate continues to fall, this
will certainly have a harmful effect on the US dollar exchange rate and the international
currency system,” Hu wrote.
Central banks are flooding
the markets with paper, and nobody takes the dollar, the Euro, the yen, or the
pound seriously. Investors are turning to gold because it is the only true
store of value. The Arab oil kingdoms and Asian exporting nations are importing
inflation through their currency pegs and dirty floats, but their patience with
the US dollar is near the snapping point.
OPEC may abandon the US dollar for pricing
oil and adopt the Euro, said OPEC Secretary-General Abdullah al-Badri on Feb 8th.
“Maybe we can price the oil in the Euro. It can be done, but it will take time.
It took two world wars and more than 50 years for the dollar to become the
dominant currency. Now we are seeing another strong currency coming into the
frame, which is the Euro,” said Badri.
US Treasury and the Fed are risking a disastrous
replay of the 1970’s, when high oil prices fueled double-digit inflation. Every
time the Fed lowered rates to boost job growth, inflation took off, causing a
vicious price spiral. The Fed let inflation rage for so long that it took a
strict monetarist approach, adopted by Paul Volcker in 1979 to finally defeat
inflation. However, the cost of subduing the inflation monster was a deep
recession, with unemployment hitting 11% in 1982.
Excessive monetary accommodation just takes the
economy from bubble to bubble to bubble. This time around, the Fed’s devaluation of
the dollar, based upon Mr Greenspan’s 2001-02 blueprints, has unleashed the
biggest wave of commodity inflation seen since the 1970’s.
Bank of England follows in Fed’s Footsteps
With 1.5 million adjustable rate mortgages
due to reset in the UK
this year, the Bank of England has joined the Fed’s money printing orgy. On Feb
7th, the BoE lowered its key lending rate by a quarter-point to
5.25%, following a similar cut in December. Pressure has increased on the BoE’s
Monetary Policy Committee to slash borrowing costs, even as soaring energy and
food bills are driving inflation higher.
Britain’s factories are facing the
strongest input price pressures on record and are ramping up prices to
compensate, but that didn’t stop the Bank of England from lowering its base
rate to 5.25% last week, to shore up the Footsie-100 stock index. And there is
little sign that UK
price pressures are set to ease with the cost of raw materials surging 18.9%
from a year earlier, the fastest rate in 22-years.
UK producer prices are surging at an annualized 5.7% rate
in January, a 16-year high, not surprising, given the bullish trends in the
global commodity markets. The price of
imported food into the United
Kingdom rose by nearly 15% in the past
12-months. But the bigger fear haunting the BoE is that weaker
growth will undermine housing and stock prices, putting further pressure on
bank balance sheets, and prompting a further tightening in credit conditions.
On Feb 13th,
the BoE projected an economic slowdown to zero percent in the first two
quarters of 2008, with a high probability that the UK economy will contract in at
least one quarter. BoE chief Mervyn King’s message was blunt. “Tighter credit
conditions will bear down on demand, while rising energy, food and import
prices will push up on inflation. Both developments are now more acute than in
November,” he warned.
Mr. King says the
BoE is powerless to counter surging commodity prices, which he believes “will
result in a genuine reduction in our standard of living. However, there is no
point in us going mad and pretending it is sensible to double interest rates in
order to bring inflation back to target in the next six months,” he argued.
Instead, King thinks that slower growth over the coming year will “reduce
pressures on capacity” and bring inflation down to target towards the beginning
“The Bank of England needs to stop worrying
about inflation and cut interest rates to prevent a sharp slowdown in growth,”
said BoE policymaker David Blanchflower on January 27th. “It’s
essential that the BoE get ahead of the curve, as the current level of UK interest
rates are restrictive. Evidence from the housing and the commercial property
market is worrying. It is time for the MPC to lead not follow. Worrying about inflation at this time seems
like fiddling when Rome
burns,” he declared
Herein is the
crux of the “Stagflation” trap. Lowering interest rates to bolster the local
economy can backfire by igniting faster inflation, and erode the purchasing
power of local citizens. But the BoE has been destroying the purchasing power
citizens for years, by inflating the British M4 money supply, up 12.4% from a
year ago. Gold has risen by 110% against the British pound from four years ago,
and is a proven vehicle for protecting asset wealth from abusive central
To ease the plight of its exporters, the BoE engineered a 10% devaluation
of the British pound, from a 26-year high against the dollar in
November. Britain’s goods trade deficit with the rest of the world ballooned to a record
at 87.4 billion pounds ($170.4 billion) last year, up 10% from 2006. The
current-account deficit widened to 5.7%
of gross domestic product, the highest of G-7 nations. But a weaker pound also exacerbates Britain’s
inflation problem, by lifting import prices.
“The BoE needs
to balance the risk that a sharp slowing in activity pulls inflation below
target against the risk expectations keep inflation above target,” the BoE
said. Given the choice of defending the purchasing power of the British pound
or rescuing the housing and stock market, the BoE will eventually show its weak
hand, and lower its interest rates further, spinning its citizens on the
treadmill of inflation